I'm using vb.net to create an application to be deployed on a pocket
pc.  When creating a new project, do I have to use a "smart device
application" in order for this to work?  If not, how can I do it? 
There are functionalities that are not included in the .net compact
framework that I would like to use.

1. Do I have to use a "smart device application" in order for this to work?

Yes, you do.

2. There are functionalities that are not included in the .net compact
framework that I would like to use.

There is a project out there that is working to bring some of the
functional differences from the full .NET Framework to the .NET
Compact Framework. You can find out more information by visiting
www.opennetcf.org

1. Do I have to use a "smart device application" in order for this to work?

You can use emulator which comes with VS.Net 2005 or with VS.Net 2003
you can dowload from internet or chose from options while installing
Vs.net2003.

2. There are functionalities that are not included in the .net compact
framework that I would like to use.

you can referrence your assemblies/dlls (functionality that is not in
Framework) to the project. Only thing is it might addup to the size of
your application.