I think that the fact it can't do colour or really high res powerful games is one of the great things about it.
If the resolution was just a tad bit higher (or maybe the aspect ratio changed a bit - since the following depends more on horizontal resolution than vertical), one could achieve artifact colors, at least on NTSC (PAL doesn't do artifact colors well or possibly at all).
On the TRS-80 Color Computer 1 & 2, using an NTSC television or composite monitor, there was the screen known as "PMODE 4", which was technically a 2-color screen (black and white; ok black and "buff" - which wasn't quite white, according to the manual), but it had enough resolution horizontally (256 pixels H x 192 pixels V) that in the NTSC mode, when placing vertical lines next to each other in different patterns, one could obtain two other artifact colors - a "red"-like hue, and a "blue"-like hue. It actually worked really well; tons of games used the colors (one of my favorite, though more obscure titles: Robot Odyssey by The Learning Company - http://en.wikipedia.org/wiki/Robot_Odyssey
The PAL "version" of the Color Computer couldn't do the proper artifact colors - supposedly they saw green and purple stripesl. Artifact colors were used by some on other systems as well; interestingly, the CGA adaptor could do them (if you had a proper composite monitor hooked up), but most people used a standard color monitor, and so it wasn't a widely used mode for the IBM. A similar thing occurred on the later Tandy Color Computer 3: When it was launched, it had the ability to use an RGB monitor, which a lot of users purchased (the CM-8). It could still hook up to a television or composite monitor, but in order to use the higher resolution displays and 80 column text modes, the display was crisper and led to less eye strain on the monitor, so a lot of users went this route.
This led to an unfortunate oversight by the community, one that wouldn't be resurected until late last year (2009): The Color Computer 3 640x192x4 color artifact mode. In this mode, if you selected that screen (HSCREEN 4, IIRC), then set the color palette to the four grey-scale colors available (white and black, plus two intermediate greys) - then with the right patterns on-screen with an NTSC monitor or TV - you could suddenly get hundreds of colors! This has been called a "256 color" mode - whether that is true or not, I don't know - but it is quite amazing to see:http://www.atariage.com/forums/blog/105/entry-6693-color-computer-3-artifact-art/
Unfortunately, it drops the "usable" resolution down to 160x192 pixels (note where it says in that posting "200" vertical pixels - by default, the Color Computer 3's maximum vertical resolution was 192 pixels, but there were ways to increase that number). Whether such a system could've been used for games or other applications is unknown, but I bet had the community been widely aware of this "mode" at the time (mid-late 1980s), applications would've been developed. I say "widely", because from what I have found, this mode was actually discovered by someone at the time, but was only published in a small Color Computer magazine that didn't have the wide circulation of the main CoCo mag, The Rainbow - and so the mode and technique was quietly ignored.
So - you can see that if the resolution of the TVOut library was changed slightly, we could potentially get four colors. If there was just a way to employ more bits per pixel, we could potentially get even more (perhaps up to
- but unfortunately, there isn't enough memory. Now - if someone wanted to figure out how to replicate the Atari 2600 graphics hardware in a couple of ATMega328s - that might be possible, but it wouldn't be anywhere near as easy to code for...