I am currently making UO flash movies and i have learned alot since the first time I made one. You must first understand the flash program in order to do any of this properly. One of the biggest things you have to understand about flash is the fact that it is a vector based program and rasterized images (.bmp .gif .png) will not work effectively when directly imported to the program. Now it is not limited to the files mentioned above any non-vector image used is going to blow up your file size and look bad in the end.
What you need to do is gather all images to be used and save those as a .png there is a reason for this and I will explain. You basically want one large sheet a single image containing each frame of animation for a character each character would have its own .png file. You can use macromedia fireworks for that. Once all your animation frames for the character are laid out on a .png and saved you import that png to flash and use the trace bitmap function to turn your rasterized image into a vector image and that is how you cut the size and reduce distortion.
There is so much in between what I told you and actually creating the movie though and I would really suggest first learning about how the flash program works and understanding the difference between a vector image and a rasterized image. Once you have a good idea how flash works then look at tracing bitmap images in flash and you will be able to go from there with little trouble.
In the mean time though if your bored with all of that you can make gif animations with almost no hassle and you can use a bitmap image for those because a gif is a bitmap image.
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