The screen and the atmega power up and the cpu runs though its code and output as expected but I have a problem using the onboard joystick on the shield.
I am using analog 0, but it seams that my breadboard setup is causing the atmega pin 23 to get a perminant signal "left" on the joystick. Even when I disconnect analog 0 from the cpu it still has this problem.
I assume its due to some grounding problem, on the duemilanove +5v and analog 0 has a resistance of around 10k. On my breadboard it is 0 ohms.
Do I need to build the highlighted area to solve my breadboard problem?
It sounds like your home built Arduino is working properly. I assume it does something like send serial diagnostics to your computer or lights an led to confirm this?
Make sure you have the right pin. It's easy to mess up the mappings when they are not labeled on the pcb. You could connect an led and download a sketch to blink it real quick. I'd also try another pin just in case their is an issue with that one and check connectivity on all lcd connections with voltmeter.
But to answer your question about bread board wiring, we really need a picture of it (or a schematic). Can you post a pic?