Step 3Decide whether to make absolutely minimal boards, or external-oscillator based boards
ATmega168 chips have an internal oscillator which can be enabled; it runs at about 8mHz, which is half the speed of most Arduino boards (with the exception of Lilypads). The internal oscillator is guaranteed to be calibrated to within 10% (which is not tight enough tolerance for guaranteed good serial communications). In my experience, the factory calibration at 5v has always been fine for uploading programs, but YMMV. I wouldn't use the internal oscillator for Important Things Which Need To Speak Serial, however. For blinkylights it should be just fine though.
Arduino chips with the bootloader pre-loaded that I've found always run at 16mHz, and these will require an external oscillator. If you don't have access to an AVR programmer, you will probably want to buy a pre-loaded Arduino chip. I highly suggest Ada Fruit Industries as a source.
Note that the oscillators really aren't all that expensive (generally $.50-$.75 at Mouser); they're just another part which is often not necessary, and the pin layout sucks for really clean breadboarded Arduino layouts.
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