if you're just doing midi out then you can skip it,

if its midi in, you'll need it to avoid voltage issues, the IC does literally its name (isolates this part from the rest of the circuit, optically). 

you're basically separating the MIDI part (midi-in) from everything else by giving it a light buffer.  voltage spikes or irregularities coming from the midi-in line are mediated this way.

Optoisolator is on the MIDI-IN part of arduinoboy circuit, not MIDI-OUT.
You want your gameboy to be master or slave?

I personally would not ignore the optical isolator for two reasons: first, I'm not familiar enough with the protocol to just hook it up to serial in on the 328p (since I'm pretty sure current flows both ways on the lines I don't think it would be easy or robust), and second, it serves as a protector, isolating the entire ArduinoBoy circuit from the MIDI input, protecing your gear from a potential frying.  Omiting the MIDI out/thru is a simple matter of not installing the output DIN connector.  You can also omit one LED and an entire section of the ArduinoBoy code that handles MIDI sync and out from LSDJ.

If I only want MIDI-IN, can I ignore the opto isol and the rest of the MIDI-OUT portion of the circuit? I don't have an opto isol on hand and was going to breadboard an arduinobuddy this morning. Thnks!