Given the error above and more information below:
The type 'System.Web.UI.ScriptManager' is ambiguous: it could come from assembly 'C:\WINDOWS\assembly\GAC_MSIL\System.Web.Extensions\1.0.61025.0__31bf3856ad364e35\System.Web.Extensions.dll' or from assembly 'C:\WINDOWS\assembly\GAC_MSIL\System.Web.Extensions\188.8.131.52__31bf3856ad364e35\System.Web.Extensions.dll'. Please specify the assembly explicitly in the type name.
I have to deal with this issue a couple of times and each time, I have to make a mental note. I figured I'd rather make a post so it can help others and myself in the future to solve the issue when upgrading to 3.5
1. Make a backup of your /bin directory and delete all files in it.
2. Re-build the project or website.
3. Add all the DLL's associated with the project.
4. The 4th step is odd but I have to go to Property pages>References and remove both the System.Web.Extensions (3.5) and the System.Web.Extensions.Design (3.5) to make it work. I hope this helps.