OK, I cannot give you a definitive answer as I don't use Vista. You will be somewhat on your own, but perhaps a member with Vista can help.

As I suspected, it looks like either a corruption or synchronisation problem with IE7.

IE takes its file associations from the OS that it is running under. When you loaded Vista and IE7 you did not have Telnet loaded. When you installed Telnet into Vista it created the association (because it works, so it must have done ) Somehow this does not seem to have passed through to IE7?

The registry entry was supposed to take care of that.
No, the way I read that regedit is it simply switches off the Registry block on Telnet which is the IE7 default. We are not even getting that far from how I understand those messages. I agree with your interpretation that they look like a missing association?

I have only played with Vista a few times but you might like to check the entries in Windows Start Menu -> Default Programs. Also try opening IE, going to a Telnet link, right clicking and it will either be "open with" or in "properties" and you should be able to associate.

I am guessing that the application is something like "Telnet.exe" and that will call something like rundll32.exe url.dll which is the Telnet Protocol Handler (or it is in Win 2000).

Hopefully you will have a checkbox called something like "always open with", or it might just remember it of its own accord?

At worst, now that you have it in Vista, I am pretty confident that a reinstall of IE7 would set up the association correctly.

Good luck!