Moving forwards or back?

Can .NET framework 2.0 assemblies run under .Net framework 1.1?.  

Short answer: NO.

Long answer: In .Net framework 2.0 many features are added. Many features(Generics first comes to mind) warrant a medata format change. As a result, .Net framework 1.0 and 1.1 will not recognize assemblies compiled with .Net framework 2.0 compilers.

 [via Microsoft WebBlogs]

I can write a program now that works on Win98 through Windows XP SP2 and takes advantage of the 'more advanced' features of the more recent platforms - in this way one maintains a very broad reach as far as potential customer base is concerned.

With .NET, which is meant to be the platform of the future this is no longer going to be possible. You can write an app to take advantage of new features but it won't run at all on old platforms. Stuff written for old may/probably run on new (though you might get caught by a breaking change - in which case what happens?). This gets even more interesting in the Longhorn timeframe, an OS that is going to only support one version of the CLR being available on the machine.

I suppose its really not that different to dependency on a version of the VB runtime - its just not an idea I (C/C++) am used to.