The image will be streamed over serial to your MCU as a JPEG image. And an ATmega32 (like the ATmega328p in the Arduino) only has 2K of SRAM, nowhere near enough to hold even a QQVGA (160x120) image.
With some savvy coding you might be able to decode the image on the fly if you are looking just for specific pixels, but since JPEGs are stored in "ZigZag" order it will be tricky.
Most people just stream the image directly to SD and don't analyze the image. Cameras such as the OV7670 are better suited to direct access by the microcontroller, but the image will still be too large to store in memory.
Even an ATmega1284p which has a whopping 16K of SRAM could only hold a QQQVGA (80x60 565RGB) image.
If you are looking to process images in memory, I would recommend looking at beefier microcontrollers, like the xmega384 (32K), the pic32 (up to 128K), or ARM microcontrollers (up to 262K IIRC). One option to consider is the Arduino Due which has an ARM Cortex-M3 MCU and 96K of ram which is enough for a 320x240 greyscale (or indexed color) image.