I have created a Ajax Control Toolkit in my tool box of VS.  I then selected add item and navigated and selected  'C:\Documents and Settings\rlc\My Documents\Visual Studio 2005\downloads\SampleWebSite\Bin\AjaxControlToolkit.dll'.  When I try and use on of the controls Like TextboxWaterMark. I have no trouble adding it to the page. But it does not add the extra information to the properties so I can adjust the settings. And if I try and run the project I get the following error: 
Warning 1 Unable to update auto-refresh reference 'ajaxcontroltoolkit.dll'. Can not find assembly 'C:\Documents and Settings\rlc\My Documents\Visual Studio 2005\downloads\SampleWebSite\Bin\AjaxControlToolkit.dll'. C:\Documents and Settings\rlc\My Documents\Visual Studio 2005\WebSites\AJAXEnabledWebSite1\Bin\ajaxcontroltoolkit.dll.refresh C:\...\AJAXEnabledWebSite1\
 The AjaxControlToolkit.dll file does exists in the folder.  I am just not sure how I can fix this error.
 

Sounds like a VS configuration issue. Maybe try deleting the Toolbox stuff and trying again? Maybe if that doesn't work, reset the Toolbox and start from scratch.

http://blogs.msdn.com/Delay

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I tried to reset the ToolBox and now when I try and run the project I get:
There is no source code available for the current location.
And it shows this location.
--- d:\TFS\AtlasControlToolkit\Release\AjaxControlToolkit\ExtenderBase\ExtenderControlBase.cs
 is there a way to change the lockation so that it can find the cs files.

That's the path on our build machine. :) If you manually open the relevant file from your disk, VS should do the right thing. Alternatively, if you compile the AjaxControlToolkit DLL yourself, the paths will automatically be correct.

http://blogs.msdn.com/Delay

This posting is provided "AS IS" with no warranties, and confers no rights.

I compiled the dll, but the path does not update.  Does this have something to do with the version?
~~ Believe in Science, not religion.  Science will always progress, religions will always collapse. ~~

fyi, it was the version number in the web.config file.  fixed.
~~ Believe in Science, not religion.  Science will always progress, religions will always collapse. ~~

Could you please be more specific on this matter. I would appreciate if you could post the code that you placed in the web.config file. 
Thanks,

Just updating the reference to this file fixed the problem for me.
Before doing anything make sure you have the file somewhere in your PC. It should be in the location where you unzipped the files after you downloaded the package from CodePlex.
 
In Solution Explorer you'll find Bin folder where the ajaxcontroltoolkit.dll is.
Delete that entry.
Right-click your project (the top most entry in Solution Explorer) and select Add Reference... 
Select Browse tab from the dialog box and point it to the ajaxcontroltoolkit.dll file.
 
That's it.