There are some Gmail Labs features that are creative, neat, and truly new. Then there are the things that make email veterans say, "Well, finally!" Inline image additions certainly fall in the latter category.
The Gmail team points to our own HTML work-around as the only means Gmail users had to get an image embedded amidst their message text. Now, once you enable the "Inserting Images" feature in your "Labs" list and make sure you have "rich formatting mode" chosen in your composition settings, you'll see a new image button on the toolbar, and you'll have the option to upload a file from your system or grab one off the web to plant right where your cursor was when you hit the button.
As noted, Gmail still restricts images from displaying until someone clicks the "Show images from ..." or "Always display images" links on one of your messages, so you might note that in any must-see pics you're sending off. Thanks, AcaLazarevic! New in Labs: Inserting images [Official Gmail Blog]