The issue re: file extensions was fixed in the IH3 release. It's best that you upgrade to IH3.
If you prefer to remain with IH2, you shouldn't have to change your file extensions from JPG to png. Rather...all your file extensions must be the same CASE (either JPG or jpg).
No need to make them a higher resolution PNG or png file because you can upload a jpg and tell IH to display it as a png.
Bottom line: Either -
Upgrade to IH3
OR
Keep your file extensions all lower case or upper case.
AND...no matter which of these you do...read the readme file. Particularly the configuration tab re: image settings and the troubleshooting tab re: prepare your site for growth.
Good luck and happy Zenning
