The behavior is expected - with the current logic, if the height of all items is smaller than the height of the rotator itself, when all items are displayed, RadRotator will take the first item and show it in the position from which the rotation is set to start - in your case the bottom. In general, the idea is to provide seamless rotation of the items and in scenario like yours we would recommend to either increase the number of items (or their height) or to set the height of the rotator to a lower value.
As for the client-side resizing, this feature is implemented in our internal builds and will be available with SP1 next week.
the Telerik team
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