I had a .Net 1.1 application with Setup project and RemovePreviousVersions=true.
After I converted it to .Net 2.0, I've tried to install it on machine where previous version was installed.
It caused System.BadImageFormatException exception. I believe that new .Net 2.0 Setup failed to uninstall .Net 1.1 application due to .Net framework versions mismatch.
I've desided to change UpgradeCode, that will be considered as new application, and it allowed me to install new version.
Alternatively user can manually uninstall previous version prior to install new one(not tested yet).
I've reported the issue toMicrosoft.