Can a image be to small? I got the icon above earlier also, when i try to insert a small image.

Ok, I'll check, could be something getting over ridden by the editor 

I think it is only effective when the image is uploaded, that is when the thumbnail gets created, it does not change it on the fly

Originally posted by HuwR

This is definitely how it works, it is either scaled or cropped when uploaded.

This is two files i tried to insert, and got that other thumbnail as shown above