You've been working with no problems probably in VS2008 on web app written on .net 2 or .net 3.5 or .net 3.5 sp1 and then you try running on a machine with windows 7 or vista running IIS7 and you get this error message...
Simples. It's comes of running your .Net 2 (you did know that a .Net 3.5 app actually runs on .Net 2 didn't you?) app under .Net 4. Fix it by changing the app pool for your web app to the pre-defined "Classic .Net App Pool", which runs .Net framework 3