What is a Smart Folder?

A smart folder doesn't actually store files. It is a search of files based on specific attributes.
However, if you do any deleting from a smart folder, it plays dumb, and will delete your file! So be careful.

Message was edited by: a brody

From the os help menu - +"Smart Folders automatically find and organize files by type and subject matter. For example, one Smart Folder can automatically grab all your spreadsheets, while another gathers the files that mention a specific project. One file can be in many Smart Folders.+

+Smart Folders are updated automatically as you change, add, and remove files on your computer."+

To add to the other posts, you can think of smart folders as a window displaying files matching a certain criteria.
Those files remain at their original locations and the Smart Folder only shows them grouped because all those files have something in common. To see where the files reside on your HD, in Finder go to the View menu and pick Show Path Bar - the path to a selected file will show at the bottom of the window. You can jump to that location by: right click on the file and choose Open Enclosing Folder or, double click on the folder in the path at the bottom of the window.
There's no danger of filling up the HD by creating many SMs.