Actually, I'm pretty sure that it IS illegal in a lot of places ... but really, unless you use it in front of a cop, or unless you somehow go around advertising that you have such a thing installed on your car, I doubt that it'll ever become an issue. Fitting it in the fender is just about perfect.
How much did that monster cost? And does the compressor run on a constant or switchable 12v power source separate from the horn's power supply wire? Judging by the size of the compressor, it'd have to have a pre-compressed supply of air to be able to work instantaneously, so it'd have to pump up to a certain pressure level before you can use it ... um, right?
Pics of installation would totally rock.