You can indeed use ModeShape with applications that use the JCR 1.0 API. However, since ModeShape does require the JCR 2.0 API JAR, you really need to have the 2.0 JAR on the classpath. That should be perfectly fine, since the application will continue to only use the JCR 1.0 API methods, and because the JCR 2.0 API is a strict superset of JCR 1.0 (although JCR 2 deprecates some functionality, ModeShape correctly implements all of the JCR 1.0 methods that were deprecated in 2.0).
So you do not need to use the javax.jcr.RepositoryFactory method; you can either set it up via JNDI or directly configure the ModeShape instance via ModeShape-specific code. If you have any questions, please ask.