I'd recommend that you do not sit in the same room and if you have to do not say that you were one of the developers. People might not be as honest because they might think they'll be offending you. In fact, its often best if you have a third-party (or make it look like a third-party) show off your stuff. This way the participants will feel that the person isn't tied to the product and are more likely to be honest.
As for how to show off the product, ask the users to first play around with the software for a couple of minutes. Once they get comfortable, if your product "remembers" settings reset them to the default. Then ask the user to perform tasks. For instance, if you were showing off a contact management system you would have them "Add a contact", "Search for a contact", "Delete the contact", etc. Never take control of the mouse or keyboard, always keep the user in power.
At the end, ask them about any features they found good, bad, hard to use, easy to use, etc. Never prompt them though. The question/answer "Did you like feature XYZ?"/"Yes" is worthless. "What did you like or dislike about feature xyz" will give you much better answers.
I'd really recommend screen recording the session, if possible, and also have a video camera on the user if you can. This way you can take that back to the other devs so they can experience it.
I can go on and on, probably, but you'll learn each time you do this and hopefully you'll adapt. I've had demos completely change from day 1 to day 2 because we learned something so obvious that we didn't even think about it.