Do you , in fact, have NET Framework 3.5 SP1 installed?
Yes, I had VBstudio and it installed several DotNet Frameworks, v1.1, v2.0 sp2, v3.0 sp2 and v3.5 sp1, as well as two DotNet Compact Frameworks (v1.0 sp3dev, 2.0) ...
What OS Service Pack (XP) level do you have installed?
SP3, but PaintNet has worked for a long time with this version, and very well too.
Just, perhaps, not after the latest security updates last week...
Will Paint.NET not save as any filetype?
When I select any Save option (icon, Save or Save As...) it just hangs, it will not show any dialog windows to let me select file types or directories! it just hangs/freezes right there.