If you only need to send data to the LCD you can use HCT buffers. HCT is TTL-compatible HCMOS, so made to work at 5V, but instead of needing 0.6 Vcc input for a high level (or even 0.7 Vcc) it can do with TTL levels, i.e. 2.4 V for a high level.
The 74HCT241 is an octal buffer.
For status and other unidirectional lines from the LCD you can use a resistor divider to scale the 5 V down to 3.3 V. A 10 kΩ resistor in series with a 20 kΩ gives you 3.3 V out for 5 V in.
For most simple applications, you needn't have two separate grounds. For heavier applications or where there is need for greater cleanliness of the power supply, it is generally considered a good practice to keep the grounds separate.
Being able to join two grounds together is usually possible (Though not always).
simulate this circuit – Schematic created using CircuitLab
In the case of batteries, any two batteries are isolated from each other for most practical purposes. Once you connect them (or the circuits they are part of) together, the point at which the connection is made specifies how the voltages are related to each other. For conventional applications, you could just call the connection point the combined circuit's main ground reference point, and connect the negative terminals of the batteries to it.
In the case of something connected to a wall power supply, such as with using a transformer, a similar logic can be applied. The transformers isolate the outputs from the input (wall power), and so the DC voltages derived by rectification are effectively isolated from each other. Again, you can connect the two negative points (the 'grounds') together to make a common reference point. Most commercial power supplies that feed off of wall power will output isolated DC voltage due to regulatory requirements. If the power supply also uses the third pin (Earth) on the wall socket, it may be using that to bias the output (fix it to a certain point relative to the Earth at your house / office / what have you), in which case some care must be taken to connect them together. If the power supplies produce single ended DC output (5V and GND, or 12V and GND), then you can pretty safely assume that if the supply is fixing the output voltage relative to Earth, it most likely will be connecting the output ground (0V) to the Earth. Make sure to make the connection on your circuit as well anyway, because the output may also be isolated.
The problem comes if you are using an unusual power supply combination. If you are using a power supply which produces 5V,5VGND; 12V,12VGND, and the two supplies are for reason not isolated and 5VGND is not connected to 12VGND, then you cannot connect them directly. Which means you will have to most likely treat the two grounds as truly separate.
Treating the two grounds as separate is also necessary if, say, you are driving high power motors which may interfere with your Atmega, or if you are also trying to make sensitive analog measurements, or for a variety of other reasons. If you do have to use separate grounds, though, then your Atmega outputs cannot be directly sent to the L293. The signals have to be referenced against the L293 ground (which we'd usually refer to as the power ground) and not the Atmega ground, and these two are not necessarily at the same voltage (the potential difference between the grounds cannot be guaranteed to be zero unless you actually connect them together). This 'translation' can be done using ICs such as optocouplers and other methods of galvanic isolation, which means that the signal is translated from one 'ground' to another without using any usual conducting connection.
Best Answer
VCC2 is the motor voltage, you got that right.
VCC1 is the logical supply voltage. You would like that to be 3.3V, because that is the level at which you are controlling the chip, but the datasheet specifies a minimum of 4.5V, so you'll have to tie it to 5V.
This means that the logic 1 level are somewhat lower than the chip was designed for, but according to the datsheet it accepts > 2.3V as 1 (with VCC1 = 5V), so it will probably work.