This is how I got it to work - and it's a little "involved"... but I really like the way the video looks in the post, so it's worth the trouble as far as I'm concerned.
You got the uploading part right, just MAKE SURE you have the embed code enabled ("Display embed code and allow external sites to embed this video" checkbox) - do that on wordpress.com.
Next, make a post (but don't actually post it) in wordpress.com, with the video inserted - in the body of the post simply put that code [wpvideo dbsa40SD] then preview the post. Select EMBED (upper left in the video) and "Copy to Clipboard" next to the code listed under "Embed this video on your webpage".
Make your post on your wordpress.org site, pasting the code in the HTML view where you want it in the post.
Here's the kicker - you CANNOT turn off the EMBED option in the video in the media library on WordPress.com, or the video in your blog (or anywhere else it's embedded) will GO BLACK. However, you do not have to save the wordpress.com POST you made, you can delete that entirely.
You're restricted to the 3GB of space that you get on wordpress.com (unless you pay for space upgrades).
I just posted my first video on my wordpress.org site: http://www.kevinesmeier.info/chelsea61309/. I chose a lower quality for video file size, to see an example of higher quality video, see Matt Thomas' blog (http://www.iammattthomas.com).
This is still better than dealing with all that YouTube garbage and screening comments from somewhere else, etc. The fact that you get a "clean screen view" once you move the mouse off the video makes it very appealing. I just wish there was a better way to post the video on wordpress.org.
If anyone has a better way of doing this, please share.