Well I have tried all scenarios that have been suggested and posted throughout this forum and this thread.
Comparing my self contained test page, and the AjaxToolKit control I have in DNN, the part that looks like it may be the problem is the fact that there isn't the CDATA block under all the other WebResource.axd and ScriptResource.axd script include lines that get generated. But for the life of me I have no idea why this is not being added to the page. Here is what I have

- web.config contains all the values from the AjaxToolKit web.config template merged into the DNN web.config
- Default.aspx contains the ScriptManager (also tried in the skin, same results)
- My control has an UpdatePanel inside of a TabControl Tab from the Toolkit. I have a simple button that updates a Label text when the button is clicked.

I think the CDATA blocks that are not being included are to override postbacks for the Ajax, but they are not being generated to the page output. I wish I could provide a link to my work, but currently is on a local test environment.

Well thanks so much for your project entry about AjaxToolKit and DNN.
Turns out, I was missing one (very critical) line
<remove verb="*" path="*.asmx" />

Now the AJAX stuff is working. Now I just need to figure out my half tab CSS issue. Has anyone else seen this within DNN? It works just fine outside of DNN in all browsers. Within DNN IE is the only one with problems. Go figure!

It looks like no one answered your question about the half tab headers.  Too bad, cause I have the same problem.  I am using dnn version 4.5.1, so I didn't have to worry about the changes to the web.config.  Is anyone else seeing this problem with IE?