The registry is the "official" way to detect if a specific version of the Framework is installed, but which registry keys are needed change depending on the Framework version you are looking for.
Framework Version Registry Key
------------------------------------------------------------------------------------------
1.0 HKLM\Software\Microsoft\.NETFramework\Policy\v1.0\3705
1.1 HKLM\Software\Microsoft\NET Framework Setup\NDP\v1.1.4322\Install
2.0 HKLM\Software\Microsoft\NET Framework Setup\NDP\v2.0.50727\Install
3.0 HKLM\Software\Microsoft\NET Framework Setup\NDP\v3.0\Setup\InstallSuccess
3.5 HKLM\Software\Microsoft\NET Framework Setup\NDP\v3.5\Install
4.0 Client Profile HKLM\Software\Microsoft\NET Framework Setup\NDP\v4\Client\Install
4.0 Full Profile HKLM\Software\Microsoft\NET Framework Setup\NDP\v4\Full\Install
The value is also different. For .NET 1.0, the value is a String value; all others use a DWORD.
Determining the service pack level follows a similar pattern:
Framework Version Registry Key
------------------------------------------------------------------------------------------
1.0 HKLM\Software\Microsoft\Active Setup\Installed Components\{78705f0d-e8db-4b2d-8193-982bdda15ecd}\Version
1.0[1] HKLM\Software\Microsoft\Active Setup\Installed Components\{FDC11A6F-17D1-48f9-9EA3-9051954BAA24}\Version
1.1 HKLM\Software\Microsoft\NET Framework Setup\NDP\v1.1.4322\SP
2.0 HKLM\Software\Microsoft\NET Framework Setup\NDP\v2.0.50727\SP
3.0 HKLM\Software\Microsoft\NET Framework Setup\NDP\v3.0\SP
3.5 HKLM\Software\Microsoft\NET Framework Setup\NDP\v3.5\SP
4.0 Client Profile HKLM\Software\Microsoft\NET Framework Setup\NDP\v4\Client\Servicing
4.0 Full Profile HKLM\Software\Microsoft\NET Framework Setup\NDP\v4\Full\Servicing
[1] Windows Media Center or Windows XP Tablet Edition
As you can see, determining the SP level for .NET 1.0 changes if you are running on Windows Media Center or Windows XP Tablet Edition. Again, .NET 1.0 uses a string value while all of the others use a DWORD.
For .NET 1.0 the string value at either of these keys has a format of #,#,####,#. The last # is the Service Pack level.
While I didn't explicitly ask for this, if you want to know the exact version number of the Framework you would use these registry keys:
Framework Version Registry Key
------------------------------------------------------------------------------------------
1.0 HKLM\Software\Microsoft\Active Setup\Installed Components\{78705f0d-e8db-4b2d-8193-982bdda15ecd}\Version
1.0[1] HKLM\Software\Microsoft\Active Setup\Installed Components\{FDC11A6F-17D1-48f9-9EA3-9051954BAA24}\Version
1.1 HKLM\Software\Microsoft\NET Framework Setup\NDP\v1.1.4322
2.0[2] HKLM\Software\Microsoft\NET Framework Setup\NDP\v2.0.50727\Version
2.0[3] HKLM\Software\Microsoft\NET Framework Setup\NDP\v2.0.50727\Increment
3.0 HKLM\Software\Microsoft\NET Framework Setup\NDP\v3.0\Version
3.5 HKLM\Software\Microsoft\NET Framework Setup\NDP\v3.5\Version
4.0 Client Profile HKLM\Software\Microsoft\NET Framework Setup\NDP\v4\Version
4.0 Full Profile HKLM\Software\Microsoft\NET Framework Setup\NDP\v4\Version
[1] Windows Media Center or Windows XP Tablet Edition
[2] .NET 2.0 SP1
[3] .NET 2.0 Original Release (RTM)
Again, .NET 1.0 uses a string value while all of the others use a DWORD.
For .NET 1.0 the string value at either of these keys has a format of #,#,####,#. The #,#,#### portion of the string is the Framework version.
For .NET 1.1, we use the name of the registry key itself, which represents the version number.
Finally, if you look at dependencies, .NET 3.0 adds additional functionality to .NET 2.0 so both .NET 2.0 and .NET 3.0 must both evaulate as being installed to correctly say that .NET 3.0 is installed. Likewise, .NET 3.5 adds additional functionality to .NET 2.0 and .NET 3.0, so .NET 2.0, .NET 3.0, and .NET 3. should all evaluate to being installed to correctly say that .NET 3.5 is installed.
.NET 4.0 installs a new version of the CLR (CLR version 4.0) which can run side-by-side with CLR 2.0.