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My Youtube videos certainly look as good on my S as they do on a PC, same with other YouTube videos that I've watched on the S.
You're not comparing YouTube HD videos you watch on your PC, to the ones you see on your S are you? Because the S does not do YouTube HD.
Do you have Wi-fi enabled?
My Galaxy S was set to play the lowest quality stream by default when youtubing over the mobile data network, but the high quality version when using Wi-fi.
Guess it's a bandwith saving measure.