We also use FLV format for our website. And this works really well. The quality is much better than YouTube/GoogleVideo, even at the modest resolution of 320x240. You can see examples here:
(Just log in as guest)
Just about anyone can download this format with various websites offering tools for this, as well as a Firefox plugin. There's no way to stop it.
The way you actually stream video (and audio), is just let Moodle do it for you. This works for MP3 audio and FLV flash video (see Site Admin - Modules - Filters).
All you need to do is upload the file, and then create a link to it. You can link to it as a URL (tricky- because you need to know how to determine the Moodle URL), or better do it via Add Resource - Link to File or Website. This gives you more control over how it appears, and also avoids it automatically embedding inline - which is what happens when you link to a YouTube video with a straight link.
Actually the easiest way to stream video is to upload it to YouTube or Google Video and then link to it, but there are issues of security and professional/branding appearance, and of course poor visual quality.
If you decide to create your own FLV video files, a good free tool is Any Video Converter. The new free version is fantastic (although it is nagware) as it can take just about any input file format. It can also batch convert and it is fast, producing good output quality (for flash). You can choose your output resolution (we use 320x240).
A real issue for uploading your own video files occurs when you might want that file to be available to multiple courses. You can link across courses, but again you need to know how to find the Moodle URL for files. Also you may run into issues with having to enroll the student into that cross-linked course as well.
The way we get around this is to place all our FLV files in the Front Page / Site Files area, so they are accessible without restriction. However that may not be appropriate in your situation.
Another alternative is just to upload it to each and every course that needs it, but then you are using more server space. You also have multiple copies of a file which, when needing to be updated, may cause a configuration management headache.
Swings and roundabouts...
P.S. If you find you need info about Moodle URLs see an earlier post of mine here: