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The ArcGIS for Local Government maps and apps have not been updated to ArcGIS 10.1 so there may be some functions that don't work as expected when using prerelease software. We are planning to have updated versions of the maps and apps available around the time of the official ArcGIS 10.1 release.
I had the same error in ArcServer 10, banged my head against a wall for a day trying to figure it out. I finally checked my MIME types in IIS, and ashx was not one of them, I added that in and it resolved that issue.