@halley: I was wondering how much use just sync [u]output[/u] would have been!
I've since had a good look at what's needed for overlaying/compsiting, and it would need a sync separator (LM1881), some sort of analog switch (HCF4053 or similar) and a re-write of the code to sync to external V-sync and H-sync signals. I'm not yet clear on how I'd cleanly handle sync generation when there isn't an incoming video signal to overlay onto, but I believe it's all possible to do [even for a software guy like me].
Unfortunately, these changes wander significantly away from TellyMate's "very simple hardware" remit, so I'll put them onto the wish-list for TellyMate 2.
Other things on the wish-list for TellyMate 2 include colour output, but there don't seem to be any cheap RGB to composite chips around. MC1337's are hard to source now, and AD722-725's are expensive (certainly for the quantity I'd use). I was at least hoping for a chip that's cheaper than an AVR... I think I might have to settle for greyscale 'colours'.
As it stands, I should be getting some parts this weekend to put together a prototype TellyMate Shield. Hopefully I'll post some pictures next week...