Nothing pretty but there are ways to get the code happily working together (in the order of preference):
1) Upgrade both projects to 3.5
If I understand you correctly then your .net FW 2.0 Program will have dependency on 3.5 Library, which means for every functionality of the Program to work, it now requires FW 3.5. Since you state to have the code and authority to recompile the the Program AND install whatever FW on deployment, then you can upgrade it to 3.5. Sounds simple, but since you did not do this, then I guess you have good reasons (like other programs being higher up the call chain which you cannot upgrade to 3.5/recompile.)
2) Go around the FW2.0 compiler
Build the Program when referencing the 2.0 version of Library (or dummy, just providing the public API).
Build the 3.5 version of Library separately without Program (hence removing the need to reference the wrong FW assembly) and deploy the 3.5 version instead of the 2.0 version.
Since 2.0 and 3.5 use the same CLR runtime then fooling the compiler is enough. As long as the deployment maching has FW 3.5 installed, everything should be fine.
Note: everything is fine even if you have just .net 2.0 present on deployment machine and the user does not call .net 3.5 classes. If he does, there will be crash ;)
3) downgrade Library to 2.0
if you use only some classes of the .net FW then you could remain using the 2.0 compiler by adding those missing future assemblies to project. (this is the solution from Hanselman link shared by Craig). As already noted, you'll lose 3.5 compiler's syntactic sugar like vars.
Choose whichever suits your situation best.