I guess this tells me the FTDI converter is OK
and the processor is toast?
I have no idea. That is a very strange way to fail. However, if I were in your shoes, I'd start shopping for a replacement.
No. I was unsuccessful with the PicStep.
From what I can tell, the PIC-STEP uses RS-232 for communications. If that is true, the voltage levels are high enough to damage the Arduino. Your Arduino can act as a "serial converter" but only a "TTL level serial converter" not an "RS-232 serial converter".