Can you develop plug-ins and custom workflow activities with .NET Framework 3.5?
Microsoft Dynamics CRM 4.0 uses the .NET Framework 3.0, so this is the version that is officially supported. However, the .NET Framework 3.5 uses the same underlying Common Language Runtime (CLR) – version 2.0 – so many operations will work the same regardless of which framework version you use. To make the choice, it’s important that you understand the fundamental difference between the .NET Framework and the CLR. The CLR is just one of the components of the framework. For example the .NET Framework 3.5 includes LINQ, which is not part of the CLR – but an add-in component.
If you develop a plug-in using 3.5 and refer to the LINQ libraries, and then deploy it to a server without the framework 3.5, your plug-in will fail because those libraries aren’t installed.
Stay on the safe side and use the .NET Framework 3.0.
If you, your customers and partners have a good understanding of the framework vs. CLR then you can be more adventurous and use 3.5 for some of your development.