Interesting perspective. Coming from the perspective of a non-US defence executive, I will have to say that failing demos are quite normal in defence applications. It happens, and you still win contracts, because the end client sees the value prop and trusts you to sort out the issues. Still nerve wrecking though.
Not to mention an unscheduled demo. How often do software engineers have a reliably working local state of a repository that they could just start up and demo whenever someone walks by their desk?
Was the system in operational readiness at this point in time? Sounds like it was in the middle of a sales process, based on the fact that you described it as part of the sales process.
