Microsoft says for SPS and .NET2.0 / .NET1.0

Support for .NET Framework 2.0, ASP.NET 2.0, and Visual Studio® 2005  

Windows SharePoint Services with SP2 supports running on the Microsoft .NET Framework 2.0, which includes ASP.NET 2.0. Note that SharePoint Portal Server, on the other hand, will not support .NET Framework 2.0, even with SP2. The next major releases of both Windows SharePoint Services and SharePoint Portal Server will both be based on, and hence make extensive use of, ASP.NET 2.0 and its multitude of new features. From a developer’s perspective, Windows SharePoint Services with SP2 simply runs on the new CLR. Windows SharePoint Services has not been redesigned to take advantage of any of the new major features of ASP.NET 2.0, such as Master Pages and the Web Part Framework. However, the new class libraries are certainly available to custom Web Parts, pages, event handlers, and so on. There are two supported scenarios in which you can create your Windows SharePoint Services implementation with support for .NET Framework 2.0: 

         Side-by-side installation of .NET Framework versions 1.1 and 2.0 You can install Windows SharePoint Services on a server on which .NET Framework version 1.1 and version 2.0 are both installed. If you plan to eventually install SharePoint Portal Server on this server, do not install .NET Framework 2.0. Additionally, you can also run ASP.NET 1.1 and ASP.NET 2.0 side by side on different Microsoft Internet Information Services (IIS) Web applications that are running Windows SharePoint Services with SP2. In this scenario, you can create custom extensions to Windows SharePoint Services that leverage the new features of .NET Framework 2.0, such as custom administrative tools.

         Installation of .NET Framework version 2.0 only  In this scenario, Windows SharePoint Services runs with .NET Framework 2.0, and .NET Framework 1.1 is not installed. However, running Windows SharePoint Services with .NET Framework 2.0 still provides the same features and functionality as running Windows SharePoint Services with .NET Framework 1.1. In some cases, ASP.NET 2.0 enhanced its security by locking down operations that were possible in ASP.NET 1.1. Some of these lockdowns are incompatible with Windows SharePoint Services and must be disabled for the application to function correctly. For more information about how to configure Windows SharePoint Services to support .NET Framework version 2.0, see Overview: Windows SharePoint Services 2.0 SP2 Beta in Windows Server 2003 R2.

Running .NET Framework 1.1

It is not required that you upgrade any Windows SharePoint Services 2.0 installations to ASP.NET 2.0. Support for ASP.NET 2.0 is provided to accommodate users who want to update their computers with the latest version of .NET Framework, or leverage development improvements in the new version of ASP.NET.

Upgrading to .NET Framework 2.0

Although it is not required that you upgrade to ASP.NET 2.0, there are many improvements to the development platform and environment in that release of the framework. The Windows SharePoint Services 2.0 object model and SOAP services are fully supported for use in ASP.NET 2.0 applications. To leverage ASP.NET 2.0 Web Parts in Windows SharePoint Services, a wrapper Web Part must be written to make the ASP.NET 2.0 Web Part appear to be a Windows SharePoint Services Web Part. After this is done, your ASP.NET 2.0 Web Part should function normally within your Windows SharePoint Services pages. Wrapper Web Parts will not be required in the next version of Windows SharePoint Services or the next version of SharePoint Portal Server (code named Office “12” SharePoint Servers), which both natively support ASP.NET 2.0.

In most SharePoint Portal Server installations, it is better to continue to use the current technologies that are supported natively in the product — that is, ASP.NET 1.0 and .NET Framework 1.1 — rather than mixing the platforms.