Jeez, I thought I knew this stuff: Mac 101: Applications in the Finder toolbar. I did have to switch to "customize toolbar" for the drag and drop to work. I'm a bit aghast. This would have been very handy for configuring my mother's machine if I'd know about it.
Another post mentioned that cmd-T will add a highlighted icon or folder to the Finder Sidebar, and that this is then available for all file save/open operations. Wow, what a way to save on navigation tasks. I never thought of this area as being a "scratchpad" for this type of quick operation, but now I see it was designed that way.
Once gain I note the gap between how a software designer intends things to work and what users end up doing.
Update: oops. I'm not sure the Finder toolbar tip is so great. I added a Folder rather than an application, and when I clicked on it I got the SBOD. Of course my MacBook has been doing that sort of thing since I updated to 10.4.10, so this might be a bad coincidence ...