It seems that the "Sys not found" problem seems to be caused generically by IIIS being unable to load the AXD file.
I have just upgraded to IIS7/Vista, and an existing website under my old OS (XP) will not run any AJAX app due to the "Sys not found".
Initially it wouldn't run any ASP.Net 2.0 app, until I discovered that the applicationHost.config file was missing entries for some ASP.Net 2.0 mappings for ASPX files. I wonder if it's also missing entries for AXD files.
I tried copying an entry for the 1.1 AXD mapping and adjusting it to point to 2.0 framework, but that didn't change anything.
<add name="ASPNET-ISAPI-2.0-AXD" path="*.axd" verb="GET,HEAD,POST,DEBUG" modules="IsapiModule" scriptProcessor="C:\Windows\Microsoft.Net\Framework\v2.0.50727\aspnet_isapi.dll" preCondition="classicMode,runtimeVersionv1.1,bitness32" responseBufferLimit="0" />
I also notice that if I look at the browser source for an AJAX website that works (any public ajax website) and you copy the relative URL for the any included AXD file and paste it into the browser, it loads that AXD file. But on my dev server, if I do the same, I get a 404 error.
Some configuration setting is missing to support loading these AXD files into the browser.