I am using VS2010 C#.NET 3.5 and application settings (the Settings.settings file). What I want to do is have different settings for my development and production environmen
Assuming you mean the values of the settings, I think the best way to do this is to put all the production environment values in a comment in the settings file. Or only set them when deploying the application.
There's no real built-in mechanism for this in .Net if that's what you're after.
At my current job we have a little command-line tool which will set all the values right for a given environment. The configuration is done in a database.
At my previous job we never copied the config file to the deployment directory, but rather changed the files manually if needed.