1. "Linux 2.1 AS", what is that? I assume it's RedHat some RedHat novelty.
2. You should not use telnet at all
. Disable the telnet service and tell your DBA to use SSH logins instead. You don't want unencrypted passwords and possibly very sensitive information unencrypted on your network at any time. The SSH service is enabled by default and provides an encrypted command line (and forwarding of X if enabled).
3. The mostly used XWindows distribution in the Linux community is by far XFree86, which also comes with Redhat. If this is a server I wouldn't install X at all since everything can be done using commands - hey, this isn't Windows you know!
- but choosing a desktop environment is really up to you. Gnome and KDE are the most used I believe, but I like Fluxbox.