I am sending the same reply as in the support ticket here in case someone else has the same problem:
This scenario is not supposed to work that way. I will try to explain why:
The value of the ItemTemplateProperty is applied to the ContentTemplate property of the ContentPresenter in each RadComboBoxItem when the item in the ItemsSource is not RadComboBoxItem, e.g. this template is applied only when the combo box is bound to a collection of objects, that are not RadComboBoxItem, e.g. when RadComboBox automatically generates its items. Putting a RadComboBoxItem in the template is not the same as putting a RadComboBoxItem directly in the Items collection, or ItemsSource, because the ContentPresenter does not "know" (or care) what's in its ContentTemplate and cannot "tell" RadComboBox that it should not autogenerate a new item. In WPF this can be done with a Style, data trigger, and many other ways, all of which unfortunately are not available in Silverlight.
The only solution for the problem that cames to my mind is to compute which item in the ItemsSource is selected and provide it as a property of the items source object, which could be bound to the SelectedItem property of RadComboBox. Attached is a Silverlight UserControl, demonstrating how to do it. In this control I am using DisplayMemberPath property bind a single property of the data item to the Content of RadComboBoxItem. If you need complex formatting, or ability to display more than one value, you could use the ItemTemplate property.
Doing exactly same with the SelectedIndex property is not currently working, because of some limitations of the Silverlight Framework (we cannot set default values of dependency properties). In this case, you should set the binding in the code-behind instead of XAML.
I understand that this is a common scenario for most of the developers and I will continue to search for better solution, but at the moment I cannot suggest anything better. I am sorry for the inconvenience.
Valeri Hristov (Silverlight Team)
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