Your video will look as good as you compress it... the more you compress, the worse it looks... and there are techniques and strategies to use when doing video compression... hence why a video editor is typically a must for agency work. And as far as using vector format with a SWF, this rarely happens, because most clients don't want their animations to look cartoonish... they always want photo realistic 3D... which would require either Paper Vision or Away3D engines, or 3D rendered as video.
Since this is a local app, you can use very high compression settings, even HD quality, and it should work great.
If you need animations that are synced to the frames of the video, just embed the sucker in the timeline, and make cues that fire off a dispatched event when the playhead hits that frame. It is very accurate and I have never had sync issues with this. The only issue I have come across it when you need to navigate away, you need to make sure to stop the timeline from playing in your clean up code.
We can agree to disagree about "restrictions" that FLV playback has VS SWF playback...
rp / ZA