I was unable to reproduce the issue. Except IsVirtualizing="True", the other prerequisite for the virtualization to work is RadTreeView to be placed in a container that does not measure with infinity (ex. StackPanel). What I mean is that in the scenario bellow, virtualization will not work:
<telerikNavigation:RadTreeView IsVirtualizing="True" />
<RowDefinition Height="Auto" />
<RowDefinition Height="*" />
<telerikNavigation:RadTreeView IsVirtualizing="True" Grid.Row="1"/>
will have the same visual result, but virtualization will work.
I've attached a sample project that contains a TreeView with 1000 items placed in a dock pane. Please have a look at it and let me know if you manage to reproduce the issue. I'd be glad to further assist you.
On a side note, I'd like to inform you that we've just released an online tool that allows you to reduce the size of your Silverilght applications. For more information, please visit http://blogs.telerik.com/blogs/posts/10-06-10/telerik_assembly_minifier.aspx
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