Insert image into file (using the menus: 'Insert'-'Image'-choose source)
Once the image is in place, right click on it and choose 'Format picture'. In that menu go for the 'layout' tab and choose 'tight' (third from the left on my system, Office XP).
The text should now follow the contours of the image, but be aware that this depends on the format of the image as well! I know it works with various images from Microsoft's Clipart collection, but haven't tried this yet with my own photos etc.