how can I extract still photos from an I-pad movie?

Without a dedicated app to run the movie file in the only alternative is to use the Ipad's screen capture utility. In Ipad's camera app select the photo roll (the icon in the bottom left of the camera screen. Select the still of your movie which will display frames of the movie in the top of the window. Use the slider to select the frame you want. Note that holding the slider on a particular frame will further expand your selection. When you have the picture you want, Press and hold the ON/Off button on the top of the Ipad, and whilst it is held down, press the button on the front of the iPad. A shutter sound will be heard and the screen will momentarily blank out. The 'captured' screen will now be in your camera roll. Use a photo editing App to crop and edit your image as you require.

I did that, but I got the arrow in the center of the picture? What am I doing wrong here?

You can't do it with native apps, and will have to search the app store to see if any other video editing apps exist which will allow you to do that. I can't recall seeing one, there frankly hasn't been much of a need or demand up to now, but it might exist or might soon come to exist with the release of the New iPad.

One question, though ... seeing as how you're using an iPad2, whose camera is pretty much dreck for still photos but marginally okay for videos, just what quality are you expecting to see in your selected frames if you do manage to figure out a way to pull them out individually? I wouldn't expect the outcome to be that great, frankly, certainly not good enough for printing at any but the smallest sizes.

New iPad? Different story, which is why that capability might now be developped and fielded if it hasn't already been.

You can do it with iMovie on a Mac. Not sure about iMovie on iPad though

With the native video/photo apps no there isn't a way to do it.