Don't know if this will help Keezebees situation, but I'm also using Telerik RadGrid Q3 and entityspaces. Although, I'm not using esDatasource, I bind the grid directly to the es collection through NeedDataSource event, and this is using SQL2000. In the previous version Q2 and earlier the autopaging and sorting works perfectly, bind it and it works, but not in the Q3 version.
I suspect in Q3 telerik made internal changes to the radgrid that breaks the auto paging and sorting with entityspaces, this changes broke my project. After many days and support tickets, and trying to use esDataSource instead of databinding directly to the collection, the solution is to do this:
TestTableCollection col = GetResources(SearchText);
RGrid.DataSource = col.Query.LoadDataTable();
Binding the datasource to datatable, not the best solution, but everything works fine now. However, now since the grid is binding to the datatable, any reference to GridDataItem.DataItem will be a DataRowView, not an entityspace class object. 
When I was contemplating to change my binding to esDataSource instead, I found out that with telerik grid I have to write custom paging and sorting and only works for SQL2005, too big of a change, don't have time to replace entire project to this method. Here is the telerik demo about custom paging: http://www.telerik.com/demos/aspnet/Grid/Examples/Programming/CustomPaging/DefaultCS.aspx
In summary for users of telerik radgrid, it's not the entityspaces issue, it's telerik's.