I've been running telnetd on android for a while now, and the busybox shell sucks for obvious reasons - it's not meant to be a fully featured shell. Luckily, there's bash. I've been using bash on linux for years and I was stoked to find it for android.
You can download it here. Or use Fission ROM manager to download it.
Once you have the file downloaded, copy it to /system/bin, and make sure that permission is set properly. And instead of using /system/bin/sh for telnetd you can use /system/bin/bash. So your full telnetd command would look something like this:
su -c 'telnetd -l /system/bin/bash -F'The above command runs as a sl4a script on my Droid X - super convenient this way.
To exprience the awesomeness of bash, try typing a partial command or directory and hit Tab, try hitting up and down arrow, and Ctrl-A & Ctrl-R. Oh, and adb sucks. ;)