I am currently working on a project that is moving from .NET 2.0 to 3.5 across the board.
I am well aware that 3.5 is basically a set of added functionality (libraries, if you will) on top of what 2.0 offers.
Are there any gotchas that I might hit by simply re-targeting the compiler to 3.5?
Nope
3.5 is completely compatible with 2.0, not the other way around of course
I recently migrated a small project from 2.0 to 3.5 and didn't encounter any specific problems, as the framework versions are backwards compatible. That said, there are a good number of optimisations and improvements that can be made by taking advantage of available features in the later framework versions. You may get some deprecated feature warnings, but nothing that will stop your project compiling.
Other than that some users of the application will have to download the new framework run-time, none that I know of.
This isn't a gotcha, it's more of a heads up. .NET v3.0 and v3.5 are not new CLRs but simply an added set up assemblies, compilers, resources etc...
Both .NET v3.0 AND v3.5 use the v2.0 CLR. Because of this you won't be able to say set an IIS App Pool to use a v3.5 CLR...cause it doesn't exist.
Discussed in a little more detail here: http://www.hanselman.com/blog/HowToSetAnIISApplicationOrAppPoolToUseASPNET35RatherThan20.aspx
The only issue I've seen is with name conflicts. You'll need to dis-ambiguate any class or method names in your code that share names with ones added to the .net framework between .net 2.0 and 3.5