I knew that it was done beforehand, otherwise I might have tried it myself (although that probably wouldn't have been a good idea anyway!)
I also think it would be better to do the censoring on-the-fly rather than sticking it in the database, since (for reasons already mentioned) it is always nice to have a "fresh copy" of posts in case settings change in the future. Although, would there be performance issues in doing it on-the-fly? It seems like the posts are already being parsed on-the-fly for things like vBB code, smilies, etc.
If any brave soul out there is thinking about giving it a shot, and would like someone to help test it or provide feedback, I'd be glad to help.