This is possible because a Sitefinity CMS script handles the logic for rendering the content of the designer, including the designer script. The script puts the content inside the body of the page, so that the content is displayed upon clicking Edit. Once you create your custom widget designer window, it is important to trigger the modalDialogClosed event when the dialog is closed, so the markup of the dialog is removed from your page.
NOTE: When you trigger the modalDialogClosed event, make sure to use $telerik.$ instead of just $ or any other jQuery global variable. You do this because third party widget designers may load another jQuery instance and replace the global variables, making the trigger useless since the binding was on the previous jQuery instance.
To customize the widget designer window of a ContentBlock widget to use a Kendo window:
As a result, you can see the new Kendo window of the widget designer.
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