HTC HD2 - photos on SD card distorted after software upgrade

My SO has a HTC HD2 and I’ve been round and round their website trying to figure out what is going on. A few days ago he asked me to upgrade his software - he had been getting a message that an update was available for a few months and so I upgraded it for him.

He has a SD storage card that has a bunch of photos on it and since the upgrade they are all distorted when he tried to set them as wallpaper on the phone. There is a really good photo of our dog at the dog park he likes to use as wallpaper, but it is all pinched in when set as WP.

The photos display normally when transferred from the card and when viewed on the phone - it is only when they are set as any sort of background wallpaper that they are warped.
Any idea what is going on and how to fix this?

Does the phone have a camera? If so, do new pictures taken with the phone have the same problem?

Yes, it has a camera. The photos taken with it have the same problem, but only if used as wallpaper. After some further testing, it seems that only photos taken in landscape mode have the problem. But it wasn’t doing that before the software upgrade.