Since the license service was started before entering the key, it has no idea that a key was installed, hence 'license expired'. I agree that this message is confusing, it should really say 'license missing' or something to that effect. Oh well...
Wrt your telnet problem...
Is the telnet service started?
Is it running on port 23? and is your telnet client set to communicate on port 23?
If the Windows telnet service is running then disable it as it would be in direct conflict with jBASE telnet.
Do you at least get to a 'login' prompt? That would indicate that telnet is working, and that the user is not yet configured properly.
Dan