Thanks for clarification and support, actually my project needs to handle 4X4 matrix keypad, atleast 10 digital I/O lines, an I2C 20X4 LCD display, and serial communication with PC. Currently I am using 89c4051 micro-controller and programming in assembly, the program is over 1200 lines of code, but compiles less than 4K.
While experimenting with arduino I noticed that simple LED sketches could take more than 2K of flash, so I was looking for a way to increase program memory.
Is there any other arduino compatible derivative which has larger flash and similar I/O as MEGA328 ?