I spent some time with the same problem today (which also applies to the GridView demo) and found out it is possible to use a remote SQL Server. The first thing you need to do is copy the Northwind.mdf file under C:\Program Files\Telerik\RadControls for WPF Q3 2009\Demos\DataSources\ to the remote SQL Server and attach it.
Then open the demo project Examples_WPF.CS.csproj at C:\Program Files\Telerik\RadControls for WPF Q3 2009\Demos\. Add a new connection pointing to the remote server (Data->Add New Data Source) or add the connection string by hand to the app.config. Finally look for the Northwind.dbml file in that project, open it and select Properties. Expand the Connection node in the properties and point the Connection String item to the new connection string.
Recompile the application and you should be done.
P.S Telerik should really consider shipping this example with a file base database like SQLite.