You can't do this...yet (unless you're using a prerelease of Chrome 9). There are some APIs coming down the pike that will make this possible in browsers that support them; there's a description of using them in this article.
But right now, no. To do this, you'll need to use a technology that allows local file access, such as a signed Java applet (normal unsigned ones obviously can't do this) or, on a severely limited number of platforms and browsers, an ActiveX control.
Update: Sorry, the new JavaScript APIs I mentioned above don't give you (user-granted) access to any old directory on their system. They do give you access to the file system, but it's a sandboxed file system. So you'd have to have the users move the files into the sandbox (which you could do via the File API and with drag-and-drop, keeping it an entirely client-side thing, no uploading required). But that isn't quite what you described.