I got it to work but I have no idea as to how efficient it is. Is it better to stream from the file system than from the database in terms of connections, efficency, load etc.
I could use some pointers on this!
I'm using JW Player here, hence "swfobject.js" and "player.swf"
httpHandler:
public class ViewFilm : IHttpHandler
{
    public void ProcessRequest(HttpContext context)
    {
        try
        {
            // Check if id was given
            if (context.Request.QueryString["id"] != null)
            {
                string movId = context.Request.QueryString["id"];
                // Connect to DB and get the item id
                using (SqlConnection con = new SqlConnection(ConfigurationManager.ConnectionStrings["ApplicationServices"].ConnectionString))
                using (SqlCommand cmd = new SqlCommand("GetItem", con))
                {
                    cmd.CommandType = CommandType.StoredProcedure;
                    SqlParameter sqlParam = cmd.Parameters.Add("@itemId", SqlDbType.Int);
                    sqlParam.Value = movId;
                    con.Open();
                    using (SqlDataReader dr = cmd.ExecuteReader())
                    {
                        if (dr.HasRows)
                        {
                            dr.Read();
                            // Add HTTP header stuff: cache, content type and length
                            context.Response.Cache.SetCacheability(HttpCacheability.Public);
                            context.Response.Cache.SetLastModified(DateTime.Now);
                            context.Response.AppendHeader("Content-Type", "video/x-flv");
                            context.Response.AppendHeader("Content-Length", ((byte[])dr["data"]).Length.ToString());
                            context.Response.BinaryWrite((byte[])dr["data"]);
                        }
                    }
                }
            }
        }
        catch (Exception ex)
        {
            throw new Exception(ex.ToString());
        }
    }
    public bool IsReusable
    {
        get { return false; }
    }
}
javascript
The function adds a player to <div id="video1"> and can be called e.g when a user clicks a button.  
<script type='text/javascript' src='swfobject.js'></script>
<script type="text/javascript" language="javascript">
function vid() {
  var s1 = new SWFObject('player.swf', 'player1', '480', '270', '9');
  s1.addParam('allowfullscreen', 'true');
  s1.addParam('allowscriptaccess', 'always');
  s1.addVariable('file', encodeURIComponent('ViewFilm.ashx?id=10'));
  s1.addVariable('type', 'video');
  s1.write(document.getElementById("video1"));
}
</script>