when I test the diode, i get a reading on both ends...meaning when I flip the + and - on the multimeter i get a reading of like 200ohms either way...when I take the diode out of the perf...the reading is normal again...the diode works.
The coil is shorting out the diode for your meter.
how separate are you supposed to keep the ground from a 12v psu and the regulated current from a 7805?
To the extent that they must be connected together, that separate.
can the arduino and other components take the ground from the 12v psu?
Yes it has to, you have no choice.