Yes, I can still reproduce this with your project. I reproduced it with your project exactly as is. Then I changed the CreateTreeItems method to not be random, it produces the same tree everytime with this:
With that change to the project, I can still reproduce the bug. Here is a new video with the non-random version of the project illustrating the bug. Notice I can drop into on the first set of nodes, but the remaining ones I cannot. Except later on it does offer me drop in into Item5, but no other items. The drop in offering seems to be a bit randomly offered.
http://www.youtube.com/watch?v=aVFo_0h4G7I
(recommend 720p and fullscreen)
For this particular video, I am using:
Windows 7 Professional 64 bit
Internet Explorer 8, 8.0.7600.16385
Silverlight plugin version 4.0.50826.0
Telerik Silverlight controls 2010.2.812.1040
NOTE, does not repro in Chrome!
Interesting, running the same project in Chrome instead of IE does not repro the bug. It works perfectly in Chrome.
Same Windows 7 box
Chrome version 6.0.472.62
Same Silverlight plugin version 4.0.50826.0
Same Telerik version
When I run this project from chrome, I get a brief watermark saying I am using a trial version of Telerik. I do not get this watermark in IE. Could it be IE is somehow picking up on my installed, licensed version of Telerik?
EDIT: for the record, my real project exhibits the bug in IE8 but not in Chrome 6. I wish the answer could be "just use Chrome" :), but unfortunately we need to support IE.