HTML Embedded Image howto:
<?php
set_time_limit(0);
// path to smtp.php from XPM2 package
require_once '/path/smtp.php';
$mail = new SMTP;
$mail->From('username@hostname.net', 'my name');
$mail->AddTo('client@destination.com', 'user name');
$mail->Html('<b>HTML Embedded Image:</b> <img src="photo.gif">');
// add image: image.gif and make sure if you write the correct path name to image
$mail->AttachFile('/path/image.gif', 'photo.gif', 'autodetect', 'inline');
$sent = $mail->Send('Hello World!');
echo $sent ? 'Success' : $mail->result;
?>