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This environment variable specifies the type of image to use in your Forms applications and to display it at design time. When you set this variable as "gif" (case insensitive), the extension that will be added to "Icon Filename" is ".gif". Specify the location for these images with the UI_ICON environment variable. When this environment variable is not set, or is set incorrectly, .ico is the default extension.
The image are not stored within your form. Therefore they need to be made available at runtime. They can either be stored on the server's file system or packaged in a jar file. A jar file is the preferred method because the jar file can be cached by the client JRE. The result is better startup performance and overall performance. There are numerous MyOracleSupport documents which discuss how to do this, however it is also covered in the Forms Deployment Guide:
Refer to section 4.7.3