One of my biggest pet peeves has been finally solved by xeudoxus at AllDroid.org. Here is how to do it, I have tested it and it works 100% flawlessly!
Well im pretty sure that this is the first time this has been done (on any android system). Tried to find it elsewhere and had no luck.
So..... If you LOVE High Quality YouTube videos then download the file. As of right now (Later ill fix it, too tired now) You can ONLY watch high quality, even if you tell it to switch to normal it wont let you .
If there is only a normal version video it will play that (so best quality of the video)
This is for Droid 2.01 (I know some CDMA Hero users were using the Droids Youtube.apk) I know this works on Droid (Spent the last 5 hours on it) so use it at your own risk on other devices.
Backup your /system/app/YouTube.odex first!!!!!!!!!!!!
rename YouTube.zip > YouTube.odex
Then push the new one over to /system/app/YouTube.odex and reboot.