I believe that some form of contact is essential during both demos and application practice (e.g. Kenpo technique line).
In my limited experience, contact:
1) Enables practitioners to test the effectiveness of techniques practiced in the air;
2) Ensures that when you actually hit something, your reverse punch, backfist, knife-hand etc. won't come apart like a cream puff;
3) Teaches the person on the receving end (the uke) to ride the shot and minimise injury (note: I don't mean stand there and take it, but 'roll' with the force of the blow);
4) Provides invaluable insight to the uke in that he or she can feel what it's like to be hit, and therefore, understand how to hit someone to achieve a similar effect.
Moreover, simulated attacks (the initial assault) should be as realistic as possible, otherwise you each other of the opportunity to test key attributes such as speed, power, timing and body mechanics. Instead of punching near the chest, really try to punch them IN the chest, but with deliberate control. This is how I learnt to execute the off-angling move in Leaping Crane; get hit a few times and you learn real fast, with only a bit of a sting and a bruised ego to show for it (shrug).
Lastly, I believe that injuries often occur when:
1) Either party (attacker, defender) loses control (in which case, they need to be read the riot act!);
2) Either party is not concentrating and does something completely unrehearsed (riot act again!); or
3) The uke does not dummy correctly (doesn't concave for a rib or stomach shot, doesn't leap back when kicked in the groin, doesn't move his or her leg out of the way of an incoming sidekick).
Just my two cents FWIW.
And oh yeah, imho, the girl who always forgets she's in a demo... she needs to be severely reprimanded. What we do is already dangerous enough; loss of control is therefore inexcusable.
TCG