Here's an example of video that's available both in the regular version (320x240) and in a higher quality encoding (448x336). The audio is now encoded at a sample rate of 44100 Hz, up from 22050 Hz. As you can see in the screenshots below, the right image is clearer and more detailed.
While this increase of resolution might seem minor, for the example above YouTube's re-encoded FLV file is more than twice bigger than the old one (from 9 MB to 22 MB), so it will load much slower.
If you append &fmt=18, YouTube downloads the video as a MP4 (H264 with AAC audio), encoded at 480x360. Here's the same video encoded as MP4.
To make things easier, there's a Greasemonkey script that automatically adds the magic parameter for you.
A discussion about the technical details