At last! I found the time to fix this!
The fact that Moodle does not support full screen FLV playback is something that has troubled me since day one. The button is there and many staff and students complained that when clicked it did nothing. After sifting through the code I managed to gain a much deeper understanding of the player and noticed that the fullscreen attribute is not included in the standard Moodle distribution.
Since this discovery I have added the attribute and the fullscreen option now works beautifully. I am now able to define custom skins to the FLV player and even create my own skins using Flash.