Karen -- THANK YOU! I used the technique you suggested with PhotoShop, and it worked GREAT.
To make it easy to position the circle that I created in PhotoShop, I did this:
1) In iMovie, place the cursor (that might not be the right word to use, maybe I should say the time index?) in the place where you want to add an overlay circle. Create a still image by control-clicking. Set the length of that still image to however long you want your overlay circle to last (e.g. 1 second)
2) Open the still image in PhotoShop.
3) Add a layer
4) Add an image on that layer. I used a large "0" (using the type tool) which I then filled with red color. The background layer shows you exactly where to place your image.
5) Delete the background layer.
6) Save the image as TIFF with a transparent background, as you suggested on your web site. Save it to "Photo Booth" folder.
7) Find the image (the highlight) in iMovie. (It will be in the photo browser window.)
8) Drag the image on top of the still image that you created in step 1.
9) Now you can either move that still image (with the new overlay circle) to wherever you need it in your movie, or you can drag the overlay image on top of your original video.
