.NET 3.5 did not have new versions of mscorlib, System.dll, etc. - it had new builds, but the ones you could use from .NET 2 were the same.
.NET 4 introduces new versions of these major assemblies - and the embedded DLL will reference these new versions explicitly. Visual Studio 2008 does not know about these versions - or the CLR that comes with them.
If you want to use the library in Visual Studio 2008, you should target .NET 3.5.
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