Get an app that supports the F-keys.
iSSH does.
It also supports CTL, ALT, ESC, TAB, arrow keys,
It does everything except the F-keys via a little "keyboard extension tab" at the top of the keyboard (you can slide it up or down), and/or buttons in the status bar.
As well, there's this bizarre popup with F1-F12, CTL, ALT, ESC, TAB, and a circular ring of buttons with the arrow keys, PgUp, Home, End, and PgDn.
Oh, yea, you can also switch the circular ring by pressing a button and then you get 8 "macro" buttons. 3 are pre-loaded with "uname", "ps", and "xterm".
Oh, but I hope you know what a bad idea it is to use telnet. I hope you aren't doing it over the Internet. See about using ssh instead.
(iSSH does support telnet, though, as well as ssh).