So the video on Apple site isn't compressed? It says "unedited" so it probably is compressed for web...
Well, lets say it is totally uncompressed, just for arguments' sake. You can use that link to actually perform a little experiment.
Now pause the video during playback...I just did. Do a screen grab of the image that is paused. Easy enough right?
Now look at that screen grab. In the native size you just viewed it, looks pretty good, right? Small, but still works fine for a Facebook posting or whatever. The video looks great, but the picture looks OK as long as you don't try to size it up any.
Now go ahead and zoom in just a little bit. See all those squares? Yeah...don't do that. Its very easy to take a hi-MP count picture and scale it down and retain quality. Its very difficult to upscale a low-MP count picture and not get the jaggies.
It is what it is....a really decent little Flip-video replacement device that has pause and screen grab features that they call a "camera." As long as you don't plan on needing the picture to be larger than native resolution (and native resolution is fine for Facebook posts and such), you'll not be disappointed.
Just re-set your expectations...it's not a camera for archival purposes. Its a really good little video recorder with pause and screen grab functions. End of story.
Examples below.....I'm far too lazy to post at relative sizes, just did this quickly for example purposes. But you can download that sample video and play around with pausing and screen grabbing yourself to get an idea of what the pictures will look like.
The first attachment is screen grab of Apples 'unretouched' iPod Touch 4 video playing while paused. Not too bad. Second is blown up a bit. In the attachment 'window' below you can't discern the difference easily. But when you click them individually...you'll see.