Todd, when you say "Project Manager" are you referring to the new Sitefinity Project Manager for Sitefinity 4?
This project manager does not upgrade 3.x websites, rather it is used to create and update Sitefinity 4+ websites only. Moving to Sitefinity 4+ is a migration, not an upgrade, as v4 was a complete rewrite.
Please take a look at the Sitefinity Migration Guide: http://www.sitefinity.com/resources/migration-guide.aspx
You do not necessarily need to upgrade to standard, but it IS required that you upgrade to the latest version of 3.7, which is 3.7 SP4. in addition, it must be running on asp.net 3.5 or 4.0 (asp.net 2.0 is not yet a supported migration path)
Regarding your specific error, this is usually a result of moving from asp.net 2.0 to 3.5 or greater. System.Web.Extensions is built into asp.net 3.5, so unlike asp.net 2.0 doesn't require that dll.
Check your bin
folder and delete the System.Web.Extensions.dll and System.Web.Extentions.Design.dll and this should remove that error.
I hope this was helpful, please feel free to post any other issues or questions you encounter.