Two versions of TextTransform.exe currently exist. It appears that the TextTransform.exe in the 1.1 folder is able to generate code using the .NET 2.0 framework. The TextTransform.exe in the 1.2 folder can reference the .NET 3.5 framework if "v3.5" is added to the language directive in T4 templates (e.g. "C#v3.5").
C:\Program Files\Common Files\Microsoft Shared\TextTemplating\1.1\TextTransform.exe
C:\Program Files\Common Files\Microsoft Shared\TextTemplating\1.2\TextTransform.exe