'ScriptManager' does not exist in the namespace 'System.Web.UI'

When adding ASP.NET AJAX 1.0 ScriptManager and UpdatePanels to some pages in
our Web Application project, we get the following error:

"The type or namespace name 'ScriptManager' does not exist in the
namespace 'System.Web.UI' (are you missing an assembly reference?)"

This error occurs on the declaration of ScriptManager and UpdatePanel
objects automatically generated in the .designer files. There is no problem
for pages we ported over from ASP.NET 1.1 (where no .designer files exist) -
those compile and work fine. The issue is only with new pages added that
have .designer files. If we comment out the declarations, the web project
compiles fine. Otherwise it reports the above error.

I have added web.extensions assembly to both web.config file and explicitly
as a Reference.

How do we get rid of this error so we don't have to keep manually editing
the .designer files?

Thanks