What is the *.vshost.exe.config file?
Here's a blog post that talks about the vshost process and its purpose.
http://blogs.msdn.com/dtemp/archive/2004/08/17/215764.aspx
When debugging inside VS your application will be called [appname].vshost.exe and so the .vshost.exe.config file is where the .net runtime will look for the program's config.
I noticed something else about this behaviour.
Whilst VS WILL create a config called [appname].vshost.exe.config, the API call:
var s = AppDomain.CurrentDomain.SetupInformation.ConfigurationFile
does not return this name, rather it returns: [appname].config
This was using VS2010. Not checked in VS2008