Instead of referencing the output DLL, did you try installing it as a reference to the project.
Also, did you make a clean build of the solution if any .Net 4.0 files were delayed? You can manually clean the project by deleting the bin and obj folders.
You tried to remove projects from the solution by creating a new .net 3.5 project and compiling it. Then add the ddl project (Add -> existing project) and compile, then add the exe project without a link, then compile, then add the links.
An odd question, but you are still checking namespaces. Can you call a name in your project, i.e.using mydllproject.model.myengine