Connect bluetooth module when no pins free
The code you're using for the atmega88 should be almost directly compatible with an ATmega328P, I suggest you pick one of those up.

Also you can try to:

Multiplex pins:

http://users.ece.gatech.edu/~sudha/academic/class/ece2030/Lectures/blocks/examples-5.gif

OR

Use shift registers/IO expanders:

http://tronixstuff.com/2011/08/26/tutorial-maximising-your-arduinos-io-ports/