Michael,
The private key *always* belongs on the client side, regardless of which side generated it. For OpenSSH, the public key goes in a specific file 'authorized_keys' in the .ssh directory. Recommended permissions on the authorized_keys file is '600':
chmod 600 authorized_keys
Older versions of the OpenSSH server may require that protocol 2 public keys be placed in a file called 'authorized_keys2' instead. Check your manpage for ssh-keygen to be sure.
AbsoluteTelnet 3.00 has a known problem with password-encrypted key files. For now, create your keys without password encryption or download the newest beta of AbsoluteTelnet:
http://www.celestialsoftware.net/telnet/AbsoluteTelnetBeta.exe