AH HA! I think I got it figured out. I had to name the class in the web.config file rather than use "*". Then SharePoint sees the webpart. Funny though, I can go back to the web.config file and change the Typename back to "*" and it still works.
Good demo. I have some questions about making it work for me on my system. I am running WSS 3.0 Beta 2 and the bin directory and web.config file were not located at C:\inetpub\wwwroot\. I did find the virtual directories that someone else pointed out but again no folder specifically name "bin" was there. Could the litware.dll be placed under the _app_bin directory or the App_GlobalResources directory? I modified the web config file there and created a bin folder. When I go to the Web Part Gallery and select New, I do not see the litware web part to add.