If anybody has done his/her research in this area, please share as well.
Otherwise, I will test out further before sharing the fix.
If you have a non-english ROM device, you may have to follow this instructions, after the installation.
Add Youtube fix to overcome lag playback for High Quality videos. Credits to akp99. Please download the fix here I will update the full build with the fix.
Minor update to the CAB, CAB no longer hard code to \Windows directory, but I have not tried if it works on storage card.
The cab file can be found here
I have created a patch CAB to restore the 8 system files that were overwritten by the original Youtube CAB. This is probably the last resort before having to hard reset to get Youtube working (if you had previously installed Youtube before)
I have created a patch CAB, if you do not wish to hard-reset your Xperia to install the X1i-Youtube.cab. But let me know if it works for you, because while this patch CAB does correct the problematic registry entries, it does not correct the 8 system files that the original youtube CAB has overwritten.
Build a CAB that works fine after I hard reset my phone (after umpteen times of hard reset!)