I am sorry for the question to be non - specific/vague. Since I am very new to image processing, I could not make more sense on the topic. With the help of the contributions made on the forum, I am certainly feeling a lot better, thanks all.

The Atmel 32 –bit micro controller that I was referring to is AT32AP7000, it has a pixel co processor with following features: -

• Coprocessor coupled to the AVR32 CPU Core through the TCB Bus.
• Three parallel Vector Multiplication Units (VMU) where each unit can:
– Multiply three pixel components with three coefficients.
– Add the products from the multiplications together.
– Accumulate the result or add an offset to the sum of the products.
• Can be used for accelerating:
– Image Color Space Conversion.
• Configurable Conversion Coefficients.
• Supports packed and planar input and output formats.
• Supports subsampled input color spaces (i.e 4:2:2, 4:2:0).
– Image filtering/scaling.
• Configurable Filter Coefficients.
• Throughput of one sample per cycle for a 9-tap FIR filter.
• Can use the built-in accumulator to extend the FIR filter to more than 9-taps.
• Can be used for bilinear/bicubic interpolations.
– MPEG-4/H.264 Quarter Pixel Motion Compensation.
• Flexible input Pixel Selector.
– Can operate on numerous different image storage formats.
• Flexible Output Pixel Inserter.
– Scales and saturates the results back to 8-bit pixel values.
– Supports packed and planar output formats.
• Configurable coefficients with flexible fixed-point representation.

There is an Image sensor interface with the following features: -

• Supports up to 12-bit Grayscale CMOS Sensors
• Support for ITU-R BT.656-4 SAV and EAV Synchronization
• Vertical and Horizontal Resolutions up to 2048 x 2048
• Preview Path up to 640*480
• 128 Bytes FIFO on Codec Path
• 128 Bytes FIFO on Preview Path
• Support for Packed Data Formatting for YCbCr 4:2:2 Formats
• Preview Scaler to Generate Smaller Size image
• Programmable Frame Capture Rate
• VGA, QVGA, CIF, QCIF supported for LCD Preview

The data for further analysis would ultimately be stored on the computer. But the processor in question need to compute some information from the image, once this information is found out the remaining details can be discarded or passed on to the computer.

I think as Jez Smith has pointed out it does not seem to be a processor job. The big problem was my inability to find some relevant data on the Internet as well. Thanks for the hints given to me, I would now look forward to collect data about FPGA (yes that also means I do not have much idea about FPGA).