This is one of the most common problems which people do face but they don't know yet how to embed images..
So here is the solution which worked for many and me..
1) Open the Gmail web page and login to your account
2) Navigate to the top left of your screen, and look for the Documents link
3) Click on Documents to open a new window called Google Docs
You are now working inside the Google Doc interface. All menu selections are now to be done within the Google Docs interface. Not your web browser menu bar
4) Click on New (inside Google Docs), a pull down window will appear. Select Document from the list
5) Click Insert; and a Menu will open with this window
6) Click on Image in the horizontal menu; the Insert Image dialog box will appear
7) Click on browse and look for the image on your computer or from a web URL
8) Select the image, and select open; browse to the image, or paste the url of the image
9) Click on the insert image button at the bottom of the dialogue box
10) The image will appear in the body of the blank document.
11) Copy the image (CTRL + A or right mouse click, and select copy, or CTRL + C)
and Just Enjoy Maadi..
By the way this is not the only way to do it..
There is also an alternative by uploading the image in www.imageshack.us where u can again select and paste it in the gmail compose editor..
