I agree with you, it looks like Orcas is trying to load version 2.0.0.0 of System.Web.Extensions.dll, even though the target framework is 2.0. It looks like you hit a bug and I will make sure a bug is filed. To workaround this issue, I have a couple suggestions:
1. Allow Orcas to reference the new System.Web.Extensions.dll. This may cause some issues if you deploy to a web server without .NET framework 3.5 installed or try to open the website later in Visual Studio 2005.
2. Do not allow Orcas to reference the new System.Web.Extensions.dll. Once the prompts finally disappear, manually add a reference to a copy of the old System.Web.Extensions.dll. This may cause some unintended side affects in Orcas and potentially cause some wierd behavior when adding AJAX documents.