How do you produce product demo videos?
IanOzsvald: +1 for CamTasia (Windows) and ScreenFlow (Mac), also RecordMyDesktop (Linux).  CamStudio (free Win) ok.  Online solutions (screencastomatic, screentoaster, jing) also good.  
I'm a professional screencaster (http://procasts.co.uk) - if you want to crib examples, see my Examples page, they all reflect live use of screencasts that make users happier, convert more visitors, reduce support costs etc.  
Definitely get a good mic - I prefer pro audio equipment but you'll go a long way with a decent USB mic (not 3.5mm jacks, they get electrical noise from the motherboard).  
If you can't do good audio yourself then see something like voices.com for outsourcing but melding the video+audio can be problematic.  You do need good audio, as others have said the easiest way to kill your presentation is muffled, noisy, volume-changing hard-to-understand audio.
Expect 1 day to do a first reasonable video of a few minutes, several days if you want a perfect cut with great audio, a bit more if you want to add effects (captions, fades, highlights, scrolls).
Look at ShowMeDo for 800+ examples of screencasts made by many users on different OSs with different tools.
Jolt Magazine has three useful articles: http://joltmagazine.com/2008/10/08/lets-make-a-screencast-th... http://joltmagazine.com/2008/09/23/lets-make-a-screencast-pa... http://joltmagazine.com/2008/09/17/screencasting-an-expert-r...
See LongTail video player (http://www.longtailvideo.com/players/jw-flv-player/) to embed flv/mp4 result, they have great plugins, it works with thickbox/lightbox, stats tracking possible, lots of features, I use it for all my work.