Video in Flash MX 2004 Pro

I have a *.AVI file and I want to have this controlled in flash. Now what is the best method for converting it? Excuse me as I am a newbie.

Do you import the avi and convert to a movieclip? or do I convert the file to a *.flv? That’s what I can’t get my head around! Would I use a *.flv file if I am not connected to the net? i.e. on a local device and can you add actionscript controls to it?

2nd question if that being the case, how do I convert to a *.flv file for FREE?