Fantastic, this was exactly the info I was looking for. You guys saved me allot of wire mashing. The duplex explanation makes perfect sense.
So that leads me to a question. Do you need full duplex capability in order to upload a sketch to the atmega? Or can you just send one way to the receiving 328s rx/tx pins and time the reset? I was getting the stk500_getsync() error when I tried with the max458. I know it isn't an issue with timing the reset because I had a very good success rate using with the max232 and uploading sketches. I hope to be able to upload a sketch through the max485 because my design will need them and it would be convenient to use it to update code on each node's atmega without adding a max232 to the design or popping the chips in and out for programming.
PapaG, I am going to give the test you suggested a try. Seems like a good way to see if the max485 I have is broken. I had not been using hardware or software serial in my previous tests for loopback, just typing some text into a hyperterminal on the serial port. If I am understanding this right I will first upload the software serial sketch to the atmega, and then I will wire this up and the PC should be able to read the serial prints that the atmega is reading in and then replying back with?
Thanks again guys, this has been a tremendous help.
-Sathi