I assume that most of this can be done in the .profile of your account on the box your a telnetting into. current my prompt is set locally by this:

MACHINE=`uname -n`; export MACHINE
ME=`whoami`
PS1='$ME@$MACHINE:$PWD>'

and that updates with whatever directory. Eventually I will get around to just chopping off the last directory with regular expressions (at least I think thats how its done) but I havent had time. I'm not completely sure, but I bet the title of the window could be done that way too, maybe. Or you could use an alias to do it whenever you telnet, something like this:

alias telnet 'settitle "telnet !*"; telnet !*; settitle $t:t/$cwd:t'

you could make it change the title with any app that you run in that manner. I hope that helps, most of this I havent tried, but it seems like it would work.

good luck

robb