Gmail extended the feature that lets you add attachments using drag and drop, so you can also insert images into a message. The new functionality only works in Google Chrome, but it will probably be added to Firefox, as well. (Is this the first Gmail feature that only works in Google's browser?)
To try it, make sure you use Google Chrome and Gmail's rich text mode. Compose a new message, open your favorite file manager, find a photo and drag it to the Gmail message. For some reason, I was only able to drag one photo at a time. After inserting the image, you can resize it and adjust its position.
Gmail has a Labs feature for inserting images, which works in all browsers, but it's less convenient.