Question: Over the years various versions of .NET have been deployed to my client machines via WSUS. Now it seems that on many machines these installations have hosed eachother, and certain .NET security updates are failing.

I verified that I can run the .NET cleanup tool to get rid of all the .NET installations on a client, and I can then push out .NET 3.5 via WSUS. This seems to have solved the problems I'm having on the machine I tried it on.

So the question is: if I've got .NET 3.5, is there any reason to also have previous versions installed?

Answer: 
.NET is backwards compatible to an extent, but you have to compare between versions of the framework. What they do state is that it is side-by-side compatible, which is the problem you're faced with. There is definitely a reason to have other versions installed. An app can be written to target a specific version and if this version is not present on a machine then the app will fail.
No, .net is not backward compatible. MS reserves the right to make changes. 2.0 u to 3.5 are IIRC, but that is more a "lucky side". The concet is th have al frameworks installed that are needed, and an application targets the framework it was compiled against - this allows MS to clean up new versions and introduce non-compatible changes.