First, you need to send your newsletter as HTML. Then, you can insert the image in your newsletter as
<img src="image_url">
The image_url can be remote or embedded. The remote image makes email smaller but most mail clients will ask user's approval. The embedded image will be displayed without asking user but it will be part of Email.
To use remote image, just host the image somewhere and put the URL as image_url.
Embedded image needs to be encoded as MIME parts. It's not trivial to do this. You need to use a package like PhpMailer,
http://sourceforge.net/projects/phpmailer/
Here is an example,
<?php
require("class.phpmailer-lite.php");
$mail = new PHPMailerLite();
$mail->From="[email protected]";
$mail->FromName="Your Name";
$mail->AddAddress("[email protected]");
$mail->Subject = "Your fancy newsletter";
$mail->IsHTML(true);
$mail->AddEmbeddedImage('image.png', 'image_id', 'test.png', 'base64', 'image/png');
$mail->Body = <<<EOT
<h1>My Newsletter</h1>
<p>This picture is embedded in newsletter: <img src="cid:image_id" /></p>
EOT;
$mail->AltBody="Text only, sorry no image";
if(!$mail->Send())
{
echo "Error sending: " . $mail->ErrorInfo;
}
else
{
echo "Mail is sent";
}
?>