I can recommend LINQ to SQL as being ready for production usage. We're using it on a few projects now and have had no real issues with it.

VS2008 lets you target .NET 3.5 or .NET 2.0, so you can get the benefits of the new IDE (JS debugging primarily, IME) without moving to 3.5. That said, the major benefit we've encountered with 3.5 is LINQ. I'm not necessarily talking LINQ to SQL here (don't want to ignite the ORM camp...), just regular LINQ. We have found that it has greatly reduced the amount of looping code we've written. Things like building dictionaries, selecting items from a list and the like are a veritable joy when using LINQ. I don't want to sound fanatical about this...but we've found it a joy to use once you become used to the syntax. :-D