I do know you cannot run two versions of MyGeneration side by side. That said, and Mike or Justin will have the definitive answer, but upgrading should not be a problem. Having to target both .NET 1.1 and 2.0 is still a common situation. The code generated by your templates will not change. Just as you could generate code that targeted .NET 2.0 features with MyGeneration 1.1.5, you can generate pure .NET 1.1 code with MyGeneration 1.2. You could generate Java code, if you wanted, and not even have Java installed on the same machine
I think the upgraded MyGeneration code base was prompted by developers who had moved to a .NET 2.0 only environment and did not want to have to install .NET 1.1 to use MyGeneration. I have not heard of any backwards compatibility issues, and there are some nice new features and bug fixes.