Where is the correct place to store my application specific data?

Question 2:
I suggest using a subfolder in Environment.SpecialFolder.CommonAppData (maps to C:\ProgramData on Windows7 by default). This is a hidden folder.

Question 3:
Put those files into Environment.SpecialFolder.AppData(maps to C:\Users\[USERNAME]\AppData\Roaming by default, hidden folder), if you expect that the user does not intend to backup / modify those. Some games also put their save games into Environment.SpecialFolder.MyDocuments, probably because it is easier for users to find them there.

Example code:

var directory = Environment.GetFolderPath(Environment.SpecialFolder.AppData);

using (FileStream fs = File.Create(Path.Combine(directory, "myAppDirectory", "myFile.txt")))
    // write data               

For a complete list of special folders on Windows follow the link


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