GMail have just announced another labs feature which allows you to insert images directly into your emails. To get it working, enable the feature in Labs, click save and you should see the icon in your toolbar.
You can insert images from your computer or via a URL. Frustratingly, I seem to be able to get it working in Firefox but Safari, no luck just yet. I assume internet explorer and other browsers are ok.
Gmail do note however, that Gmail recipients will need to click on “display images below” before any embedded images are viewable.