I was finally able to get things working here's what I ended up doing.

• uninstall beta 2 completely
• get everything working again in beta 1 and re-build project.
• install beta 2 again
• clear out toobars in vs and delete reference to old toolkit in solution.
• add new toolkit dll to project and to toolbar
• look at your web.config and the new toolkit sample website web.config side by side, make any changes to references etc. you see between your web.config and the sample website web.config.
• build project and run, everything works fine.
• publish project to a folder on your drive
• move project to web server
• manually add microsoft.web.extensions.design to bin folder on webserver.

Everything works now... what a trip to the dentist!