This is referring to a camera connected directly to the computer running WeatherCat. If the camera is Mac/Quicktime compatible and typically these days this means UVC (USB Video Class) then it'll be made available in the Camera pop-up in the webcam preferences. WeatherCat will then control the camera directly.
The other two options allow an image to be picked up either from a file on your hard drive or via a URL. Many IP based cameras make an image available via a URL - if this is the case, you can enter the URL into the 'File From URL' field, and the image will be picked up there. Note, the image must be available via a simple URL - typically any URL involving passwords or usernames generally won't work.
Alternatively, if the camera can FTP the image somewhere, again so its available via a URL, you can pick it up from there again with the 'File From URL' option, but note that if it's FTPing the image, then there's a chance you will occsionaly pick up a partially formed image unless the camera supports uploading with a temporary filename then renaming it when the upload completes.
Alternatively, you can use something like EvoCam to grab an image from the camera and store it somewhere on your hard disk - in this case use the 'Set Path' button in the webcam preferences to point WeatherCat at the image file on disk. In all cases, the file needs to be a snapshot/image (typically a jpg or png) and not a movie file.
Hope that helps