As you can imagine, Microsoft doesn't have a whole lot of desire to make command line stuff work well. It's not in their business plan. I'm sure if they thought they could kill the old DOS command window, they would!!
Many Windows telnet servers operate by running a DOS window in the background and screen-scraping the Window and sending the data across to the telnet client.
I've not used the XP pro telnet server, but I have used the Ataman products (
www.ataman.com) for telnet on NT, and I can also recommend WinSSHD (
www.bitvise.com) for an SSH server in a Windows environment.
Using WinSSHD and AbsoluteTelnet, I've even gotten full-color full-screen DOS apps (such as edit.com) to work, including alt-key menu dropdowns and such...