Not my project but thought you guys might be interested – this guy Phillip Stevens has designed a new Arduino board with onboard ADC, DAC, and headphone amp. It's called Goldilocks Analogue, and it's using the ATmega1284p, which I suspect is slightly underpowered for most DSP applications. At $50 it's more expensive than most arduino boards, but then it is much more capable. He does have a nice little mono-synth running on it in the demo video, and a full-color touch display to control it.
What do you guys think? Any point in using Arduino/ATMega stuff for music, or would you run into limitations too quickly to make it worthwhile?