You can't insert an image using this button:

unless the image is already on the Internet. In that case you insert the full url of the image between the img commands. You cannot insert an image that is on your PC Desktop because nobody else will have access to it. But you can attach the image as per the help link so long as it is smaller than the maximum size, which you've now managed to do. You can attach any type of file, not just a gif. You can insert any image type via the button:

- gif, jpg, png (so long as it exists on the Internet already).