Thanks Slacker, I guess I let the switching scheme get away from me somewhat. I think you do have the theory correct, unless i've forgotten something.
As it stands, I think you'll probably need three switches if you want true bypass. Originally i'd planned to wire Play/Record to one half of a DPDT switch, with the second half wired to the reset pins. Connect the center of the reset pin to a 100K resistor to ground, and the two contacts to Vcc. If the switch is a break-before-make type this might allow PD to be pulsed enough to reset, restarting playback. If not, I guess you'd need to have a bypass switch and a reset switch.
To be honest, I'm confused as to how Zach's design is able to record whilst in the bypass mode if it's still true bypass. I can't see how it's done with just two switches.
I'm not entirely sure why the chip doesn't immediately begin playing when switching P/R from low to high. According to the datasheets that's all it needs, however you could try adding the indicator LED's and transistors connected to the P/R and EOM pins. I have a feeling this might provide a low going pulse to reset the state once recording is finished.
I'll do a little more research and let you know tomorrow, i'm a bit rusty on right now.
BTW, I had to order my chip online as my local maplin didn't stock the 2560, surprise surprise, so that's put back my efforts somewhat.