What I don't like:
It isn't obvious that there are other thumbnails other than the first one. If a user wasn't aware that there are other thumbnails to view they would never think to hover over the image.
However if it's important the user discovers what's in the stack, this could be communicated visually like http://cl.ly/image/1c041l2e1S0O
Can you elaborate? I can think of obvious ways but they're aren't tasteful and ruin the effect.
The first reminds me too much of dcurtis' "Kudos" circle, though, where something happens because you left your mouse in the wrong spot for too long; it's nigh-infuriating sometimes.
Could you try extending the mouseover area beyond the images themselves? I'm not sure if that would be more intuitive, but I think it's worth trying.
I really like the concept and the execution anyway.
If you're interested in bleeding edge HTML5 experiments, you can watch Paul Irish interview him here: http://www.youtube.com/watch?v=ogumRA9LxR4
I would try to make it 'less sensitive' when transitioning, so the user doesn't accidentally switch images.
Also there needs to be a way to tell that there is a layer of images. Maybe some relative positioning on the ones that are hidden?
Cool idea though.
Now, compare the page as designed versus the page without CSS enabled. The one without CSS enabled is a much better user experience.