Hold on, Hold on. I was at the Apple Store a few weeks ago and they had 4 Apple TVs on display. Not one of them looked bad. I really don't know what you're talking about. They were playing Heros and some other shows available on the iTunes Store and I was floored by the quality. It looked HD to me. I didn't notice anything wrong with the demo units. In fact I went into the store not wanting an Apple TV and walked out longing for one. But I don't have a widescreen HDTV so I can't get one... oh well.
Really though the Apple TV is very nice, and the video looks great.
I watched "The Incredibiles" in-store and it was terrible... like someone said, much closer to YouTube than to DVD. Maybe I'll have to give it another shot if it's as good as you say... Not that I'll buy one unless someone teaches it to run elgato. Then we'll talk.
-Clive