Visual Studio 2010: Reference Assemblies Targeting Higher Framework Version

Step1: Unload the referencing project targeting .NET 2.0

Step2: Right click the unloaded project and select edit from context menu

Step3: Add <SpecificVersion>true</SpecificVersion> to the reference. Below is a sample from my repro solution:

<ProjectReference Include="..\HighFX\HighFX.csproj">
  <Project>{8DD71CAF-BEF7-40ED-9DD0-25033CD8009D}</Project>
  <Name>HighFX</Name>
  <SpecificVersion>true</SpecificVersion>
</ProjectReference>

Step4: Reload the project.

Now your should be able to build within the Visual Studio 2010, there could still be a warning as below, but the build can be successful.

Source: http://social.msdn.microsoft.com/Forums/en-US/msbuild/thread/dfadfb34-5328-4c53-8274-931c6ae00836

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