How to connect ASD bios chip

I believe I may have found a two part solution for my particular problem. I currently own an Arduino Diecimila (which has the ATMEGA168 with the problem) and also a new Arduino Nano 3.0. I went ahead and flashed the Arduino Nano with the ArduinoISP firmware. I then picked up 3 28 Pin ATMEGA328P DIP chips for $5.00 each at the local electronics store.

I used the ArduinoISP to flash one of the virgin chips with the Arduino Firmware using the above link with a crystal. I plan to now flash one of the other ATMEGA328Ps with the High Voltage Programmer firmware. This chip along with a bit of wiring on a breadboard should allow me to reset all of the fuses on the original ATMEGA168. Once that is done, I will be able to use the Arduino Nano to reprogram the chip.

Since the ATMEGA328Ps only cost $5 each, my end goal is to setup one 328 as an Arduino ISP programmer, setup the 168 as a HV Programmer, keep one 328 chip in my current Arduino Diecimila (upgrade!!), and I'll have one left over for whatever. I can then either switch chips on the Diecimila or build out a real board for the ISP and HV Programmer boards.

I still have not tested the JTAG ICE MKII yet with a logic/oscilloscope. Not sure if it is the root of the problem or not. I will address this issue after I build the HV Programmer.

I will report back on the success/failure of the HV Programmer. I just need to go get a few more 1K resistors to pull it off. Anyone ever tried the HV Programmer? Any other suggestions? If nothing else, hope this helps someone.

Most small microcontrollers will be capable of doing what you need. You could even ditch the Arduino "wrapper" and use a USB capable micro in it's place.

Microchip, Atmel, TI, ST, etc all have 8, 16, 32-bit uCs of varying RAM/FLASH/EEPROM sizes to pick from. All the modern uCs come with at least UART, SPI, I2C peripherals that can be used for your communications.
There is not a lot in them really, I'd just pick one and see how you like it.
I (currently) use ST's 32-bit ARMs and Microchip 8, 16 ,32-bit PICs.
I'd probably use a few PIC12F or 16Fs for the slave uCs and a PIC18F or PIC24F for the master.

You mention needing ~10kbits of memory (not quite clear what type or which uC needs it from your description to me though)
It's easy to determine what is suitable though, just check the RAM/ROM/EEPROM specs of each uC you look at.
For example the PIC16F1938 has:

 Parameter Name          Value
 Program Memory Type     Flash
 Program Memory (KB)     28
 CPU Speed (MIPS)        8
 RAM Bytes               1,024
 Data EEPROM (bytes)     256 

So 28KB of program memory is more than enough to store non-volatile data if your program is small enough (on the newer PICs you can also read/write to program memory at run time) 10kbits will not quite fit into the RAM though, at 1024 * 8 = 8192 bits.
The 16F1527 has 1536 bytes of RAM though, so you could use this if necessary.

For the master (alternatives to Arduino) there is something like the 18F25J50 or similar, which has a USB 2.0 peripheral. Microchip provide a USB stack an plenty of example firmware to get you started with USB.
If you need something more powerful for the master, have a look at the PIC24 series with up to 256K of Flash and 96K of RAM. Or even the PIC32 which is 32-bit and up to 80MIPS. The PICKit3 is a low price programmer that will program all the above mentioned PICs, and MPLAB (or MPLABX) is a free IDE for firmware development.

Communication can be done with I2C, which deals with the master/slave configuration and addressing easily. All you have to worry about is sending the data. 7 meters should be no problem with a reasonably quiet environment and the right setup (low value pullups - say 2.2k, low capacitance cable)