It’s not only a function of how you send the email, but also of the software with which the recipient views it as well.
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Gmail’s web-based interface is a great example of this. When you create a new email, it only lets you “attach” an image file… not showing you the picture in line with your text.
However, after you send that email, you can go over to your Sent Items folder, open the email, and see that gmail is showing you the image inline with the text (usually appended after).
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If you want to have full control over exactly where the image shows up in your email’s message body, you’ll likely need to use a full-function email client like Microsoft Outlook, or Apple Mail, or Thunderbird, or whatever. Make sure your email format is HTML, not Rich Text, and certainly not Plain Text.
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Finally, just because you send your email perfectly crafted does not mean that’s how the recipient will see it. For example, I can force Microsoft Outlook to always show me messages in Plain Text which removes all fonts, colors, images, and anything else fancy. By default, most email clients will not even display attached images (and certainly not linked ones) and require you to give permission to show them.
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Just saw @jatkay’s suggestion re: Google Labs ability to enable inline images. It works!