Hey man, you are a star.
I poked aroung Google after your previous post and have got it all working now with help from the following page.
http://asp.net/ajax/documentation/live/ConfiguringASPNETAJAX.aspx
Basically re-iterating what you have posted above with some added goodies.
I assumed (incorrectly) that when the site was created, you got all the web.config bits set up for you. In VS2005 when you created a special ASP.NET AJAX enabled site, your web.config was updated correctly, now in VS2008, you dont get the option to create an
AJAX enabled site, so I guess you have to hack the web.config file yourself.
All good learning stuff.
Thanks again
Mike