Kevin Towes presented on FMS at NAB recently and towards the end of his talk showed some sneak peaks of possibly upcoming new features in Flash and FMS. The experience he demoed shows an absolutely seamless switching capability between video feeds, or between multiple bitrates inside one file. It is not clear if it is the former or the latter, but in any case it sounds like that this is coming and it will make moving between bitrates of a single clip much easier and smoother. So smooth that you can't even hear a break in the audio.
Unfortunately the direct link to Kevin's talk does not seem to work, but if you go to http://tv.adobe.com and search for 'Kevin Towes' you will find the clip. It's the first result that comes up in the search and the sneak peak is towards the end of the presentation.


Regarding multiple bit rates I would say FMS will definitely be needed and with some buffering magic one can achive seamless switching. Progressive download would need to download all video streams in all bit rates :D.
Of course there can be some traps, so theoretically.