Aksharamala for Telugu is a FREE unicode-producing transliteration (RTS) based input scheme for windows. I strongly recommend it for all uses.
Except for windows-2000, getting things to work in IE and outlook express involves a simple task - download from aksharamala.com and register using the free licence key found at racchabanda.
Aksharamala is not needed on XP if you can follow the instructions at racchabanda but if you can't, installing aksharamala should result in auto-enabling of the support.
The activation procedure on Windows 2000 is a little involved due to microsoft's licencing restrictions. I've done it myself and it works. See aksharamala.com for details.