The TubeStop Firefox extension that I wrote in order to stop YouTube videos from auto-playing also has the serendipitous side-effect of removing ads from YouTube videos. Since YouTube is only serving ads through the player on their main site, and not on the embeddable/syndicated player, and TubeStop works by replacing YouTube's native player with the embeddable version, you won't see any ads when you're using TubeStop.
Try it out by first viewing this video without TubeStop: Rock Yo Hips. (I recommend muting your speakers; the content of the video is terrible, but it was the first video I could find with ads.) You'll see around the 15-second mark an ad pops up over the bottom 15% of the video.
Now install TubeStop, restart Firefox, and view the video again. You'll notice that while the video still sucks, there are no ads layered on it. I don't know how long this will be the case, but it works for now.
Update: It looks like Google has removed all video ads for now. I'll update this post if I come across a video that still has them. Maybe I should rename this post to "TubeStop also stops YouTube ads... FOREVER".
If you like TubeStop, check out my other YouTube-specific Firefox extension: YouTube Comment Snob. It adds powerful filtering controls to YouTube comment threads.
Update: TubeStop was discontinued on December 25, 2012.