I faced this problem while upgrading .net 2.0 website application so that it may be used in VS 2008 but target framework as .net 2.0 and not 3.5. When I tried to compile the application I got following error.

'Could not load assembly or type System.Web.Extension....". I figured out that I don't have Asp.Net ajax extension installed. When I tried installing ajax extensions I got the title error again and again. After some googling I applied various suggestions like run the msi as administrator (FYI I was using VS 2008 in Windows Vista). Finally one solution worked i.e. the service Ngen was not running in my machine due to which installation action was being rolled back. So make sure you have this service running before you install Asp.net AJAX 1.0. See this forum for more info...

http://forums.asp.net/t/1069586.aspx?PageIndex=2

As suggested by Louis.Lu there is another work around if above method doesn't work

------------------- 

hello, i'm from china, my english is nood good,

i think i could help you.

first, you double click "ASPAJAXExtSetup.msi", copy the following files to other places before the installation has errors.
  C:\Program Files\Microsoft ASP.NET\ASP.NET 2.0 AJAX Extensions\v1.0.61025
      AJAXExtensionsToolbox.dll
      System.Web.Extensions.Design.dll
      System.Web.Extensions.dll

second, copy the above files to "C:\WINDOWS\assembly"

finally, you go installation "ASPAJAXExtSetup.msi" again.

I succeeded like this.

 ----------------

   1:  Loading Demo

   1:  <!-- Code to fetch data from a database -->

To show loading message add following code to the code behind of master file Site.master.cs

   1:   

   2:  protected override void OnLoad(EventArgs e) 

   3:  { 

   4:  if (!IsPostBack) 

   5:  { 

   6:  Response.Buffer = false;

   7:  Response.Write("

   8:  <div style="top: 2px; left: 2px; width: 83px; height: 19px; text-align: right; background-color: orange">

   9:  Please wait...

  10:  </div>

  11:  "); 

  12:  Response.Flush(); 

  13:  } 

  14:  base.OnLoad(e); 

  15:  } 

  16:  protected override void Render(HtmlTextWriter writer) 

  17:  { 

  18:  if (!IsPostBack) 

  19:  { 

  20:  Response.Clear(); 

  21:  Response.ClearContent();

  22:  } 

  23:  base.Render(writer); 

  24:  } 

   1:   

   2:  try{

   3:  var divLoadingMessage = document.getElementById("divLoadingMsg");

   4:  if (divLoadingMessage != null && typeof(divLoadingMessage) != 'undefined') 

   5:  { 

   6:  divLoadingMessage.style.display="none"; 

   7:  divLoadingMessage.parentNode.removeChild(divLoadingMessage); 

   8:  } 

   9:  }

  10:  catch(e){} 

That's it now all your pages using Site.master will be showing Please wait.. message when the page starts loading. Of course instead of putting a message you can put a nice web2.0 loading image in between divLoadingMsg tags.

So how does this works? The onLoad event of master page will be called before any of the content web form's Onload event. as soon as master page loads div tag becomes visible. After the page has loaded completely the script written at the end of the master page hides the div tag. so simple isnt't it.Hope this helps! [Thanks to lijo, my friend, for this nice solution]

PS: This is my old post from http://technoesis.wordpress.com. I have imported the comments as well