If the LINQ Preview can use the C# 3.0 compiler with VS 2005 there's nothing wrong with using the C# 1.1 compiler with VS 2005. (If you really have to :P) The VS 2005 project templates is really simple to extend and I've compiled a small installer to add two new project templates to your available C# templates that makes use of the C# 1.1 compiler. One for Class Libraries and a Console Application template.
The MSI can be downloaded here.
To add more templates follow the standard procedure for creating a custom template and add the following line to the resulting .CSP file to import the C# 1.1 settings (Everett targets is a file compiled from Jomo Fisher's ready-made 1.1 msbuild file and should be installed if you run the installer):
<Import Project="$(ProgramFiles)\Everett\Everett.targets" />
With this template you can use the IDE features but still compile for the older framework. There's plenty information on MSDN on creating your own project templates. Especially useful if you setup the same projects often. ie. Unit Tests with a different testing platform etc.
<disclaimer>It worked on my machine with Beta 2 installed but I haven't tested it anywhere else...I assume the RTM templates works exactly the same way.</disclaimer>
Source: Impersonation Failure : C# 1.1 Project Templates for VS 2005