Both are valid methods, if you want configurability, then module is probably the better way, as the template path will most probably require engine modification (adding extra config options, might be wrong, not an expert), and different template engines handle things differently.
A hook for extending the template form? Have no clue, but sound like a good idea to me. Any opinion, or a ready resolution?
I am a graphic designer, so module creation would not be a strong point of mine, but I am willing to give it a go. I plan on having the module ask the user what tags they would like removed, assigning a font/ style to those tags and modifying/ creating a php file to handle the image creation. The javascript would then be outputted to the page <head> tag through the same method that other JavaScript and meta information is sent already. In phpTemplate the tag is <?php print $head ?>, so whatever method sends this data, I will look into. I will be leaning towards php and gd2, as it is supported by Drupal, and as I said, I do not want to add another requirement to Drupal installations.