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.
{ via Gmail Blog }