An Arduino is already pretty small, but if you're looking for something that's even smaller, SquareWear fits the bill. It's a tiny microcontroller that's designed to be sewn onto fabric and packed with all kinds of sensors.
SquareWear is powered by an ATmega328 and it can run anything from the Arduino library. It's also packed with its own RBG LED, a buzzer, light sensor, and temperature sensor so you can use it to power all kinds of projects. If you've ever wanted to experiment with making your own wearable tech, SquareWear's a good place to start messing around. Note that the site linked below ships to Australia, but the postage cost is high -- if anyone finds a cheaper local source, please share it in the comments.