We tested your scenario using our latest release (2009.2.720.1) and everything worked for us.
Can you please carefully inspect every single configuration file and confirm that no connection is being established to your local server. In addition can you please make sure that you have the SQL Server Browser service enabled on the server you are connecting to and disabled on your local server. Also make sure that the TCP/IP protocol is enabled for the server you are connecting to. If none of this works for you can you please provide us with any additional information you can in order for us to be able to reproduce this odd behavior.
the Telerik team