I recently encountered a problem that was resolved after some hit and trial efforts. Since I couldn't find the solution on google so I thought putting up it here would help some one using Performance Point and .Net 3.5
1. Installed and configured Performance Point server, no issues
2. Setup and published dashbaords
3. Didn't use for some time and in the meantime Installed Visual Studio 2008 and .Net 3.5
4. Recently tried to run the performance point, it failed to conenct to the database server, gave following error message
" unable to connect to the specified server"
5. Tested SQL db isntances and connectivity but everything was perfect and fully accessible from elsewhere
6. Tried connecting to to Performance Point Montioring Server (File->Options->Server->Connect), didn't' work either, same error message
7. Through IIS, brought up the web services page (http://localhost/WebService/PmService.asmx). There was the error message I was looking for, the web service could not run as it failed to load system.web.extension. The config file had version=1.0.61025.0 and although I had ver 1.1, 2, 3 and 3.5 of .net framework installed still it could not load the right dll.
8. I manually edited the web config and replaced all instances of version=1.0.61025.0 with Version=3.5.0.0. That's it, it started working again.
9. I had to do the same for http://localhost/Preview/web.config to bring up the preview site.
Thanks for your help Nick, the performance point guru.
Check Nick's post on similar database connectivity issue, if this is not the issue you are facing
http://nickbarclay.blogspot.com/2007/11/pps-data-source-connection-problems.html