Add Web Reference is a wrapper over
wsdl.exe and can be used to create proxies for .NET 1.1 or 2.0 clients. Of course this means when you are pointing to a WCF service you have to be pointing to an endpoint that uses basicHttpBinding (as I was).
Add Service Reference is a wrapper over svcutil.exe and also creates clients proxies (and additionally web.config entries). These proxies, however, can only be consumed by .NET 3.0+ clients.
It seems to me that a better approach would have been to have a single menu option that allowed you to select the proposed target framework.