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Heres the deal. There is a work-around. A brilliant man by the name of zbop wrote a FlashVideoBundle CAB that allowed videos to be played directly from YouTube. I have encorporated this into the new YouTube Pocket!
If you already have zbop's FlashVideoBundle installed, you can just click back and check that box and call it a week. If you don't, listen up! You will need to install FlashVideoBundle from here. Install this cab and then you will be all set to use this feature. Just make sure you do a soft reset first!
Now initially when you install FlashVideoBundle and check this box a little menu will pop up and ask if you want to Play/Save/Navigate to the Site. To disable this and watch movies directly just use 'File Explorer' to navigate to where you installed TCPMP/FlashVideoBundle and run 'MenuToggle.exe'. The message will then go away.
A small note about using this feature: Unlick YouTube Pocket, which I can control and change on the fly, I cannot change nor do I control FlashVideoBundle. If YouTube makes any changes to the way their site is set up FlashVideoBundle may stop working. I will not be able to do anything in that case. If that happens I reccomend you go back to the previous settings and wait for zbop to come out with an update. Typically things don't go wrong like that, but when they do, he is normally there to fix things quick.