How to remove distortion due to motion, from an image

Given that your camera outputs interlaced video, you are better off using one field of the video. Either only use the even lines of the image or only the odd lines. The image will be squashed but you won't be mixing two images together.

from the picture provided it looks like you need to de-interlace the video rather than just trying to filter what's there; i remember doing this by just taking every other scan line and then doing a resize to put it back in perspective.

i found a pretty cool site that talks about deinterlacing in case you'd like to see if you might have other possibilities:

http://www.100fps.com/

(oh, and i have not inspected the image very closely so it's possible that there is some other interlacing scheme going on than just every other line; in which case my first answer wouldn't work properly. and it does imply that you will lose some resolution but that's just the nature of interlaced video...)