Here are a few pictures from messing round with a conventional wood lathe, and a 3 Axis Router. I hope to conclude exactly what I want to use for a tool holder, and also the type of tool to use in this situation. For now, you will see that I simply clamped a "D" blank tool to the Z axis.
I want to make this whole concept work so that the Router spindle will be on at the same time as the profiling tool. At some point then, the Lathe spindle could be brought under PC control as an "Indexer". Then I can use it for conventional 4th axis applications. All in All, I might not end up using this Lathe either. We'll see how that shapes up in the end.

As you can see, I am cutting off of the side of the Z axis gantry.......

You can see that I was not using a traditional cutoff tool. I may be when I see how some different holders fit. I want to keep the holder under the point that the router mounts, so both Routing and turning methods can be used.
You can Zing out profiles in no time with this method as shown below.

One thing I like about using Round Blanks for tooling is that I can quickly make my own custom profiles. If I end up using a typical Cut-Off style blade, I only have 1/8th" wide to work with.
Below is a toolpath done in Vector CAM

It took me a while to figure out how to get Vector to cut the whole area out rather than just work from one side. The key is in that "free angle" ! It has to be 90 degrees !
This is some of the first things I cut. I started with some old pine.. No sense cutting up a bunch of good cherry !

Next issue will be to find some nice looking profiles rather than the quick PotShots I drew up.
UPDATE - Made that New Holder !

I made the Holder to hold a simple Cutoff bit. It can be sharpened in various ways to hopefully produce desired Results.

I ended up liking the Cutoff Tool better because you can get into the corners and cracks much easier and much deeper.
Below you will see how it is Mounted on the Machine

Now, When I can find some time, I'll try to cut with both the Cutoff bit, and possibly the Spindle.
One last Photo: The best Holdowns I ever made !

Thats all for now. I hope to post more photos when I get a few projects cut