PHP doesn't "process" anything - if you tell it to spit out text, that's what it'll do. What's wrong is your syntax; use the board's PHP bbcode tags and you'll see why:
<?php
if (!isset($_GET['video'])){
echo ' <a href="#"><img alt="" width="485" height="210" src="./css/images/logo-4.jpg" class="banner" /></a>';
}else{
echo '<OBJECT classid="clsid27CDB6E-AE6D-11cf-96B8-444553540000" codebase="http://download.macromedia.com/pub/shockwave/cabs/flash/swflash.cab#version=6,0,0,0" WIDTH="485" HEIGHT="210" id="$fileName" ALIGN="">';
<PARAM NAME="movie" VALUE="$fileName">
<PARAM NAME="quality" VALUE="high">
<EMBED src="$fileName" quality="high" WIDTH="485" HEIGHT="210" NAME="<?php echo $fileName ?>" ALIGN="" TYPE="application/x-shockwave-flash" PLUGINSPAGE="http://www.macromedia.com/go/getflashplayer"></EMBED>
</OBJECT> ';
}
?>
Right after the <OBJECT> tag, you close the echo'd string with a '; .
Furthermore, you have a set of <?php ?> tags inside the NAME attribute of the EMBED tag even though you're already echo'ing this from inside PHP code...?