Playing AVI files stored on TC directly on iPad (version 2)

Hi,
I've just bought the FileBrowser app which works very well, but I also have some avi files on the TimeCapsule that I would like to be able to play on the iPad.
The way I see it there are two options:

1.
Have the AVI files converted to MP4/MV4 files - in that case - any recommendations for a good cheap/free program for this kinda thing?

2.
Is there an app for the iPad which can play AVI files directly when going through TimeCapsule? I've got FlexPlayer which can handle pretty much anything but haven't figured out if it can play the files when they're not actually on the iPad and I would prefer to just have all the files stored centrally and then stream.

Any input much appreciated.

Thanks,

1.
Video monkey
Handbrake
ffmpegx

2.
AcePlayer
Cineplayer X

Thank you very much for the prompt reply! Much appreciated. Right in time for the weekend so I can try it out. Perfect