It seemed like Charles really has high plans for Lelouch, and was pissed at V.V for what he did.
But Charles also know that if Lelouch would have been killed in such a way, he wouldn't have hold to Charles hopes.
I can really see why Charles would be able to choose Lelouch over Schneizel.
Schneizel seems like an incredible son to him, but I guess Charles know perfectly well he can't manipulate him into trampling is own values of justice.
On the other hand, Lelouch goes as far as it's necessary to achieve his goals. Lelouch only needs to mature and get experience, which is exactly what is happening.
Lelouch could very well be the son Charles is waiting for, the one succeeding him, or even the one capable of killing the Gods...

Regarding Kallen and her fear for refrain?
Well human brain isn't always very rationnal. It's for some people preferable to die, rather than being humiliated. From that very single example, you understand that fear can lead you to act in very strange ways.
When you're depressed, sometimes suicide seems like a shortcut to solving your problems, rather than facing them which you're incapable of due to your state. When you get back to your senses after a long and hard work, you find that the situations and problems you were facing while on the verge of committing it were so silly that you ROFL. So I guess it will take Kallen an incredible amount of courage and willpower to overcome her greatest weakness in such a short time.