Flash Player 7 works fine as a standalone application, since the security model is not applied to locally-running content. However, using the test movie command from within the Flash authoring tool probably won’t work correctly. For more details, see thie article by Deneb. Note that you can use /etc/hosts or the equivalent to assign domain names to IP addresses for your local machine.

There appears to be an issue with flosc and the Flash Player 7, likely related to the changes made to the security model. Until this issue is resolved, you should use a version 6 or earlier player.