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To upgrade the content processor project to 2.0, both sub projects have to be upgraded separately. After upgrading both separately, the TerrImporter project needs to be added by right clicking the root note in solution explorer.
At this point the references to the Microsoft.Xna.Framework.Content.Pipeline are not able to find the assembly.

This can be fixed by removing and replacing each reference. You can do this by right clicking each of the References folders and choosing Add Reference. From there, you can navigate to the assembly on the .NET tab.

To ensure your game project can find the game library, your game library must now be added as a reference to both the game project and the content node within the game project. To do this, you first have to be sure that your game library is compiled under the XNA 2.0 framework. You can compile it by right clicking the project reference in Solution Explorer and then selecting Build. Once the new dll is generated from the build, right click the start up project node and choose 'Add Reference'. In the Add Reference dialog that appears, from the Browse tab, you can add the game library's dll by using a path similar to TerrImporter\TerrImporter\bin\x86\Debug. In the end, your references should be listed as shown below.

Once these references are complete, your heightMap properties should now reference the content processor.

The project should now run properly in XNA version 2.0.