There is a problem when WebMenu is put on master page. Everything works correct when aspx page which uses master page with menu and master page are in the same directory. But if aspx page is in different directory than its master page server throws an error "Cannot use a leading .. to exit above the top directory".
NetAdvantage 2008.2
I'm experiencing exactly the same problem but with NetAdvantage 2008.1
Sounds more like a bug in the .Net framework than a bug in the Infragistics menu control...
I'm assuming you have a good reason for not wanting to use the absolute address of the item in question...