I ran into the same problem, and, luckily, there is a relatively simple way to salvage the footage. You'll have to do a couple easy steps in QuickTime PRO (will cost you about $30 via Apple.com) to basically add a sort of vertical letterbox to preserve the aspect ratio. Your files will play in iMovie the same way vertical photos appear (with black on either side). I think it's probably the best you can do with what you have at this point. Here's what to do:
1. Import the video as normal from your iPod to your computer, and open up the QuickTime file.
2. Now you need to create the black background that will appear behind your video. If you don't have a program to do this, do what I did: just grab a black wallpaper JPEG off the web and resize it using a free resizing site (there are many, but you can try picresize.com). Resize the black wallpaper image to these dimensions, in pixels:
WIDTH: height of your video x 4/3
HEIGHT: same height of your video
Save this file to your desktop and copy it to your clipboard.
3. Now, go back to QuickTime Pro. Under the Edit menu, select "Add to Selection and Scale." If your black background was copied properly, it should now appear on your screen.
4. Under the Window menu, select "Show Movie Properties." In the list, select Video Track 2 (that should be your black background). Select the "Visual Settings Tab." In the "Layer" box, change its layer to 1 (that sends it backward). You should now see your video clip, vertically, in front of the black background.
5. It probably appears flush left, though. You probably want your video centered so that the black appears on either side. Not to worry. In the same "Show Movie Properties" box, now select Video Track 1 (your original video). In the "Offset" boxes, change the first box to the equivalent of HALF the difference between the width of your black box and the width of your video. Leave the second box at 0. Now you have essentially created a vertical letterbox, which will prevent your video from being distorted when you view the clip in iMovie.
Hope this helps you use your footage. I guess we've all learned something, the hard way: let's just stick to recording in horizontal!
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