Could it be that you had the <strong>Convert to Telerik Web Application</strong></td> markup in the clipboard and you pasted that to the file? The toolbox drag and drop does not deal with markup addition other than the default control registration...
As per the reference update, once you have the Telerik.Web.UI assembly referenced by your project, you don't have the "Convert" menu item anymore, as the project is already "converted" to use the RadControls. In this case, to change the referenced Telerik.Web.UI assembly with a newer version, you should use the Upgrade Wizard
menu item. The Telerik Menu post
could shed some more details about that.
I hope that helps.
the Telerik team