Building a MJPG Camera
Alright so building a camera system from scratch like this is not an easy task.  Just looking at your diagram you're missing the whole image processing section between the raw output of the sensor.   A PIC32 seems pretty under powered for this but hey you could prove me wrong.

Take a look at something like this chip from Nuvoton if you really want to do it from scratch.

I'd ask though (in a nice way) if you can't use the board from a cheap security camera what makes you think you can make a smaller version?  The size and components required will be similar.

Given the amount of effort required to make a camera from scratch, and the fact that building a camera isn't your actual goal, it might be worth it to consider other options.