The Linq to SQL features, well really pretty much the Linq Extensions in general are well worth the upgrade.
As for your worries about HD space and install time, IMO these are not relevant on most modern systems for the newer frameworks. The newer versions of the frameworks (3.0 and 3.5) are really just "refreshes" of the 2.0 framework. Unless your customers/market is older PC's I think you will get a good tradeoff in functionality and productivity for your dev team as opposed to the negligible risk of losing customers because they can't risk adding another 20Mb on their hard drive (I made up the 20mb number, someone can call BS on that).
