I think this display and touch screen have a lot of potential but I would have thought that you want a mega-type chip at least (1280?). Yes, the ATMega chips are not very powerful but a lot has been done with them. I do however doubt how fast this camera, screen module thingy will be.
If it is cheap then I might pick one up though.
I would be interested to know more about the display as it is obviously cheap and relatively simple to interface with. Is there any more information available about the screen itself and how it is interfaced with?
Mowcius