Have you tried the mobile site, m.youtube.com? Works much better than the built in app.
I just did a search and found out that the resolution will vary depending on using Wi-fi or 3G.... THIS SUCKS
Not when you're using the mobile app, which is why the guy above said it was better.
I don't know why.
But m.youtube.com on my iphone browser. Videos still look grainy over 3g compared to over wifi.
It's better quality at m.youtube.com over 3g compared to the standard youtube iphone app. But wifi is still much clearer.