The invention provides a system and method for providing smart file import and drag-and-drop functionality in a graphical user interface environment. As a file is dragged and dropped onto a set of folders using an explorer-like interface, the system automatically determines into which folder the file should be placed. If the folder does not already exist, then it is automatically created. A similar process can be used for file imports. The system is particularly useful for manipulating Java, Java derivative, or Java-related source files (including JAVA, JWS, CTRL, JWI, JAR, class files, etc.) in a Java application development environment, since in this type of environment the location of the file within the folder tree can be very important. Other embodiments of the invention include an icon-display mechanism which denotes to the user that the Smart Drop processing will take precedence over the normal drop behavior.