I did some re-wiring to use the READY line using this circuit:
When I raise the RUN line, this circuit will drop the READY line on the first CLK edge after ALE goes low. This stops the 8085 at the right time: when the address is latched, and the 8085 is trying to read from memory. When I raise the STEP line, the 8085 will run for one machine cycle and then stop again. When I lower the RUN line, the 8085 will run continuously.
I wrote these routines for the PIC to control the 8085: STOP at instruction fetch cycle; RUN; Jump to an address; write to RAM; step to next address (do a NOP). With these I can do all the functions of the front panel.
I tested this by taking the 8080 program to echo characters and re-located it to start at location 010000 (octal). Then I wrote a program for the PIC to STOP the 8085, Jump to 010000, write a byte to RAM, step to the next address with a NOP, write the next byte to RAM, etc., then jump back to 010000 and RUN the 8085. ...and it works!
At this point I could easily add the lights and switches and have a working computer with a front panel that can run Altair BASIC. But adding the front panel is a big arts and crafts project involving making a panel that looks good, lots of wiring and lots of potentially expensive switches. I'm not sure I'm into that right now.
I can post the complete schematic and/or source code if anyone is interested.