Following several online examples, we have implemented the following  using WSE 2.0:

In the Web Servic .asmx file:
namespace WebService1

{
    public class Service1 : System.Web.Services.WebService
    {
          public class AuthenticationManager : UsernameTokenManager
        {
            protected override string AuthenticateToken(UsernameToken token)
            {
                return token.Password;;
            }
        }
...

  And in the Service's Web.config file we have the following:
<security>
    <securityTokenManager
        qname="wsse:UsernameToken"
        xmlns:wsse="http://schemas.xmlsoap.org/ws/2002/12/secext"
        type="WebService1.AuthenticationManager, WebService1" />

  When we run the client application, we get an exception when it calls the web service:

System.Web.Services.Protocols.SoapHeaderException: Server unavailable, please try later ---> System.Configuration.ConfigurationException: WSE032: There was an error loading the microsoft.web.services2 configuration section. ---> System.Configuration.ConfigurationException: WSE040: Type WebService1.AuthenticationManager, WebService1 could not be loaded. Please check the configuration file. at System.Web.Configuration.HttpConfigurationRecord.Evaluate(String configKey, SectionRecord section)

  Any clues as to what we're doing wrong?

  Thanks,
  Chris