Very similar issue with many hours involved. I was using .net2.0 and the web services would not work on the production server running Windows Server 2008 R2 running IIS 7.5. All the issues with the web service returning XML had to deal with the web.config. I build an ajax based web application and copied the config file over to my config and it worked perfectly. The lines of code that needed to be updated are below:
<configSections>
<sectionGroup name="system.web.extensions" type="System.Web.Configuration.SystemWebExtensionsSectionGroup, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35">
<sectionGroup name="scripting" type="System.Web.Configuration.ScriptingSectionGroup, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35">
<section name="scriptResourceHandler" type="System.Web.Configuration.ScriptingScriptResourceHandlerSection, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35" requirePermission="false" allowDefinition="MachineToApplication"/>
<sectionGroup name="webServices" type="System.Web.Configuration.ScriptingWebServicesSectionGroup, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35">
<section name="jsonSerialization" type="System.Web.Configuration.ScriptingJsonSerializationSection, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35" requirePermission="false" allowDefinition="Everywhere"/>
<section name="profileService" type="System.Web.Configuration.ScriptingProfileServiceSection, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35" requirePermission="false" allowDefinition="MachineToApplication"/>
<section name="authenticationService" type="System.Web.Configuration.ScriptingAuthenticationServiceSection, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35" requirePermission="false" allowDefinition="MachineToApplication"/>
<section name="roleService" type="System.Web.Configuration.ScriptingRoleServiceSection, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35" requirePermission="false" allowDefinition="MachineToApplication"/>
</sectionGroup>
</sectionGroup>
</sectionGroup>
</configSections>
in the web.server:
<httpHandlers>
<remove verb="*" path="*.asmx"/>
<add verb="*" path="*.asmx" validate="false" type="System.Web.Script.Services.ScriptHandlerFactory, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35"/>
<add verb="*" path="*_AppService.axd" validate="false" type="System.Web.Script.Services.ScriptHandlerFactory, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35"/>
<add verb="GET,HEAD" path="ScriptResource.axd" type="System.Web.Handlers.ScriptResourceHandler, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35" validate="false"/>
</httpHandlers>
<httpModules>
<add name="ScriptModule" type="System.Web.Handlers.ScriptModule, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35"/>
</httpModules>
and:
<system.webServer>
<validation validateIntegratedModeConfiguration="false"/>
<modules>
<remove name="ScriptModule"/>
<add name="ScriptModule" preCondition="managedHandler" type="System.Web.Handlers.ScriptModule, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35"/>
</modules>
<handlers>
<remove name="WebServiceHandlerFactory-Integrated"/>
<remove name="ScriptHandlerFactory"/>
<remove name="ScriptHandlerFactoryAppServices"/>
<remove name="ScriptResource"/>
<add name="ScriptHandlerFactory" verb="*" path="*.asmx" preCondition="integratedMode" type="System.Web.Script.Services.ScriptHandlerFactory, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35"/>
<add name="ScriptHandlerFactoryAppServices" verb="*" path="*_AppService.axd" preCondition="integratedMode" type="System.Web.Script.Services.ScriptHandlerFactory, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35"/>
<add name="ScriptResource" preCondition="integratedMode" verb="GET,HEAD" path="ScriptResource.axd" type="System.Web.Handlers.ScriptResourceHandler, System.Web.Extensions, Version=3.5.0.0, Culture=neutral, PublicKeyToken=31BF3856AD364E35"/>
</handlers>
</system.webServer>
I installed Microsoft Visual Web Developer 2008 on the production server and created a new web site, then selected the ASP.NET Web Service. I figured that if you create a project on the production server and it works, the config should have everything correct. Hope this helps.