Each version of the framework is independent of eachother, you do not need
to install 1.1 to have 2.0 installed, and you can freely have 1.0, 1.1, and
2.0 installed on the same machine with few, if any, issues(the only problem
I could see would be which version has the asp.net bindings)

Most applications written for the 1.1 framework should be importable into
VS2k5 and work, if thats what you mean. There were some small changes, but
I've had few issues going that direction. However, that alone will not buy
you any of 2.0's heavy improvments, like generics. You will have to modify
your code to use those features.