Would be perfect if they placed it inside the search button "blank" space between the keyboard and the search window text box
This is the same thing I was thinking. As a standalone app, Gesture Search doesn't really interest me because it duplicates functionality that is already present in the phone. For example, if I want to search for "Nancy" in Gesture Search, I have to open the app then swipe an "N". To do this without Gesture Search, all I have to do is click on the magnifying glass button and then click the "N" key on the keyboard.
Now, instead of duplicating functionality already present on the Droid, if Google integrated Gesture Search into the search capabilities and core apps of the Droid, I would be excited. They could ad an option to allow you to swipe a letter in the core search app above the keyboard. And even better, they could integrate this into search for all their core apps so that swiping a letter on-screen could virtually replace scrolling through large lists.