I have Framework 3.5 installed, why does my IIS show only ASP.NET 1.1/2.0?
I've replied a lot to these questions lately.
I'm not going to go to very deep with this, Scott Hanselman has excellent post covering this, see that:
How to set an IIS Application or AppPool to use ASP.NET 3.5 rather than 2.0
http://www.hanselman.com/blog/HowToSetAnIISApplicationOrAppPoolToUseASPNET35RatherThan20.aspx
Simple way is also to think that 3.0 and 3.5 bring "a few more" dlls to 2.0 runtime (which is 2.0 SP 1 in practise). So basically 3.5 is not really that big upgrade to vanilla ASP.NET 2.0, although it certainly isn't any minor upgrade.