My understanding this would mean smaller sized maybe similar to the Youtube 320x240. If they are streaming then it would most likely be compressed fairly heavily so quality may not be a significant factor.
I would say the most reasonable "source" is the final edited version of the video. You don't need to edit the video again. If you have an original edited version in a higher quality format than the current .wmv file then yes you should use it to create the new .flv or other chosen file format. If the .flv converter does not support the "source" format then dump it to a higher quality .wmv and then convert.