[Thus spake Hubert Feyrer ("HF: ") Tomorrow...]

HF: td: recv suboption AUTHENTICATION IS NULL CLIENT|ONE-WAY

That one right there looks like it might have something to do with it :).

HF: td: recv suboption X-DISPLAY-LOCATION IS "miyu:0.0"
HF: td: netflush 53 chars
HF: td: recv suboption NEW-ENVIRON IS VAR "DISPLAY" VALUE "miyu:0.0" VAR "USER" VALUE "feyrer"
HF: td: netflush 92 chars
HF: telnetd: Authorization failed.

...and so might that one.  Are you allowing remote X connections?
Is there an X auth/PAM module that is getting in the way here, perhaps?

				--*greywolf;