I was complaining in May that Google Video served content from third-party sites (not from Google-owned sites) in a Google Video-branded player and hosted all the content on its servers. Google changed its mind in June and started to only show thumbnails from the videos.
Apparently, this was only a change in exposing the content, because Google continue to host FLV videos from third-party sites like Metacafe. Searching for [Sunshine Metacafe] on SearchMash, an experimental Google site, you'll notice that, even though all the videos come from Metacafe, the interface doesn't communicate this. The only way to realize that the source of the videos is Metacafe is by clicking on "see larger video". You'll be sent to a Google Video page that shows the original source in a frame.
All the videos from third-party sites are displayed in a Google Video player...
... and they're hosted on Google's servers:
I agree that it's more convenient to host all the videos in the world and play them using a standard interface, but I don't think copyright laws allow you to do that. It's the same reason why Google only shows thumbnails in Google Image Search and sends you to the original site to see the images in full size.
Other video search engines have different ways of displaying videos: Yahoo Video shows a thumbnail and sends you to the original site, Truveo displays the embedded player of the original site, while Blinkx hosts a 30 seconds preview for each video.
38 minutes ago