In this project I embed what I call a hackduino which is an Arduino-compatible circuit, in this case built out by hand on perfboard. I have made an instructable specifically about building one of these yourself, which you can read here.
Step 1: Build out the microcontroller circuit
1. the 7805 voltage regulator. This so we can take 12v DC output from the theremin, and lower it 5v which the ATMega chip needs. The code attached will work for both ATMega168 and ATMega328 chips.
2. the ATMega168/328 circuit. This consists of the chip itself, a 16MHz crystal oscillator, and several capacitors. I have not made an instructable for creating this circuit on a perfboard, however several tutorials exist for example here. Alternatively, you could use any Arduino compatible device - there is a list here.
I will be attaching the Arduino code to upload to your chip
I have built mine out on perfboard from radioshack. Reasons why I do not just use an Arduino board: This is cheap, and completely permanent. This entire circuit cost about $7 and is much smaller than an entire Arduino. I can permanently add components as I need to. I feel a sense of hacker legitimacy when I don't spend $35 on the bulky blue board.
3. LEDs.... [next step]