New in GMail Labs – Inserting Images
Before if you want to insert an image in your GMail message, you would need some third-party script or add-on. For instance, Ubiquity as mentioned before. Now you can do that (link via URLs or upload from your computer) without additional help.
All you have to do is enable this feature in Settings/Labs:
Then you can see an image icon appeared in the toolbar when you compose your message.
(via GMail Blog)