Thank you for pointing this out! The sample solution made identifying the problem a lot easier.
The DragDrop did not have the method to correctly identify the Z index of the nested windows (since the .Controls assembly does not reference .Navigation assembly, a workaround is used).
We now have corrected this and the topmost window is correctly identified, solving the issue. The update will be available in the SP1 release of the controls.
I have sent you the updated assemblies in a support ticket, hopefully not too late for your deadline.
Your telerik points have been updated.
the Telerik team