Like a few others, I eventually ditched ASP.NET 1.1 Web Form projects in in favor of Class Library projects.  For any of you out there converting your 1.1 Class Library projects to ASP.NET 2.0 and want to use the after-market Web Application Project, here's what you need to do.

1. Convert your 1.1 project to 2.0 using the VS 2005 conversion wizard (just open the project in VS 2005)
2. Close VS 2005
3. Edit your .csproj or .vbproj file with a text editor
4. Find the line that reads <ProjectType>Local</ProjectType> and change it to:
   
   [C#]
   
   <ProjectTypeGuids>{349c5851-65df-11da-9384-00065b846f21};{fae04ec0-301f-11d3-bf4b-00c04f79efbc}</ProjectTypeGuids>
   
   [VB.NET]
   
   <ProjectTypeGuids>{349c5851-65df-11da-9384-00065b846f21};{F184B08F-C81C-45F6-A57F-5ABD9991F28F}</ProjectTypeGuids>
   
   

For any of you still developing under VS 2003, check out Fritz Onion's ASP.NET without Web Projects.

UPDATE: Found out that settings for VB.NET projects are different.

UPDATE 2: If you've upgraded a 1.1 project to WAP, you'll probably want to also right-click on the project and choose the "Convert to Web Application" option.  This will split the code-behind files into partial classes and enable designer support.  Thanks for the tip, Scott!