From About.com:
Insert an Image Inline in Gmail
To add an inline image to an email you
are composing in Gmail:
- Make sure rich text editing is turned on in the Gmail message you are
composing and Insert images is
enabled.
- If you see a Rich formatting ยป link above your message's text editor,
click it.
- See below for turning on image insertion.
- Drag and drop the image from its folder to the desired position in the
message.
To use an image you found on the web,
or to upload from your computer if
dragging and dropping does not work:
- Position the text cursor where you want the image to appear.
- Click the Insert Image button in the message's formatting toolbar.
- To upload an image from your computer
- Click Choose File and open the desired graphic.
- You can click Choose File again to add another image while others are
already uploading in the background.
- Make sure the desired image is highlighted.
To use an image located on the web:
- Make sure Web address (URL) is selected.
- Enter the image's URL under Image URL.
- Click Add Image.
Images you have uploaded from your
computer remain available in the
Insert Image dialog while you compose
the message (but not for other
emails).
Enable Image Insertion in Gmail
To turn on Gmail's Insert Image
button:
- Follow the Settings link in Gmail.
- Go to the Labs tab.
- Make sure Enable is selected for Inserting images.
- Click Save Changes.
