One of the problems that may cause this behavior on your server is that the Isolated Storage on your development server is not enabled. You can verify that by right clicking anywhere on the Silverlight plug-in and select Silverlight. Then, go to the "Application Storage" tab and ensure that the "Enable application storage" check box is checked.
On the other hand you can use RadNonPersistentCustomDictionary class instead of RadIsolatedStorageCustomDictionary to store custom dictionaries. You can achieve that by getting the appropriate DocumentSpellChecker object and replacing the custom dictionary for the selected culture with one that doesn't use Isolated Storage.
Please try this and get back to us if you meet any other difficulties.
All the best,
the Telerik team
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