Have you tried declaring the Item outside the loop like this:
IQueryable objectCollection = dataContext.Repository();
int amountToSkip = 0;
IList objects = objectCollection.Skip(amountToSkip).Take(250).ToList();
Item item = null;
while (objects.Count != 0)
{
using (dataContext = new LinqToSqlContext(new DataContext()))
{
foreach (Object objectRecord in objects)
{
// Create 0 - 4 Random Items
for (int i = 0; i < Random.Next(0, 4); i++)
{
item = new Item();
item.Id = Guid.NewGuid();
item.Object = objectRecord.Id;
item.Created = DateTime.Now;
item.Changed = DateTime.Now;
dataContext.InsertOnSubmit(item);
}
}
dataContext.SubmitChanges();
}
amountToSkip += 250;
objects = objectCollection.Skip(amountToSkip).Take(250).ToList();
}