First of all, thanks for sharing the solution to the community.
It looks like the WebSite FW3.5 conversion does not add the binding redirects, so one can also create new 3.5 web site/web app and just copy the web.config into the converted site/application.
Other than that, the latest Prometheus RadControls v2007_2_1107 seem to work fine in VS2008 RTM. We started testing all the RadControls yesterday and the only major issue found so far is a problem with the Prometheus installer, which we will address as soon as possible.
the Telerik team