AJAX :: Sys.Extended Is Undefined?

We just upgraded from 2.0 to 3.5 and the latest AJAX Toolkit. AjaxControlToolkit.dll is version 3.5.40412.0

Project references are up to date. The old Toolkit files were deleted and the new ones copied from the distribution ZIP. ScriptManagers were replaced with ToolkitScriptManagers. The project builds with zero errors. The built-in AJAX controls (UpdatePanels, etc.,) work but the Toolkit controls don't. This is happening on local developer boxes and on our development server.

The javascript error we're seeing is "Sys.Extended is undefined." It's occurring in server-generated script blocks like this:

<script type="text/javascript">
//<![CDATA[
(function() {var fn = function() {$get('ctl00_ToolkitScriptManager_HiddenField').value = '';Sys.Application.remove_init(fn);};Sys.Application.add_init(fn);})();Sys.Application.initialize();
Sys.Application.add_init(function() {
$create(Sys.Extended.UI.TextBoxWatermarkBehavior, {"ClientStateFieldID":"ctl00_PageTop_Search_TextBox_TextBoxWatermarkExtender_ClientState","WatermarkCssClass":"Watermark","WatermarkText":"keyword","id":"ctl00_PageTop_Search_TextBox_TextBoxWatermarkExtender"}, null, null, $get("ctl00_PageTop_Search_TextBox"));
});
//]]>
</script>

I found a similar post on CodePlex: http://ajaxcontroltoolkit.codeplex.com/WorkItem/View.aspx?WorkItemId=26717&FocusElement=CommentTextBox