So I, too, went to download and play Episode 3 to find the game reset to defaults and claiming I not only had no save games, but I only had the first episode (apparently it forgot I downloaded and played Episode 2). I checked these forums, but everyone's "fix" was to modify the Steam files. I'm not using the Steam version, I'm using the direct download version.
Still, I decided to look in the Walking Dead directory in my Documents folder (using Win7x64). There was my props file, dated in July. I thought that seemed perfectly fine, my save files were there as others have reported, etc. But the game still reset itself and ignored all this. So, I renamed the directory to "The Walking Dead Copy", just to make it different, so I could see if the game was making new save/preference files. I started up the game, and it said I had no episodes and no saves. But -- it still had the settings I changed to make it go full screen again, etc.
As it turns out, I examined my Telltale folder:
And saw this new directory there: GameData.
I opened it up, and sure enough, a props file dated today. I deleted this directory, started the game again, and it had reset back to defaults. So I exited, went back to the Telltale Games directory, opened up The Walking Dead Copy, hit [CTRL]-A to select everything. Then I hit [CTRL]-C to copy it all. I went back to the Telltale Games folder, and opened up GameData. I hit [CTRL]-V to paste the files. When Windows asked to merge similarly named directories, I said yes. When it said files already exist with the same name, I said to copy and overwrite.
Now, when I started the game, if I went to downloads, Episode 3 is the only one missing. If I said start game, my save game files were listed.
If only I could get it to download Episode 3 now without crapping out on the download...but, even though I can't truly verify this worked 100% yet, it certainly seems to have made the game realize it's been played before, so I'm posting in the hopes this might help others.
Devs: What did you do to make it no longer look at The Walking Dead folder, and instead create a generically named "GameData" folder???