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I never had much luck playing youtube under 1.6, although I didn't really give it much time (upgraded within a few hours of getting the PE).
If you decide to upgrade, youtube will play well through the stock browser or others you might want to install.
On the stock browser, you might still get the 'sorry' message, but by simply hitting the return button (or whatever it's called -- 4th one after the rotate button), it starts right up and plays flawlessly.
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