I personally think that #1 is the best way to go. I think that if people have to watch an advert before each video, they wont be watching too many videos. The problem with putting it at the end is that they'll likely click on when the advert starts to play, but I would rather have that happen than to have them stop watching.

Doing it this way, the ad can be displayed at the end where it is unobtrusive to the user. I would personally just use the pre-roll for a short 3-4 second station id, mostly because it's better branding than a watermark when it comes to embedded videos.

A better method of advertising may also be the overlay image, seen in an example at the url below. It looks to me like it's basically a fancy watermark. Would be nice to have something like this come in after about 15 seconds of play and stay up for 5-10 seconds.

http://www.jeroenwijering.com/extras/ad ... ments.html

Just my thoughts.