I ran into the same issue. Like others, I feel this is a bug. The funny thing is that the files iPhoto is duplicating are from iPhone. And when it does duplicate, it actually increases the size of the files (e.g. 600k -> 1 MB).
iPhoto should in no way require the image to be rotated. It should just be rendered according to the EXIF info; no need to edit it just yet.
I managed to find a solution. There is a software called 'jhead' <http://www.sentex.net/~mwandel/jhead/> that is available on Mac. A very nice tool to modify image files - I use it normally to rename image files to the date/time the picture was taken.
If you run it as follows it will modify all images *in-place* in a given dir to rotate per the EXIF info and then reset the EXIF rotation info per the updated rotation. So if you try this, copy the directory of images you are testing on until you've "made your peace" with the program (I have found jhead to be *very* reliable).
jhead -autorot *.jpg
This uses jpegtran which claims a lossless rotation process (I would have assumed rotation was lossless anyway but apparently not - go figure).
As I said, I use it often to rename files so the filename is the date/time taken. The CLI for this is:
jhead-mac -n"%Y-%m-%d %H.%M.%S" *.jpg
** But you can do even fancier things like getting it to write all files to a nested dir tree such as YYYY/MM/YYYY-MM-DD.HH.MM.SS#.jpg
Anyways, enough of the divergence... To use this program to rotate images, you also need jpegtran (a link to it is in the help for jhead). And there is the rub. I could not find a compiled version of jpegtran on the net; so I downloaded it as source and compiled it. To do that, I needed to download the XCode dev environment from Apple (or get it off your OSX CD). After that, it was a painless effort at the command line as follows:
<cd to where you downloaded jpegtran>
tar -zxf jpegsrc.v7.tar.gz
cd jpeg-7
./configure
make
make install
You can get jpegtran here as source (get the Unix package):
http://sylvana.net/jpegcrop/jpegtran/
You can get XCode here:
http://developer.apple.com/technology/xcode.html
Good luck!