Just to answer the original question, the RadControls for ASP.NET AJAX work with both the .NET 3.5 and 2.0 version of System.Web.Extensions. There are two different builds of the Telerik.Web.UI.dll, one for each version of the framework, so they support whatever environment you're working-in.
In any event, I'm happy to see you were able to fix your problem and get on with your usage of the controls. Watch for the next release with tons of new features and improvements later this week!