IO540,
Yes, you're quite right about being dependent on other aircraft having transponders. Actually, not just having them but turning them on - I pass quite a few PA28s and the like which presumably have transponders fitted but don't show up on screen .
This is one of my main worries about GA TCAS; it has the potential to lull you into a false sense of security in that it's easy to start to assume that it'll tell you about everything that's out there. The fact that it tells you about so much traffic you wouldn't otherwise have been aware of only reinforces this impression, but it's a potentially dangerous one.
Because I fly microlights as well I'm quite aware that the majority of my lightweight friends don't have a transponder and therefore won't show up, but even so it is very easy to start to rely on that nice colourful TCAS screen.