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I keep all my apps in the applications folder, but I also make aliases of all my frequently used apps and put them in a "favorites" folder. Then I put the favorites folder on the dock as a stack.
 

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I put everything in the Applications folder and frequently used aliases in the Dock. Everything else can be found instantly, with Spotlight and the new version in Leopard is even faster and defaults to app anyway (i.e. Apple Key + Space, type 'saf' and hit return for Safari)
 
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