The .NET Framework 3.5 is shipping later this year at the same time as Visual Studio 2008. The .NET Framework 3.5 is an additive release, meaning that it adds functionality in terms of classes in assemblies to the previous versions 3.0 and 2.0 of the .NET Framework. Since .NET Framework 3.5 doesn't replace (or install side by side) with .NET Framework 2.0 / 3.0 it is able to retain backward compatibility for applications built to .NET Framework 2.0 / 3.0. However there are two required service packs before you can install .NET Framework 3.5. They are .NET 2.0 SP1 and .NET 3.0 SP1, fortunately they are included in the distribution of .NET Framework 3.5. They will also be available for separate download from Microsoft and on Microsoft Update for existing customers who do not need .NET Framework 3.5 but still want the fixes.
The fixes in these service packs help address security issues, performance issues, standards compliance, other bugs fixes, and some additive new functionality has been added to existing classes. From Brad Abrams, we've started publishing information about the new functionality in the service packs coming.NET Framework 2.0 SP1 and .NET Framework 3.0 SP1.