Hi,
.NET 3.5 is a superset of 2.0 so it will only show it as 2.0 in IIS even when it is using 3.5. You should make sure you have 3.5 SP1 installed though.
Regarding startup performance, see
http://www.mojoportal.com/using-the-appkeepalive-task-to-speed-up-a-low-traffic-site.aspx
Hope it helps,
Joe