I found the following from the Apple forums (http://discussions.apple.com/thread.jspa?threadID=1203870):

To enable telnet and other Inet services, you edit the files in /System/Library/LaunchDaemons . For telnet, you edit the file /*System/Library/LaunchDaemon/telnet.plist*. Change line 5 from Disabled to Enabled. Then restart your mac. I’m sure there’s a way to avoid having to restart the computer, but I haven’t found it (admittedly, I didn’t spend much time on it) and simply restarting launchd with a killall -HUP launchd didn’t do it.