BTW, there is a 20MHz version of the Mega8 too. Oh, an I forgot the 16 in 168 means you get 16K of Flash versus 8. I'd say go to the 168. Another benefit would be that you could port it to use Arduino boards versus rolling your own.
I haven't played with Arduino myself, I have all the programmers I need (STK500, Dragon, and a JTag) but the bootloader and USB functionality are more friendly to beginners. Nuts and Volts has been featuring articles about the AVR and recently the Arduino.
Not trying to confuse anything just submitting items for consideration. BTW, new Ardunios are using the Mega128 and Mega256 chips
Jay