Hello Carl,
I'll try to help you out with what I know.
1) It sounds like you can achieve this by either an animated gif file, or a simple swf file. You can make .swf files with Macromedia's Flash, and an Adobe product (sorry...cant think of it off the top of my head... is it GoLive?).
2) Here, you have many options, unfortunately most of them you pick are going to degrade your quality because you want smaller files. You can make the video files Quicktime, Windows media, mpg, OR... the way I have been using it, A swf (Flash MX) file. I have found the quality of the flash mx video files is extremely good, and the size is very managable. THe only thing you miss out on is the flash file is not streaming. If you want to "Stream" your video (have the user view it while it downloads), you will want to go with quicktime or windows media file. If you want an example of the flash MX video quality (using the sorenson squeeze codec), please follow this link to my website:
http://influx-media.com/port_ERU.html
The above files are around 1.5 megabytes... IMO, thats damn good for the size.
Brian Artka
http://www.influx-media.com
Digital Video/Digital Media Specialist
Video Production/Web Design 
