There are doubtless plenty of different ways to play video from a SharePoint 2007 site. Here's an example of a nice simple one. The text you're reading now is inside a Content Editor web part, one of the most useful new web parts in WSS 2007. I uploaded a video to youtube on building custom list forms in SharePoint 2007, navigated to it on youtube, and clicked in the "embed" url youtube exposes for you. Here's the url:
<object width="425" height="355"><param name="movie" value="http://www.youtube.com/v/zs5kHAddhzY&rel=1"></param><param name="wmode" value="transparent"></param><embed src="http://www.youtube.com/v/zs5kHAddhzY&rel=1" type="application/x-shockwave-flash" wmode="transparent" width="425" height="355"></embed></object>
To embed and play this video from youtube, directly from within our SharePoint site using the Content Editor web part, all I have to do is copy this block of html code to the clipboard, and then paste it into the Source Editor property setting in the Content Editor web part. Since the Embed url is exposed for every video on YouTube, you can use this technique for any video content from youtube.