It should work normally, nothing has changed in that area actually in vs.net 2005 (other than that you can change the .config files now at runtime). My test projects in vs.net 2005 all use a config file and work ok. Could you re-check if you've copied the data into the right file?
The problem was that I copied the right information: connection string in appsettings in config section, but due to playing around with some datasource objects, datasets, etc. there were other sections that had been added with other connection strings in there so vs2005 didn't like that it didn't know which one to use. After deleting the other info besides the usual simple config/appsetttings, it worked fine.
