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I figure all they need to do in order to do the rotation is to have an image sequence pre-rendered, and then download them to the ipod in sequence order.

Yeah, they did a small bit on The Screen Savers on how to do a video like that. Seems to me this whole idea was created out of the annoyance that the iPod Photo doesn't play videos, which makes no sense to me at all, considering its price.
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Matt