Kudos to Lini and I'd like to express that toward the entire Telerik Support team. I did not follow your suggestion about using a fixed encryption key although I may incorporate that in the future. Your explaination about this symptom being caused by the App Pool recycling was the key. I should have looked at that earlier. My App Pool was recycling VERY frequently (like every minute or two). Your suggestion got me to look at the App Pool recycling frequency and, once that was fixed, the spell check problem was fixed.
For others with IIS hosted on a virtual machine, see KB article http://support.microsoft.com/kb/911716. I set garbage collection to workstation mode and the app pool recycling problem was resolved.