This blog post has some tips.  If you produce a verbose log file during the .NET 3.5 update, it would help in debugging the situation.  I have to state that for this issue, it would be best if you contact Microsoft Support through whatever support channels you typically use.  Until then try the following scenarios

Option 1

Try installing as a ‘local admin’ not a ‘domain admin’.  There have been isolated issues where 3.5 will not install properly unless done with local administrator privileges.

Option 2

1. Run the .net cleanup utility from http://astebner.sts.winisp.net/Tools/dotnetfx_cleanup_tool.zip

2. Make sure there are no .Net versions from add/remove programs

3. renamed the C:\Windows\Asssembly folder and restart

4. On restart, install the .Net Framework 3.5 from the linkhttp://download.microsoft.com/download/6/0/f/60fc5854-3cb8-4892-b6db-bd4f42510f28/dotnetfx35.exe

Reference Blog:

http://blogs.msdn.com/astebner/archive/2004/11/10/255346.aspx