UPDATE : September 29, 2008
The update from the Web Development Team is that, this behaviour is only related to Click Once Deployment. However, when you create a website/project, the runtime targeted is 3.5 SP1 if it is present without any manual effort (if you are using the .NET 3.5 option from the version selector in Visual Studio 2008 while creating the website/project)
If you are wondering what the post title is all about, it is precisely about it 
I had an interesting question on how to target .NET 3.5 alone after installing SP1. This is because VS 2008 lists only .NET 3.5, .NET 3.0 & .NET 2.0 and does not specifically show .NET 3.5 SP1.
Once you install .NET 3.5 SP1 (and Visual Studio 2008 SP1), for applications that only use the core .NET 3.5 features, the default target runtime would be .NET 3.5. In fact if one needs to specifically target the SP1 features, one has to either add a reference to the System.Data.Entity Assembly or implement one of the steps listed in the article below, from the Project - Properties Settings .
http://msdn.microsoft.com/en-us/library/bb398202.aspx
Also, the following post explains some of the multi-targetting concepts
http://msdn.microsoft.com/en-us/library/bb398197.aspx
As usual, it is well documented in MSDN but was hiding somewhere, so thought of wiring up a post quickly to provide the reference.
Cheers !!!