Thanks for the reply.
You said that one must use an opto-coupler in this scenario. However, the exact same setup is used in this "Tweet-a-watt" project, without it.
If you look here:
http://www.ladyada.net/make/tweetawatt/solder.html
Under "Transmitter schematic," you'll see what I mean. (I imagine your smelling sense must be very active right now from all the Darwin awards)
My worry is that I am powering the Arduino from the USB of my computer, while the input is coming from the transformerless setup. The two have separate grounds. Do you think this will be an issue?
Thanks!