Yes this is a bug. i gave you 1000 points for your efforts.
The problem comes from the fact that children elements in the view model are stored inside a ObservableCollection. If you change the type to be List for example and make the necessary changes the bug should not be introduced.
However I'm attaching a project with the work around that does not depend of whether ObservableCollection or List is used. The solution is based on data binding. This way the value is preserved during expand. Note I'm implementing the INotifyPropertyChanged interface in order to employ two way binding.
All the best,
the Telerik team
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