Hey Souldelay,

You'll probably want to have more than just the source code to understand what's going on there. I highly recommend checking out Physical Computing by Tom Igoe and Dan O'Sullivan if you are interested in learning about making a physical interface for your project. Also, purchase any one of the number of books on Processing that are coming out over the next several months (Ira Greenberg, Casey Reas, and Dan Shiffman are all putting out titles with slightly different target audiences, so I would check to see which one best fits your needs). Work through a lot of examples that just do part of what you're interested in before trying to integrate everything.

Some things you will need to learn:
Serial Library for linking physical controls with the computer. Despite its name, you don't need a serial port for this. Arduino accepts serial signals over USB. (or hack a keyboard for push-button controls without using serial) There is full documentation of this in reference/libraries/serial

An understanding of an audio library, either Sonia or Ess will allow you to analyze incoming sounds and synthesize new ones.

some examples that will speed you on your way (in the learning section, look at even more):
linear image
loop
objects

Best of luck as you get rolling with this stuff. Don't get frustrated with the learning, because when you understand how things are made, you'll be able to come up with something other than just a rehash of someone else's project (although rehashing is valid and fun).