You are obviously confoosing the 'funny pin level' (hardware) start of ISP with the NoTouch approach (software).

I'm confused, how does sending 'qwerty' through the serial port cause the reset?
The 'qwerty' is detected by YOUR code and YOUR code executes NoTouch.

Using the DTR line of the serial port to reset the chip is described in a FlashMagic application note, is this not how you do it?
Ah dunno, what is DTR connected to on the RD2

You use NoTouch, why are you mucking with PSEN
Ah, this is where I was confused. Are you saying that since we are not using external memory, we just tie !PSEN to ground (through a 2K resistor according to the datasheet) permanently?
NO, nothing to do with psen, leave the poor sod alone, if you use the NoTouch, you can have any pin at any state (except Vpp). All the 'funny pin levels' are to force the RD2 to go to ISP, NoTouch does the same with software.

If so, how does the board ever start with a zero status byte? When it is reset, the status byte will always be non-zero, since the conditions of:
Vpp high
PSEN low
ALE disconnected
P2.7, 2.6 high
see above

I don't see how it will go into normal operation?
With NoTouch, all pins are at 'operation' levels, so when the puppy is kicked and not petted, it will generate a reset on timeout which will start your code.

Erik