I'm just trying to create a new application pool in IIS7 and specify 3.5 for its framework version. However it only has "v2.0.50727" or "no managed code" as options in the framework version drop down.
How can that be and how can I fix it?
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This is correct.
As long as you have .net 3.5 installed on the box then .net 3.5 web apps will run.
"ASP.NET 3.5, it is still based on the ASP.NET 2.0 core fundamental. Therefore, there is no new application type(for ASP.NET 3.5) in IIS"
Taken from here: link text