Turns out that ASP.NET looks at the HTTP Handlers in the root web.config first, and then looks at the HTTP Handlers in the virtual directory web.config file. So when it hit the line I marked as "Culprit" below, it never reached the line in the virtual directory web.config file. So I just added another line above the "Culprit" HTTP Handler.
Root website folder web.config HTTP Handlers:
<httpHandlers>
<add path="/services/social.axd" verb="GET,POST" type="Acu.Cms.Modules.Social.PeopleHandler, Acu.Cms.Modules.Social"/>
<add verb="*" path="AcuLanapCaptcha.axd" type="Lanap.BotDetect.AcuCaptchaHandler, Lanap.BotDetect"/>
<add verb="*" path="LanapCaptcha.aspx" type="Lanap.BotDetect.CaptchaHandler, Lanap.BotDetect"/>
<add path="*.cmsx" verb="*" type="Acu.Cms.Web.HttpCmsRequestHandler, Acu.Cms"/>
<add path="image.acux" verb="GET" type="Acu.Web.Imaging.WebImageHandler, Acu.Web.Imaging"/>
<add path="media.acux" verb="GET" type="Acu.Cms.Web.CmsWebMediaHandler, Acu.Cms"/>
<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" />
<!-- FIXED WITH THIS LINE --><add verb="*" path="Telerik.Web.UI.WebResource.axd" type="Telerik.Web.UI.WebResource" validate="false" />
<!-- CULPRIT ............ --><add path="WebResource.axd" verb="GET" type="System.Web.Handlers.AssemblyResourceLoader" validate="true" />
</httpHandlers>
Also added this to the virtual directory web.config:
<handlers>
... removed other handlers
<add name="Telerik.Web.UI.WebResource"
path="Telerik.Web.UI.WebResource.axd"
type="Telerik.Web.UI.WebResource, Telerik.Web.UI"
verb="*" />
</handlers>
... the other alternative is to add "admin/*" to the beginning of the path web.config attributes. If that handler is used in the RadEditor or other control, you must reference it correctly.
Best Answer
Solved!!! This helped me in achieving this : http://www.rosshawkins.net/archive/2006/10/08/webresource.axd.aspx
The problem was i missed MachineKey tag. Now it is working perfectly.. Hope this helps someone..