Does atlas need to be install on my hosting provider? Or does just including the atlas.dll in the bin directory when I copy the site out?

You need to include the DLL and merge your web.config with the atlas web.config (found C:\program files\microsoft asp.net\Atlas\v2.0.50727\Atlas\Web.config).  You only need to set up the *.asbx extension if you plan on using Atlas' bridging technology.  Even then, there is a workaround to using the extension: http://atlas.asp.net/docs/atlas/doc/bridge/tunnel.aspx

For more information, see the Atlas setup instructions: http://atlas.asp.net/docs/overview/install.aspx and the toolkit setup http://atlas.asp.net/atlastoolkit/Walkthrough/Setup.aspx