As no one has answered my question I will do myself so people who deal with the same problem will know. What I didn't mention is that my IDE is Visual Studio .Net 2002, because I didn't realize that it is tied up with .Net 1.0. There is only one way to upgrade from .Net 1.0 to 1.1 and that is buying VS.Net 2003 - the same is true for .Net 2.0 and VS.Net 2005. While you could argument that running the 1.1 compiles from the command prompt is a work around, it does not have any significant effect because you can't use anything from the 1.1 framework while developing.
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Moving to C# .NET
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Uninstalling .NET framework 1.0
