A couple years ago, I had a Panasonic Lumix DMC-ZS7 digital camera. This is now obsolete and was replaced by the ZS10, which in turn is being replaced by the ZS20. The ZS10 is being blown out at places like Costco for $200. (These cameras might be sold as the TZ7, TZ10 and TZ20 in some countries.)
Anyway, back to the Panasonic Lumix DMC-ZS7. I got it mainly for still image photos and was delightfully surprised at how good it was for video. It was capable of 720p HD video, which it could record in either AVCHD Lite or Motion-JPEG formats. I could not get AVCHD Lite to work with VideoStudio Pro x3, but Motion-JPEG worked perfectly. The ZS7 turned out to take good photos and good videos -- neither was great but both were good. This was fantastic, because I could carry one camera that fit easily into a pocket, and it would do me good either for photos or videos. Here is a video I shot completely on the Panasonic DMC-ZS7 and edited on VS Pro x3 (using Motion-JPEG):http://www.youtube.com/watch?v=D1x-SqsET_A
That's me asking the interview questions and doing the occasionally clumsy narration. The audio on this camera was surprisingly good, and the wide-angle (25mm) lens let me work close.
Not a bad video camera for $200, huh? And think that it conveniently takes quite decent photos, with a good flash and reasonable control. Sadly, I inexplicably got a chip in the lens of this camera and I no longer use it. I bought a roughly similar Nikon as a replacement (Coolpix S8100), but it's not nearly as good with video and the photos are perhaps about the same quality. I very much wish that I'd just bought another Panasonic ZS7.
I've read that the Panasonic ZS10 had more noise in the photos, but I don't know about the video. The ZS20 is said to be better with noise, but again... I don't know about the video quality.
So don't overlook the possibility of a digital still-image camera that can be small, take good photos and decent video. In my experience, they do exist.