As you might be aware, videos uploaded to YouTube are usually of a higher original quality than what the site shows you in the video window. Video and audio are transcoded to a low quality Flash format, resulting in a fairly low quality video and low quality mono audio. I expect YouTube made this trade-off in order to lower the server load at their end (and as such reducing cost), but one might even argue that a lower bit rate results in a better user experience for the user when he or she is using a slow connection (faster loading times, less hickups, altough this is becoming an increasingly smaller problem).
However, it seems that YouTube does in fact store the original uploaded video material and not only the low quality Flash video that is presents to its users by default. This became clear when Apple introduced its iPhone in June of 2007, and with the Apple TV firmware update of that same month. Both devices cannot play Flash, however they both allow viewers to watch YouTube content. For this to work, YouTube offers the video in AVC or H.264 format. And since older videos were also made available to users of these Apple products, one can assume that YouTube saved the original videos in order to do the transcoding.
As a nice side effect, videos played back on these devices looked better than the ones on the YouTube.com web site accessed from a computer, as H.264 is a fairly powerfull, efficient and high quality codec.