master.xml

<data>
  <hello>paste your xml here</hello>
  <p>Image.jpg</p>
  <p>This is some text I don't want to convert .jpg</p>
</data>

master.xsl

<xsl:stylesheet xmlns:xsl="http://www.w3.org/1999/XSL/Transform" version="1.0">

  <xsl:output method="xml" indent="yes" />

  <xsl:template match="/">
    <hi>
      <xsl:value-of select="data/hello" />
    </hi>
    <xsl:apply-templates select="data/p" mode="ninja"/>
  </xsl:template>
  
  <xsl:template match="data/p" mode="ninja">
    <p>
    <xsl:choose>
      <xsl:when test="contains(.,'.jpg')">
        <img src="{concat('http://imgur.com/',text())}"/>
      </xsl:when>
    </xsl:choose>
    </p>
  </xsl:template>

</xsl:stylesheet>