When you add a video slot, you can select from videos you have already associated to your site, or you can search YouTube from within the Media section to find videos you want to add to your site.
If they are not on YouTube, you can use their embed code to include them on the site.
If the video you want to add is not on YouTube, you can add video from a whole range of video services like Viddler, Vimeo and others by using its embed code.
When adding a video in this way, click on the "Add by Embed Code" button and just paste in the embed code. You can then upload a screenshot or thumbnail for when the video is in the pause state in the Media section.