Andrea Haubner has a new blog post for wp7dev beginners that will help you understand how Isolated Storage works.
Source: Andrea's Blog
So far in my examples I allowed the user to input some information, but I’ve not done anything useful with that information. So, today I am going to use the phone’s own storage capacity, its Flash drive to store the information.
In Silverlight applications I don’t get free access to the entire phone’s file system. The user is protected from portentous, malicious applications. And it does that by providing each application with its own personal storage area. That is called Isolated Storage. That makes sense, because each storage area is isolated from its ‘neighbor’ in applications.