Hypnotic
There's a certain rhythm to this animation that's very mesmerizing. Excellent style and editing! I'm still wondering how you made it look like you did.
Some of the animation needs to be done a little better, though. In particular, when the caterpillar is crawling it looks nothing like what it should. I'd recommend that you watch a video of a real caterpillar crawling and redo that part. Also, some of the elements made in flash don't really mesh with the hand-drawn (?) pictures. Those black wavy arms, for example, seem to be unattached to the caterpillar body in certain frames.
Finally, it is a bit unclear just from watching the flash what point it is trying to make. The first few times the caterpillar comes out, nothing really changes - it is only towards the very end that the world gets smaller because it flies off. Maybe you could show how the newly-grown body parts of the caterpillar help it do usefull things in the outside world - as it is, it just goes out and back in without really interacting with it.
This animation certainly won't be liked by everyone as it's rather artsy, but I sure liked it. It's amazing what people's minds can come up with...