Follow these steps to prepare your machine for development or production Web Services applications that take advantage of AJAX. I had to cull these steps from multiple blogs, MSDN information, etc.

Development or Production

1. If not already installed, install .NET Framework 2.0
http://www.microsoft.com/downloads/details.aspx?familyid=0856eacb-4362-4b0d-8edd-aab15c5e04f5&displaylang=en
2. Install ASP.NET 2.0 AJAX Extensions 1.0
http://ajax.asp.net/downloads/default.aspx?tabid=47
3. Install ASP.NET 2.0 AJAX Futures January CTP (or more recent)
http://www.microsoft.com/downloads/details.aspx?FamilyID=4CB52EA3-9548-4064-8137-09B96AF97617&displaylang=en
4. Until this is fixed at Windows Update, get the validators.dll that is missing from AJAX
http://blogs.msdn.com/mattgi/archive/2007/01/23/asp-net-ajax-validators.aspx
and update your web.config as outlined in the post above.

Production

To deploy your Web Services application, follow these steps.
1. Copy your project into a subdirectory under inetpub/wwwroot
2. Start/Programs/Administrative Tools/Internet Information Services (IIS) Manager
3. Expand the Computer Name and right click on Web Sites
4. Choose New/Web Site… and follow the wizard to set up your Web Site
5. Once you are done with the wizard, right click on the site you just created and choose Properties
6. Click on the ASP.NET tab and make sure that the ASP.NET Version is 2.x (not 1.x)