After enabling the feature, mouse over a contact from Gmail chat box, click on "Video & more" and select "Send SMS". For now, this feature only works for US phone numbers. "If your contact replies, the text message response will appear as a reply in Chat. These conversations are stored in your Chat history just like regular chats." The explanation is that Google assigns each Gmail user a virtual phone number so that your contacts can send replies.
"On the receiving end, when you get a text message from Gmail on your phone, it will come from a number in the 406 area code. (The l33t folks in the crowd will note that this spells G0O.) You can reply to this text on your phone just like you'd reply to any other text. The reply gets routed back to our Gmail servers and shows up in your friend's Gmail chat window. Each of your friends' messages will come from a different 406 number so you can reply to any message and it will get back to the right person. Messages from the same person will always come from the same number, so you can even bookmark it in your phone. If you get a message from somebody you don't want to chat with from your phone, just reply with the word BLOCK. If you don't want to get texts from anybody using Gmail, reply with the word STOP and we'll leave you alone," informs Gmail's blog.
At some point, the virtual phone number could be the same as the GrandCentral number and Gmail could become a centralized communication system, where you can send email messages, SMS, make phone calls, use video chat, share files and archive your entire communication flow.
{ Thanks, Niranjan. }
