Something is wrong with rc.local and it is not being properly executed. You're experiencing the "stock" telnet which is enabled in the 1.0.7.8 release from Asus. I suspect they never meant to have telnet enabled at all, but who knows.
Make sure you flash the XXX_02.nas version of my firmware:
http://wl700g.homelinux.net/drupal/f...kc_1078_02.nas
And follow the "I've really messed my rc.local" instructions found here:
http://wl700g.homelinux.net/drupal/?q=node/192
- K.C.