You receive the above error despite the fact that qualifying products are installed. This was on a Windows 2003 SP2 server. Turns out that the hotfix will only install when there is a just .Net 2.0 installed and no service packs.
I managed to find a discussion that recommended installing KB971030 but this had been discontinued and superceded by KB981574! Information is here: http://support.microsoft.com/kb/981574
Unfortunately it states the hotfix is only available via a call to Microsoft – I googled the hotfix and found that I could download it fromhttps://connect.microsoft.com/VisualStudio/Downloads/DownloadDetails.aspx?DownloadID=33154 and I installed the x86 version NDP20SP2-KB981574-x86.exe although there are IA64 and x64 versions available.
Hopefully this will now stop the .Net fatal exception errors in the event viewer and the crashing of a third party application service.