I don't have the time to debug all that code that you posted, but I did download and try it.

I found that if I set the service to "daytime", it worked! The daytime service has no option negiation at all. That points the finger at the option negotiation. Ftp has subset of telnet's option negotiation, so I tried setting the service to "ftp" and this also failed, but your program produced much less debug output.

I suggest that you set the service to "ftp" and debug the option negotiation on that. Once you can get a login prompt from ftp you can then try telnet.