I created a brand new Virtual Machine for just VS 2003 Development. Installed SQL 2000, IIS 5.1, .NET Framework 1.1, and Visual Studio 2003.
Whenever i tried to start a new asp.net web application, i encountered the above error message "Visual Studio .NET has detected that the specified Web server is not running ASP.NET version 1.1. You will be unable to run ASP.NET Web applications or services."
So, I abandoned that VM and started on a new one, and installed the software in this order:
Windows XP SP2
Visual Studio 2003
And, I still get the same error message.