Incompatibility with the Developer Toolbar in IE7
There is a known compatibility issue with Microsoft's IE Developer Toolbar for IE7 and recording tests in Telerik Test Studio. Microsoft's Developer Toolbar in IE7 interferes with Test Studio keystroke recording. When you try to record text entry into text input fields, Test Studio records a sequence of "KeyPress" steps, one for each key pressed, instead of recording a "Set Text" step. Attempting to playback a test with this series of Key Press steps will likely fail, because the input focus probably won't be set to the correct input field. As a result, the key presses will not go into the correct input field.
Disable or uninstall the Developer Toolbar.