The insert image button opens the window shown below.

Insert image dialog/window

You simply enter a URL to the image you want to link to and enter a image description, this is then displayed as an alternative text descripton of the image on the page.

Field descriptions:
Image URL URL/path to the image.
Image description Alternative description of image contents.
Dimentions Image width/height.
Alignment Image alignment, useful when wrapping text around images.
Border Border thickness.
VSpace Vertical space, useful when wrapping text around images.
HSpace Horizontal space, useful when wrapping text around images.