If you get to the logon prompt, then telnet services are running fine.

The reason you can't login as root, is because telnet does not alow that.(there is no way to change this, that I know of)
You must log in as a normal user, and then su to root.

If the user you log in as cannot su to root, check and make sure that user is part of the wheel group, in /etc/group.

SSH is the same way, it will not let you login as root directly either. However unlike telnet SSH's configureation has a peramiter to allow root logins, although I do not recommend that since its a major security issue.