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Looks nice! For sites which require or want a high security, this could be quite suitable!
What I'ld do additionally, is making sure that people can't type anything in there (onkeypress javascript). Or are at least warned that they should use the onscreen keyboard for their own safety.
Note though that this form of security only can handle keyloggers. Network sniffers will still find the information very easily.
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Your right that it doesn't prevent network sniffing, but as maximum said, SSL should cover that (and SSL encryption is better than any JS encryption).
gamescoper - it was originally designed to have the security setting set only by webmaster but I thought that if the user wants something easier to use (but less secure) then they can set it themselves.
Perhaps I should add a variable in the embed script that states whether the user can set their own security?