This is funny. Microsoft holds a Windows Vista speech recognition demo session and things hardly go well. This is the awesome doublespeak it spits out during the session:
Dear aunt, let's set so double the killer delete select all.
The poor presenter tries to repair the situation but it goes from bad to worse. Here's a video of the event:
I feel for the Microsoft presenter. I've been in a similar situation (although not quite as devastating or as funny as this one) where nothing in your demo to the client works. It's Murphy's Law that whatever can go wrong will but only at the most inopportune time. I'm sure all you other software developers out there can agree. You can practice your demo a million times but the time you actually perform it for your audience things goes wrong.
The best way to handle these situations is to not get frustrated, embarrassed or angry. Laugh at yourself and roll with it. If you have the client laughing (with you, not at you) and make them sense that you are secure in the fact that nothing worked quite right they will feel more confident that you will get things working correctly.
What's worse, seeing someone screaming at the computer and saying "It's not my fault! It worked yesterday! I swear it did! It must be this computer, is Service Pack x installed??".
Someone taking it all in stride and laughing it off. Then explaining that this is a demo of a work in progress and jotting down notes of problems as they occur.
That second person seems a bit more stable and likely to succeed than the first guy don't you think? Don't make excuses. If things don't work then that's something that needs to be addressed instead of making excuses for it. Unfortunately, Microsoft's has made excuses for the failed demo above by blaming ambient noise and echo. Excuses don't instill confidence. Actions taken to correct the problem instil confidence.
Side Note: Microsoft's situation is a bit unique in that they needed this demo to go well. Vista has slipped several times and still doesn't look like it's coming out anytime soon. Confidence in their ability to ship is already low.