Even at its best quality of 24Mbps--usually sufficient to adequately capture scenes like this--extremely busy, detailed scenes are susceptible to compression artifacts. While it's not nearly as noticeable while it's playing, it's still noticeable; plus, it affects editability of the footage. (frame grab)
Though the VG10's photos tend to be highly saturated, they do look significantly better than most camcorder stills. That said, the stills don't seem as good as a cheaper dSLR. (still photo, 18-55mm lens, 1/100 sec, f5.6, AWB, pattern metering)
The VG10 does have an excellent noise profile for a camcorder's stills; they look quite good up through ISO 800, and okay through ISO 1600. (still photos)
If you want to see more photo samples, here are the samples from my first outings with the camera.