SharePoint automatically creates two JPG images every time you upload image to a Picture Library: they are thumbnail image and web preview image. They're stored along with the original image in the Picture library.
No in-place conversion happens: the image is converted only once during the initial upload process.
SharePoint needs these extra images to display picture library thumbnail views and item forms correctly, quickly and not causing excessive server load.
You can retrieve your original image at any time, it has permanent server path and could be accessed directly for whatever you need.
Preview images size could be customized through Object Model (customization will affect only new images), you can set up ThumbnailSize, WebImageHeight and WebImageWidth properties of your document library for this purpose. Alternatively to programmatic approach, obviously you can use PowerShell. Here is a simple example:
$web = Get-SPWeb http://localhost
# Please, correct the "My pictures" string to correspond your existing library title
$library = $web.Lists["My pictures"]
# this will set thumbnail maximum size (height or width, whatever is greater) to 90 pixels
$library.ThumbnailSize = 90;
Unfortunately, at the time of writing there is no way to influence upon the preview pictures quality. However, if you don't like this functionality, you can completely disable this feature, by setting ThumbnailsEnabled property to