They can co-exist next to eachother without a problem.
The only thing you can run into is with new projects created with v2.0 is that vs.net might reference the v1.0.2005.1 runtime libs, even though the cs/vbproj file points to the v2.0 ones. This is a one time thing and easily solved by updating the references in vs.net, but most of the time this works correctly. (.net 1.x projects sometimes give this issue in vs.net 2003).
