Clarification
C# 3.5 doesn't exist. There is C#1.0, C#2.0 and C#3.0.
Then there is .NET 1.0, .NET 1.1, .NET 2.0, .NET 3.0, and .NET 3.5.
We should not confuse the two.
C# 3.0 vs C#2.0
Now, is C#3.0 worth the move? I would say that with the existence of Extension methods and Lambda expressions, the answer is yes. These two features alone make for easier to read and quicker to write code. Add that to auto-implemented properties, LINQ, and partial methods, and C#3.0 shows itself to be an advantageous move.
However, it is not necessarily beneficial to move an existing project. You have to weigh the pros and the cons, especially with regards to introducing new bugs and instability, before deciding to migrate existing work. For new projects, I'd say start with C#3.0.