R – Why is the swf causing the Flash Player to crash

Passing this params in URL won't help, because they're taken using javascript code in the html-wrapper. The 'flashVars' params are taken using the Application.application.parameters, so, you have to set these params manually in your case.

If you are using SWFLoader to load another app, you should create the object, that will represent the application loaded and apply all you need:

<mx:Script>
    <![CDATA[
        import mx.managers.SystemManager;
        import mx.controls.Alert;
        import mx.events.FlexEvent;

        private var loadedApp:Application;

        private function onLoadComplete(event:Event):void {
            var smAppLoaded:SystemManager = SystemManager(event.target.content);
            smAppLoaded.addEventListener(FlexEvent.APPLICATION_COMPLETE, onLoadedAppComplete);
        }

        private function onLoadedAppComplete(event:FlexEvent):void {
            try {
                loadedApp = Application(event.target.application);
                if(!loadedApp) throw new Error();

                loadedApp.parameters["param1"] = "value1";
            } catch (e:Error) {
                Alert.show("Failed to get application loaded.", "Error", Alert.OK); 
            }
        }

        private function onLoadError():void {
            Alert.show("Failed to load an application.", "Error", Alert.OK);
        }

    ]]>
</mx:Script>

<mx:SWFLoader 
    width="100%" height="100%"
    source="./AppToLoad.swf" 
    complete="onLoadComplete(event)" 
    ioError="onLoadError()" securityError="onLoadError()" />

Not sure I get exactly how the application works so excuse me if I'm wrong. If the flex instance must load the AVM1 proxy wouldn't it be possible to inject a flash-var via the URL containing a generated ID for the LocalConnection to use ?

In addition to your comment, just added how to send variables to the AVM1 movie. This works fine locally at least (not tested on network):

AS3 - FP10:

loader = new Loader();

var request:URLRequest = new URLRequest("as2proxy.swf");
var variables:URLVariables = new URLVariables();
variables.id = "local_connection_id";
request.data = variables;

loader.load(request);

AS2 - FP7 (first frame on the timeline of "as2proxy.swf") :

trace(id); // (_root.id)

BTW, stumbled on the following class from Libspark : http://www.libspark.org/svn/as3/ForcibleLoader/src/org/libspark/utils/ForcibleLoader.as