I like your ideas, 43501. DT, your post brought another idea to my mind, even though it has very little (re: nothing) to do with 43501's.
In the beta builds of Cave Story, Balrog was a small, common enemy. I don't know if the sprite sheet for those minibalrogs is floating around anywhere, but if it were it could be useful. Maybe a Balrog-based mod could tell the story of how Balrog left the land of mini-balrogs and grew into the behemoth that we all know and love. Yes, I know that the mini-balrogs aren't "officially" part of the "cannon" or whatever since they never made it into the completed game, but it could still make for a fun story if it were executed well. That way MyChar would use a smaller Balrog sprite. Just a thought.
