cheaper alternative to microcontroller
There are plenty of legitimate microcontrollers available for under $1 if you buy them from the right place.  I am more familiar with Microchip PICs, but I'd be real surprised if Atmel doesn't have a few sub $1 offerings too, especially at 10k quantity.  By the way, 10k quantity isn't all that high, but high enough so that you should talk to your local manufacturer's rep or sales guy to find out how to buy them to get the good price.

Of course, don't expect a ethernet MAC/PHY, 80 pins, 16 channels of 12 bit A/D, two UARTs, and the like for under $1, but there are some reasonably capable ones.  If you're not locked into a particular product line yet, check out the PIC 10F, 12F, and the 16Fxxxx (4 digit part number) from Microchip.