Settings Menu, there are many different tabs here, click on "Labs".
From the Labs tab scroll down until you see the box “Inserting images” by Kent T. Click “Enable” to turn this feature on.
Now click “Save” to save it of coarse.
Now to add an image to the body of your email click on the little “Image” icon on the top menu.
When you click on that image icon you can then upload a image from your computer or the web address of the image. When the image is uploaded click “Add Image”. You can then choose the size from small, medium or large or keep it in the original size.