How do I do a Vidio overlay where I have a Video or image as a background and another as a smaller one in the foreground like a pic in pic?

I found a post that said you are to use pip transition but traditions don't seem to work? I put the red box where I want the overlay vid to be in the white box.. but when I play the time line both vids are still full size and on top of each other?


if it helps you have a better Idea what I mean here is as link to a youtube vid that does a pic on pic affect, it uses a pic as a back ground but I want to use a Vid or PIC

http://www.youtube.com/watch?v=TXD4vykBzU0