Here's the solution I figured out for Windows 7. Some people have linked to vaguely related solutions that haven't really worked for most people and have been kind of wonky, but this one definitely worked for me.
Copying over the prefs.prop into the steamapps default subheading folder will not fix many peoples' problems because those of us on Steam shouldn't even have a prefs.prop in that folder in the first place.
The reason people transferring prefs.prop to their steamapps default folder doesn't work is because all that does is transfer your stats. When I did this, my choices were all wrong and when I rewound previous episodes those choices were all wrong.
But I noticed that new save games weren't creating new folders but still carried over when I restarted the game. It's because TTG created a brand new save folder and prefs.prop right under our noses.
[*]Open two windows. In both do a search for "The Walking Dead."
[*]In the first window, find Documents>My Documents>Telltale Games>The Walking Dead (my folder had capital letters) and back up this folder somewhere safe in case my instructions don't work for you.
[*]In the second window, find Documents>Public Documents>Telltale Games>the walking dead (my folder was lowercase).
[*]Copy the contents (not the whole folder, just everything inside) of the "The Walking Dead" (in My Documents) into "the walking dead" (Public Documents) and overwrite the matching elements inside.
That should do it. Now the new folder has your Episode 1 and 2 saves and prefs.prop in it and the game will reference this content for Episode 3 save games.