There we go… Took me a minute. But here it is for anyone who runs into the same thing.
http://kimili.com/journal/kimili-flash-embed-20-preview-the-wordpress-edition#c001945
Needs wp_head and wp_footer to be called in your theme in the header and footer files respectively.
Ah… Its got something to do with my theme. When I used another one it interpreted the tag correctly. The theme I’m using is really stripped down ( consisting of only index, header, footer, style.css and an images dir ) and uses no js of its own. Something I need to add?