Just finished uploading the RsWebParts 1.3 package to the project site. I added in a quick fix for the parameters issue. The fix is that you can now include the standard Reporting Services toolbar and parameters which should fix the problem. It isn't as flexible and it takes up some of the report view space, but it works until I come up with something better.
Thanks to everyone for all the great feedback, especially David Korn for testing out the new version.