Remove the current installation and follow this instructions
http://www.asp.net/ajaxlibrary/act.ashx[
^]
Take also this notes:
The current version of the AJAX Control Toolkit is not compatible with ASP.NET 2.0. The latest version that is compatible with ASP.NET 2.0 can be found here:
http://ajaxcontroltoolkit.codeplex.com/releases/view/11121[
^]
When using the Ajax Control Toolkit with Visual Studio 2008, you must have Visual Studio Service Pack 1 installed.
EDIT:
Sorry just know got to me, you are not speaking about the 2008 but vs8 that should be the 2005 version.
If you are using .NET Framework 3.5 and Visual Studio 2005 then you should use the earlier Toolkit version 1.0.20229 at
http://ajaxcontroltoolkit.codeplex.com/releases/view/11121[
^]
Cheers