Yes, flash compresses all of your media be it images or audio.
So, first off, don't use/import pre-compressed images. If your using graphics you've obtained from the web then your kinda screwed.
Having done that, you can either let flash compress each image in a standard way (which is usually pertty ugly) or you can overide that standard setting (it's in export/publish settings somewhere), but that's not the best idea as varying types of images retain/loose quality differently. The best method is to set individual compession rates for each image. To do this, open up the library and double click on the imported image file, there you'll get a lit of compression options.
The JPEG lossy compression option is usually the default for all JPEG and 24-32 bit PNG images. 8 bit PNG and GIF images will use a paletted lossless compression (lossy = compression with quality loss like blury/boxy artifacts, lossless = compression with no quality loss, kinda like internally zipping the pixel data). Although, flash MX (not sure about MX 04) has an odd range for JPEG Lossy quality. 100 usually means no quality loss, but in Flash this is roughly the same as 90 to 85 in Photoshop. As far as I know, there is know way to use JPEG compression in flash without some quality loss. And at 0 in flash things get downright ugly, Photoshop doesn't even let you compess images that much it's so unberably stinky.
The default in flash is usually JPEG compression at 50, which is roughly the same as about 30 to 40 in PS, which is why it looks god awful. Settings of around about 80->70 (Same as PS 50-60) will do for most images if you're animating them as you don't need detail if it's moving. 80->90 if you really care about the fine details, but I don't think I've ever needed to go above 85 before.
Anyways, play around with it, you'll get the hanf of it eventually.