We verified the workflow you've mentioned with our latest May build (2011.1.530.1), which should be visible for you under "Manage your products > Latest Internal Builds". Everything was tested under VB. As far as we are considered everything works "by design", nevertheless let me shed some more light what we believe is the right behavior:
1. "Show Model Settings..." option - in general those are the settings of the model that is opened. In the specific case of changing the namespace we are closely following the default Visual Studio behavior which is: If the namespace of a project is changed, the already added files are not touched, it will be applicable only for newly added files. Therefore we provide the same behavior - if you change model's namespace globally through the Model Settings, it will not affect the already available classes on the diagram. Only if you add a new class, the new namespace will be picked up.
2. Changing namespaces via the Properties Pane - This is a trivial operation, and when my college said the "Properties dialog" he reffed actually to the standard VS Properties Pane/Window. You can change there the namespace by selecting the entity in question on the diagram. After that its properties will be selected and displayed in the properties pane. There you will see the namespace property and it is available for edit. To persist the change, you should save the model.
the Telerik team
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