This service is disabled by default. Before enabling it on systems, you do want to consider the security ramifications of so doing and consider how you are going to perform access control.
The telnet server is installed on all versions of Windows 2000 and XP by default, but is set to start manually. You will need to set it to automatic start, of course, in order to make regular use of it. To start it manually, you can just issue the command:
net start tlntsvr
There are typically 2 settings you might want to modify when enabling the telnet service; NTLM authentication and also the default telnet port.
You can configure the telnet service by running tlntadmn.exe. The key parameter to modify if you will be using non-Win2K/XP clients is the NTLM authentication. By default this is set to a value of "2" which means NTLM authentication is required. For non-Win2K communication, set this to "0".
The default telnet port is 23. Microsoft's tlntadmn makes this easy to modify; just select the port from the configuration choices and change to the number you want. Remember the port if you change this; you'll need to know it to connect remotely. Modifying this to a high number is a useful method of keeping "browsing" port scanners from knowing about it.
Not only can this wreak havoc with over-the-Internet connection success, but if you are using a Win2K+ telnet client, your client will also pass your NTLM hash over the Internet automatically using cached credentials! That's a whole other story, but after seeing how easily l0phtcrack can recover passwords, I have an ongoing concern about the ability of someone to spoof your machine into passing a crackable hash to it. As a bonus, they have your local user ID, domain name, and a connection source IP with it.