Additionally, Castles 2 won't play the videos if they're not in the directory -- since IIRC the game itself was about 4 MB while the videos were something like 7 MB, so you might have gotten a "truncated" version that saves on the space if you didn't find the videos in your version. But yes, it played short B&W videos in the lower right part of the screen; incidentally, there are some "extra" videos (not accessible via normal gameplay, but viewable by changing filenames) of when they were testing the feature out that's part of the video set.
(Darn...I was one day late
)