Thanks for the reply Ravi.
Turns out that if you have .net 3.5 installed on your machine, you won't see it from the IIS side.
http://blogs.msdn.com/vijaysk/archive/2008/03/20/running-asp-net-3-5-on-iis.aspxSo my assumption that I needed IIS7 was incorrect; I just was thrown by not seeing that version from IIS manager.
I was able to bump my projects to compile as 3.5, along with the website and so from what I can tell things are good-to-go at the moment, just need to do more testing.
It would be nice to be able to do an inplace OS upgrade since it would save the time of rebuilding the box, but it will probably come down to doing just that - rebuild with 2008 and restore the site. I might just try the in place OS update on my dev VM and see what happens, but it is pretty low on my list at the moment.
Have a good day!
Rob