In order to ease the development I've added the USBaspLoader to the project. The bootloader is activated by pressing and holding both buttons while the board is inserted in the USB slot (i.e. when the board is powered).
Using the Bootloader I've uplodaded the firmware from the inspiring project , ported to ATMega8.
I will probably keep the bootloader since it allows me to upload pre defined passwords to the EEPROM space of the microcontroller which is necessary to support legacy passwords.