Tiny cameras are expensive.

Ok well, they can be expensive.

The one we decided to use came from ebay:
Ultra-small 2.4GHz Wireless Camera Nanny Cam CCTV

and only $50 after shipping.

I received it yesterday and immediately tested it with the provided AC power supplies.

Image quality is decent: I'd describe the quality as somewhere between a cell phone video and a VHS camcorder. It has a manual focus (it comes with a little tool to adjust it. hehe tool)

Audio quality is decent: Audio??! Yes, this camera has a built in mic, so you can hear, not just see your kids being beaten by the nanny.
Though you wouldn't be able to clearly make out a conversation from 10 paces, it's good at close range. It'll do just fine for our purposes.

I noticed that the image would break up a bit if the camera was jostled at all, but upon closer inspection it was just the power plug wiggling around. We will perform a power-jack-ectomy and hard wire the camera to our battery holder, so this will not be an issue. In fact, the little power jack dongle thingie feels heavier than the camera itself.

To be continued...