Use the Replay Editing Mode
1. First, you need a recorded replay. You can get one of these by playing a game in the "Split Screen," or "Online" modes. After you finish the game, the menu will show you your stats, awards, and (depending on the mode) have options for saving a replay. Save your replay in to an available slot, or delete an existing replay to make room.
You can have at most 20 replays, depending on how much space you have on your HDD. When space starts running low, the number of available replays will be lowered so you dont run out!
2. Once you've saved a replay, head back to the main menu.
3. From here, select "Extras"
4. Select "Replays"
5. A menu showing you all of your saved replays will be shown (or, if you dont have any, a message will greet you telling you how to get some stuff in the list)
6. Select a replay, and choose any of the options.
If you choose to upload to YouTube, or save to the XMB, you will have additional video editing options, otherwise, you just get standard camera controls. Also, the "Help" section contains special information for replay editing mode, I suggest reading them all!
Pressing Start and selecting "Controls" will show you a complete listing of all the available buttons for your editing mode. Every button has a function!
If you chose a video option in step 6, you will have approximately 10 minutes of recording time, in which time you may toggle recording as many times as you like, until your 10 minutes of video has been used, at which time you will be forced to save or quit. If, at any time during your recording process, you decide that your video is perfect, you can press Start and choose "Save Video" to begin the Saving/Uploading process. This is only available to users who selected a video option in step 6.
If your video is larger than ~35MB, you MAY have trouble uploading to YouTube. It will pause at 98% for up to 2 minutes, and then give you a message saying that the server timed out. This is an issue with Sony, and they have told us that it has been resolved in the next firmware update (2.5x), due out soon. Your video was still uploaded successfully, even though the message says that there was an error. There is no need to retry the upload. Sorry for the confusion.
In the event that a video actually fails to upload, fear not! You can always retry, or just save it to the XMB for uploading later (by a PC).