When you define the RadTreeView.ItemTemplate you define the way the business data will be displayed inside the RadTreeViewItems. Basically when you bind the RadTreeView control to a business collection, the control's ItemsSource collection is populated and it is used to create RadTreeViewItem containers for each business item from the ItemsSource. So when you set an ItemTemplate it will control the way the business object inside the RadTreeViewItem container is displayed. However, in your case you define a RadTreeViewItem to display the business data, which means that the structure of your tree in any level will contain a RadTreeViewItem inside which a RadTreeViewItem is created to display the business object.
This is why I wanted to ask you to try this instead: