What screen do you have in mind for the final version?
I've a few of these ordered from Deal Extreme. Same idea as the one I used to test but of a much higher quality. These screens are used in many mods you see around including the Sega Nomad screen mod and a lot of hand held conversions (portable Nintendo 64 and that type of thing).
How difficult is it to use X in such a low resolution?
It's manageable but you wouldn't want to be doing a lot of work on it. I'll be doing up some sort of interface that's more usable on such a small screen at some stage, unless someone else does it first or has it already.
Here's a vid I just did of some normal games running on the screen(GameCube). It's actually not bad at running these considering it only cost £10 sterling. Sound is low and a bit distorted as its coming from some small and cheap speaker in the Pi.