Windows 7 comes with .NET 3.5 SP1 pre-installed. One possible source of the problem is having Visual Studio 2010 Beta 1 installed before you did the Win7 upgrade. The upgrade will destroy the .NET 4.0 configuration, all programs that use the default version of the CLR will no longer work correctly. I found a workaround for it but I strongly recommend you reinstall Win7, now selecting a clean install rather than an upgrade.
Strike that. The info we were missing is that you copied it into the system32 folder. That folder is virtualized in a 64-bit version of Windows. A 32-bit app will see the syswow64 folder instead. That is an issue with Reflector, it has config flags (visible with corflags.exe) that forces it to run in 32-bit mode. Accordingly, it can't find its .exe.config file.