Work in progress...
You will get a security error when trying to read the file if you don't run this code on a server, to test locally see the Development section below.
Check out the heavily annotated source here http://jxson.github.com/html5-file-drag-and-drop/
To get around a security restriction with using the FileReader API on local files this project is wrapped in a tiny Sinatra application for local development. To get up and running you will need an install of ruby and the bundler gem. Once you have all that (most of you should have this stuff already) you can run:
bundle install # get the prerequisites
bundle exec rackup # fire up the server
open http://localhost:9292 # open the example in you default browser
If you don't want to mess with all that ruby stuff you can always copy the public directory to a server that you have access to.