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More specifically, does the performance degradation of context switching apply to threads that are in a wait state?
Under what conditions or circumstances would a ManualResetEvent, or WaitHandle, be likely to consume resources?
A ManualResetEvent doesn’t have a wait state. The only thing that can wait on an MRE is a thread. And yes, a thread consumes plenty of precious resources needlessly when it is not doing what it was made to do, execute code. A megabyte of virtual memory and a handful of kernel objects. The single kernel object that MRE consumes is small potatoes compared to that.
You typically want to use a threadpool thread instead.
And look at what’s available in .NET 4.0. Like ManualResetEventSlim (not based on an OS object) and the Task class.