Cool. Fork on github and send any pull requests. The issues right now are that it only works with ff3 and chrome. I'd have thought safari would work, but it doesn't (didn't for me). Some integrated browser detection to offer transparent reduction for images on compatible browsers would great.
It might be - not sure it's just a PNG issue, or if it's a canvas flaw, or what. The system could ideally check the before/after sizes, and only send the smaller one. Good catch (I think I'd seen that once in testing too).
I created a client-side image shrinker - demo at http://kimsal.com/shrinker - github at http://github.com/mgkimsal/jsclientshrinker Perhaps integrating this functionality for images that are 'too big' (whatever file size you decide) would be a nice enhancement? :)