Your suggestion of changing "Layout"->"Theme" and "Display"->"Layout" makes sense to me.
I would actually prefer not to use 'Layout' for Displays - since that implies that you are affecting how things are "layed out" on the screen and displays is more than that. My interpretation of Display is - 'What games will I see' (based on romlist, filters), then 'How will it look'.
I'd recommend against swapping definitions of the same word. Layout -> Theme might not be a big deal because theme makes sense for the overall look - but Display -> Layout - making 'layout' mean something different after it already meant something else would be very confusing. You call the layouts 'layout.nut' so if you change to theme and layout means something different.. you'd have to change 'layout.nut' to 'theme.nut' then either have broken layouts, or backwards compatibility where layout.nut still works and is still used by some themes - making it even MORE confusing
If you change Displays - I'd change it to a different word.. not sure what though!
I like Luke's suggestion - I'm constantly switching around displays and changing the layouts for testing and whatnot.. If I can have a default Theme used for all Displays, that would be awesome. Perhaps have Theme / Theme Options be in the main menu (the default Theme), then in a 'Display' (whatever it might be called) you could specify an overriding 'Theme' preferably letting you know when the default theme is overridden. Not sure how to make that idea more user-friendly.
Another thing is alternate views of the same layout. It'd be nice if this was an 'Alternate' option in the themes menu, rather than just using a button/list to switch to them.