Previously I experimented with drag and drop file upload with Google Gears. Recently FireFox 3.6 (codenamed Namoroka)
Correction: Ionut G. Stan pointed out that File API was actually available already in FireFox 3.0. What Namoroka introduced is the drag and drop interface for the files. Sorry for the confusion.
old new HTML5. Again there is a working demo. You will need FireFox 3.6 to test it. Full source code can be at GitHub.