I just updated my AppleTV with the latest software to get access to YouTube and I have to say that the H.264 quality is excellent! We all know what the majority of YouTube video looks like, but this is something well beyond what you normally see and bodes very well for the iPhone when it’s released next week.
Once you connect and login, you can see your favorites and rate or report video. You can’t however see your own videos or those of your friends / subscriptions which seems like an oversight to me. I would expect to see that in a future update since that’s a large part of the community aspect within YouTube.
I shot some video of the process which should give you some insight into the update process as well as the quality of the experience. It’s not the most exciting of videos, but here you go: