I found the root cause of the problem and got it solved.
I was having VS 2008 with SP1 on my vista based laptop and was unable to run telerik demos (locally installed) from my local computer via ASP.Net Development Server. I was getting constantly "Internet Explorer Page cannot be displayed" error.
Initally, I thought that it is a problem with some configuration of Telerik controls on my laptop and I floated my problem here in the forums. But when I was not able get reasonable answer so thought of working on the issue and all of the sudden remember C:\Windows>System32>drivers>etc>hosts file.
I opened the file and made sure that I am having an entry for 127.0.0.1 for localhost and it worked (actually i remebered all of the sudden that I have configured the 127.0.0.1 IP for one of the application hosted locally as a public URL like www.somesite.com). If anybody is also facing any such problem then please try the same with URL for localhost with http://127.0.0.1/whateverapplication. You will get the solution.