Voltage divider is a pretty lame solution - it's either very high impedance (can not provide enough current) or very wasteful. Just use an LM7805 and power arduino directly to 5V pin.
I agree - it's not the optimal solution. But the whole idea of this was just a very small, quick solution to fit in a very small form factor - to be strapped to a 9 yr old's arm for a few hours of trick or treating. I've got a whole bin of voltage regulators but using one would mean a bigger form factor.
BTW, how are you switching LEDs? Sourcing current from Arduino pin?
Yep - see the "knight rider" link in my first post.
This is not intended to be a finely engineered project - just something I put together in an hour one evening.
Thanks for everyone's ideas.