There is another posting in the Telerik forums that recognizes the problem with the HTML export. The posting from Telerik (Daniel) explains that the HTML format will cause a warning in Excel 2007, and suggests an alternative 3rd party library (NPOI). I have tried this library, but this has some limitations as well.
Here is the link to the Microsoft blog that explains why using the HTML format with the XLS extension causes the warning.
With regard to the Open/Save option, I had not considered the ramification of the SL client-side implementation not prompting to Open. Is this something the RadGrid development team might give some thought to, since it involves an extra step for the end-user to save off the file, and then navigate to the file in windows explorer to open in Excel?
Perhaps it would be useful to integrate this with a Telerik SL Excel viewer, such as the MS Word viewer that you have already produced: