Aside from all the technology, it's crucial to get a solid, professional voice-over that tells a clear story about your product. My personal experience has been that even the best video production can be quickly tarnished by a voice-over that is casual, meandering, or inconsistent. For our demo video, we first sketched out what points we wanted to make in the video, wrote a draft script, then recorded nearly an hour of screen footage. My colleague then spent a couple of days locked in a room with iMovie and a microphone. We ended up with a five minute video that I think really captured what we were trying to do with our product. We used ffmpeg for conversion to mp4+h264 (and a fallback to flv), and the very respectable JW flash video player. I think Snapz Pro X was used for video capture.
We worked with MostlyLisa.com on PriceAdvance.com's video demo (http://www.priceadvance.com/demo_video) - she did a great job and is up for more work like this I'm sure.
Seconding this. Use x264 (or an application that uses it, like ffmpeg) and make yourself an mp4 video that plays in Flash. Having low quality for a product demonstration video simply isn't tolerable--and yet it's amazing how much people tolerate awful quality internet video despite the fact that one doesn't actually need a lot of bandwidth to achieve reasonable quality. JW Player is of course a great tool, and takes literally 30 seconds to set up.
My standard toolchain is ( x264 -> rawvideo + faac or NeroAACEnc -> aac audio ) -> mp4box -> mp4 file. For those who are commandline-phobic, there are many GUIs to streamline the process; for example, MeGUI can produce Flash-compatible H.264 video files with x264.
Make sure you're using the latest versions of the encoders as well, especially if you're trying to get away with a much more fancy video than the one in the parent--it's better quality and compression for free.
Also remember that Flash supports H.264 all the way up to High Profile, so there's no reason not to use all the features.
(aside: above video uses a ~2007 version of the encoder, according to my detection tool)
