Actually if there are 2 different websites with their own web.config. MAke the root folder 1.1 and when you create the virtual directory, you'll find the tab for 1.1 or 2.0. Select 2.0 and of course as you said you need to put a different application pool.
Now, rememeber that you won't be able to share Sessions (you could but many steps to follow), Authentication etc...
Best way is to open the 1.1 website project with VS2005 and the editor will convert the website in minutes!!
Have fun
Cheers
Al
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