In Sakajati's HyperDragon IV ROM, the Flash Lite 3.1 ActiveX Player plugin works perfectly with both PIE8.12 & old PIE for WM6. It is a rumor that FL3.1 does not work with pie. The FL3.1 he used is 22.214.171.124. Edit: Try google 'official fliash lite 3.1 cab', you can find this build, a 2MB cab.
Edit: There are two layer's function of FL, HDIV ROM works on both of them, (for both pie & opera, in both FL3.1 cooked-in & seperately installed cases):
Layer 1: .swf files, e.g. www.cnet.com
Layer 2: Stream video like .flv on www.youtube.com
In many cases ppl say it does not work means it only does not work with layer 2. Many reason can cause this. Mostly is RAM issue, coz FL3.1 is a RAM intensive app, check HKLM > Software > Adobe > Flash Lite ActiveX > Memory Settings > Dynamic Memory (in MB), on default it was set to 32 MB. I doubt that if RAM not enought FL does not even launch layer 2.
Beside this there's some hardware driver (like D3D & OpenGL) and also software crash issue may also involved in the performance or functionality of FL3.1.
I'll attatch some screenshots later on.
If everything setting well (like in HDIV ROMs), the YouTube playback quality should be as same as the standalone player, at least I can not tell the difference from my eyes.
Edit: On HDIV Rhodium ROM for example, I don't need to do anything to ensure the playback quality for PIE. But I need to release memory for Opera to playing same quality (like disable m2d, large start menu, shutdown animation, etc.) I think it is because Opera Mobile 9.7b1 itself consumes about 9MB RAM, while PIE8.12 only around 1 MB, the ram needed for FL to play the same .flv is same on PIE & Opera.