Why is the registration exception being thrown?

Well there, that is a tricky problem....let me help you with that one...

add this inside the first try statement inside actions/register.php  

that should do it.

if(strpos($email, "blahblahblah.edu") === false){
            throw new RegistrationException(elgg_echo('RegistrationException:Not a blablabla email address....email admin@blahblhablha.com for access'));
        }

What if you used this plug in, Turn off elgg Registrations, and manually registered them

There is a plugin here for that: http://code.elgg.org/plugins/branches/1.7/emaildomains/

I've never tried it.