Your so close to getting this right, just click the next tab (not feed, but iTunes tab) go to that setting for the iTunes image, click 'browse', find the file on your computer, then at the bottom of the screen click 'save'. It will save the image on your server, PowerPress will rename the file to force iTunes to get the image, and you're good to go.
We offer phone support, but I'm just going to repeat the same thing I've said here in print over the phone/Skype.