Hi,
If you create a component in the .NET Framework 2.0 and it only uses functionality that existed in the .NET Framework 1.1, then there is a good chance it will work on a system with only the .NET Framework 1.1 installed. However, there are some breaking changes between version 1.1 and version 2.0 (notably for security issues but also for other reasons) that may cause this to not be the case.
If you want to support a scenario where only the .NET Framework 1.1 is installed on a system, the most reliable way is to create that component in VS 2003 and test it on a system that only has the .NET Framework 1.1 installed. However, with some additional testing, you might be able to support building the component only in VS 2005 depending on what functionality in the .NET Framework your component uses.
Thanks! Aaron