Meh, he's a comedian. I think the audience took it the wrong way, not that there was really a right way to take it, racism really isn't funny. But it sort of brings up the question, how much is too much? If he had dropped the n-bomb once or twice it wouldn't have been such an issue, but his repetetive use of the word was well... unnessecary. I do think, however, that Micheal Richards isn't racist, and he just crossed a line from comedy into offensive behavior.
What's strange about all of this is that I haven't even come close to letting Mel Gibson off the hook. Maybe it's because I love Seinfeld, or maybe it's because Mel Gibson really hates Jews.