I would first try uninstalling and reinstalling .NET 3.5. If this does not work You may need to cleanup any fragments of .NET then reinstall.
First part, try using Add/Remove Programs and look for all
.NET versions and uninstall them. If you get an error at any point uninstalling any version of .NET, then try the .NET Cleanup Tool
. This tool is being pointed to by an MSDN Blog post and I've personally used it in the past to fix many errors with .NET.
Hope this helps,