Telnet can become a hacking tool, one of the more common ways (to my knowledge) goes as follows:

$HACKER connects to a win2k box with IPC$ open and makes a connection to that share. Then they connect using computer management and activate the Telnet service. $HACKER then connects to the telnet port with the client of their choice and if they have a username and password, can issue commands. Once this is done, they could compromise other boxen, maybe to put a buffer of hacked machines between them and a bigger target such as a corporate or .gov server.

With win9x this is not such a problem as the OS does not have a telnet server installed by default. But, considering how insecure it is, a trojan could easily be installed and used to the same end.