YouTube is now accepting and displaying higher resolution videos. Instead of the old 320 x 240 resolution, YouTube can now work with videos up to 480 x 360 resolution. YouTube calls this "Higher Quality Video," which it is.
To view higher quality videos whenever the higher quality is available, you need to change your account settings. Go to your Account page and click the Video Playback Quality link. On the next page, select the playback setting that makes sense for you, then click the Save Settings button.
Know, however, that the majority of existing YouTube videos are available only in the older 320 x 240 resolution. Look for newer videos to be uploaded at the higher resolution.