I'm completely shooting from the hip, but here are a few off-the-cuff ideas:
Since you checked the inetd.conf file, I have to assume that it is set up to run.
Can you telnet in from the machine itself (telnet localhost, for example).
Check the /etc/services file to see what port your server is expecting connections on, and make sure the client is using the same port. The default is usually 23, and usually you can specify a different port for your telnet client as well if needed.
Youcan also try changing the telnetd to run in various debug options (-D, for example) by modifying inetd.conf. (see "man telnetd" for a host of different options for that)I've never done it, so I can't be much more help there.
Good luck!
-D_Frost