Very interesting! It's great to see how the original sprites were formed, but I doubt I'll manage something clever like that at this stage. Remember that the graphics are taking a reduction in size, if tiling of the characters is to be done, then I think that tiling the graphics we've got - size reduced, re-coloured, and re-detailed would be the way to go.
In terms of the speed the graphics are produced on the screen I doubt it could be faster just by using tiles -although I've found that when there is more memory things do run faster - typically it seems to take a hit when lower than around 200KB left.
.iff file for the Damnd we're currently using is 89KB