I went through the source code, and I don't see any reference to any code in there that converts the jpg to png. It's creating the image from scratch at one point, but it maintains the mime type while doing so.

I'll download a copy of it on my server, and test it out, nevertheless.

Also, you're using it on a forum? Or a blog?

EDIT: According to the source, it should have been fixed. Ref: http://code.google.com/p/timthumb/issues/detail?id=28