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Good choice on the ATMega 128!!
I've been using it for some time now and it's great.
If you're new to the AVR, check out the AVR websites and the Atmel website.
There are ton's of example projects and tools.
Choosing your compiler depends on the Language you wan't to use.
- Codevision AVR (www.hpinfotech.ro)
- ImageCraft ICCAVR (www.imagecraft.com)
- IAR Embedded Workbench for AVR (www.iar.com)
- GCC AVR (gcc.gnu.org)
- Elabs ACRco (www.e-lab.de)
- Bascom AVR (www.mcselec.com)
- FastAVR (www.fastavr.com)
- RVK Basic (www.rvkbob.com)
- SwiftX AVR (www.forth.com)
The AVR Freaks site is a very good starting point and has a very extensive resource collection.
Check out www.avrfreaks.net
If you register, you can also get into the academy section with over 100 user projects.
Look in the elektroda forums to find more info on getting a working version of any of these compilers.
I personally use Codevision AVR because it has a great Wizard to get you started. Unfortunately it doesn't fully support ANSI C and also gets a little disorientated when you make big projects.