EXIF-based auto-rotation for JPEG files works in Explorer, Photo Viewer, Photo Gallery and Media Center 7 as we describe on the Codec Pack
web page, mainly because these applications "play ball" and use our replacement JPEG codec.
There are some places where the application insists to use the standard codec (or where an older image access library may be used) and where the standard rotation-ignorant behaviour is maintained as our codec is not even loaded. The desktop background setter is one such places, the built-in MSPaint application being another.
Microsoft could either fix this in the future by letting those apps use whatever default codec is installed, or they can force the use of their own stock codec in every built-in apps and in both cases there is little we can do about it without using risky techniques that might compromise the system stability, something we'd rather avoid
We took great care not to break
anything with the auto-rotating JPEG codec (that was not so easy) and it works well in most situations (Explorer, Photo Viewer, Media Center, Photo Gallery) but unfortunately there are a few corner cases here and there that are not handled, at least yet.