I've moved this discussion into the Wavelink area.
It sounds like you may have DataWedge running in the background rather than using the scanning wedge built into TelnetCE. If you exit to the desktop on the device check to see if there is an icon in the tray in the bottom right that looks like a triangular shaped barcode. If there is launch that and then disable it or turn it off and then re-launch TelnetCE.
If you can now scan in TelnetCE then DataWedge is your issue. You can either opt to not have Datawedge installed, not have DataWedge run at startup, or confgure TelnetCE to use DataWedge as its default scan wedge in its emulation parameters.