If I reference a file in a silverlight project, is that file going to be looked at on the local pc or on the server (using silverlight 4 running in the browser)?
For instance if I opened up a StreamReader and gave it “C:\test.txt” (assuming silverlight had permission to read that directory, which I assume in this trivial example it wouldn’t)
If you had permissions for that file – which you don’t, it would be on the local (client) side. A SL4 app running on the browser does not have permissions to acecss arbitrary files on the client computer. It does have access to a special location, the IsolatedStorage, which is located somewhere buried in the user directory, but you can’t use a StreamReader directly to open a file from there, you need to use the IsolatedStorage classes to do it.
If you want to access a file on the server side, you need to explicitly expose it, for example using a web / WCF service.