2
Yes.
You are probably (almost certainly) using the GD image package, perhaps without realsing it. Most servers come with three packages...GD, ImageMagick and NetPBM. Ideally you should use NetPBM, or Imagemagick if that is not available on your server.
If you are using a hosting company, just go into the modules admin, and select Preferences. The third option down is called 'Package treating images' with a drop down menu. Just select NetPBM (or ImageMagick), then further down where is says 'Path of NetPBM' just leave blank and it will automatically detect the package from the server.
You should then find your pictures look just fine!