Xpendable:
I need all interaction to happen in transmitter so that I can drive indicators and such. I want to slowly change the speed of the motors.
IIRC, there are hobby R/C transmitters that take a serial input; they are meant to be hooked up to a PC to allow flight simulator software to control an actual R/C plane, among other things.
You probably want to use something like that; the only real problem is whether they've all gone to USB by now (which they probably have)... That will make communications using an Arduino difficult (as the Arduino has to act as a host, and you have to reverse engineer the protocol being used if it isn't simple HID, etc - plus a bunch of custom software driver writing, etc - it get's big, bad, and terrible fairly quickly).
Your best bet would probably be to modify the transmitter to control the potentiometers via servos, and any switches via relays. Then you can use an Arduino and the Servo library to control those servos, and use digital output pins (and appropriate transistor/mosfet drivers) to control the relays. You'll likely have to remove the potentiometers from the transmitter, and measure their resistance (or read it off the parts, if they are marked). You could then either substitute your own, or use the existing ones; probably mount the pots to a board (extending wires from the transmitter), and mount the servos next to them, then connect the shafts (using rubber tubing or something else).
The rest would be programming - interfacing your "telegraph controls" to the Arduino, and having code to simulate the call-pause-acknowledge cycle in a realistic matter (perhaps with audio playback, or LCD display, or output to the computer via the serial port - any number of possibilities).
You might want to stick with using a Mega for this, though - I can see the number of pins needed for the project being fairly large, and perhaps outside the ability of a standard Arduino (without using multiplexing or some other scheme, of course).