TELNET is the terminal emulation protocol in TCP/IP environment. TELNET uses the TCP as the transport protocol to establish connection between server and client. After connecting, TELNET server and client enter a phase of option negotiation that determines the options that each side can support for the connection. Each connected system can negotiate new options or renegotiate old options at any time. In general, each end of the TELNET connection attempts to implement all options that maximize performance for the systems involved.

When a TELNET connection is first established, each end is assumed to originate and terminate at a "Network Virtual Terminal", or NVT. An NVT is an imaginary device which provides a standard, network-wide, intermediate representation of a canonical terminal. This eliminates the need for "server" and "user" hosts to keep information about the characteristics of each other's terminals and terminal handling conventions.

The principle of negotiated options takes cognizance of the fact that many hosts will wish to provide additional services over and above those available within an NVT, and many users will have sophisticated terminals and would like to have elegant, rather than minimal, services.

Option requests are likely to flurry back and forth when a TELNET connection is first established, as each party attempts to get the best possible service from the other party. Beyond that, however, options can be used to dynamically modify the characteristics of the connection to suit changing local conditions.

Modern Telnet is a versatile terminal emulation due to the many options that have evolved over the past twenty years. Options give TELNET the ability to transfer binary data, support byte macros, emulate graphics terminals, and convey information to support centralized terminal management.

http://www.javvin.com/protocol/rfc854.pdf : TELNET PROTOCOL SPECIFICATION