Doesn't redhat 7 use xinetd instead of inetd? Go to /etc/xinetd.d and edit the "telnet" file's disable line from "yes" to "no" to activate telnetd. Then just restart xinetd and your telnetd should be up and running.
"/etc/init.d/xinetd" is used to start the xinet daemon, it shouldn't have anything to do with telnet itself.
Not to doubt you mornse, but you really don't have an "/etc/xinetd.d" directory? That's fuct. I'm using redhat 7.1; I didn't think they would vary that much between 7.0 and 7.1. Guess ya learn something new everyday eh.