Just to make sure I understand your problem properly:
You have a machine running Redhat linux 5 and you want users logging in via telnet only to be capable to be in his own home directory.
This is a quite tricky issue, since he must be able to access directories like /bin or /usr/bin to be able to work. So chroot will not be an option. If you just want the user to be able to list the contents of /home, just unset the group/world readable bit of the directory /home. In this case the user will be able to access subdirectories (unless access is restricted), especially his own, but he cannot list the contents of /home.
Can you give more details why you want to impose this restriction on the user??
reply as soon as possible.
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