This issue is previously logged in our system under the name:
TreeView: The DefaultImageSource and ExpandedImageSource properties don't work in virtualized tree
If you don not need virtualization (your tree is small and you don't need performance optimization) you can turn it OFF (IsVirtualizing = False) and this will work properly. On the other hand, there is an elegant workaround in MVVM scenarios - do not use these image properties and add Image in the ItemTemplate of the RadTreeView. Then bind its Source to the IsExpanded property and use converter to selected different image sources based on the value of the IsExpanded property.
We think this issue has little priority due to the workaround possible. Furthermore we have to admit that exposing such image properties in our RadTreeView is a mistake in our design. The usual way for such customizations should be ViewModels + ItemTemplates as suggested above.
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