In our existing application running NH1.04, I have methods and properties in my classes, that I did not declare as virtual. However, upon converting to 1.2, I get an error message complaining about these. Is this normal?

The following types may not be used as proxies:
CID.IPath.NewBusinessLayer.organization: method get_projects_security_filtered should be virtual
CID.IPath.NewBusinessLayer.organization: method get_locations_security_filtered should be virtual
CID.IPath.NewBusinessLayer.organization: method Serialize should be virtual
CID.IPath.NewBusinessLayer.organization: method get_projects_security_filtered should be virtual
CID.IPath.NewBusinessLayer.organization: method get_locations_security_filtered should be virtual
CID.IPath.NewBusinessLayer.invoicepackage: method GenerateInvoice should be virtual
CID.IPath.NewBusinessLayer.invoicepackage: method Discard should be virtual
CID.IPath.NewBusinessLayer.invoicepackage: method Serialize should be virtual
CID.IPath.NewBusinessLayer.claimreviewtasktype: method Serialize should be virtual
CID.IPath.NewBusinessLayer.seriouscasereason: method Serialize should be virtual
CID.IPath.NewBusinessLayer.QAQCRecord: method Serialize should be virtual
CID.IPath.NewBusinessLayer.feeschedulesection: method Serialize should be virtual
CID.IPath.NewBusinessLayer.Statelicense: method Serialize should be virtual
CID.IPath.NewBusinessLayer.feeschedule: method Serialize should be virtual
CID.IPath.NewBusinessLayer.procedurecode: method Serialize should be virtual
CID.IPath.NewBusinessLayer.ProviderOfGS: method get_organizations_sorted should be virtual
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This is no longer a problem. I solved this for now by adding default-lazy="false" to hibernate-mapping element.

Yes, this is normal behaviour, when using the lazy feature all methods of your object needs to be virtual in order for the proxy to be able override these.