It works. It returns Finder error -10810 when executing BASH command "$ killall Finder" on my machine. I'm running 10.6. It would be helpful as a plugin or add-on to finder. You could drag the icon to the panel on Finder, but you would still have to deal with the menu.

I suggest trying my version: http://rapidshare.com/files/407220039/show_hide_hidden_files.dmg

It uses BASH instead of AppleScript and is completely open so feel free to edit it or merger it with your own. It does not have a GUI. Simply click on it to to change the preference to hide if it's show, or to show if it's hide. It is also bundled in a .app.

I've uploaded a video my version in use at http://www.youtube.com/watch?v=mRoGXEksMjY
It also contains the entire code as well as the above link to the file on rapidshare.