Why should I do this?

Because the /sbin/syslogd (which is linked to /bin/busybox), or syslogd from inetutils-1.4.2 has a bug, so it couldn't log messages from remote machines.
(see http://lists.gnu.org/archive/html/bug-inetutils/2003-02/msg00006.html)
Or, you want to have a syslogd which doesn't ignore a config file. This is important if you want other services to log correctly.
(see http://www.busybox.net/downloads/BusyBox.html)

Precompiled patched binary:

• Get a patched syslogd binary from http://jrbnet.de/joomla/component/option,com_remository/Itemid,45/func,startdown/id,1/(approve sites)
• Unzip to extract a single syslogd binary file.
• Move this file into /opt/sbin

Manual compilation:

• Read and follow: HowTo.NativeFloatingPointToolchain
• Get and install tools (bash, bzip2, coreutils, diffutils, flex, gawk, m4, make, patch, tar)
  ipkg (Manual is at http://handhelds.org/moin/moin.cgi/Ipkg) will do this for you
• Get the source from GNU: http://ftp.gnu.org/gnu/inetutils/inetutils-1.4.2.tar.gz
• Untar it, patch syslogd.c, run "configure" and "make", don't make "install", (cause we only need the syslogd) and copy the resulting binary into /opt/sbin

How to install on the NSLU2:

• To prevent the original from starting, you must edit /etc/inittab and comment out the syslogd line.

is this the right way? After a reflash it'll vanish?

• Add a startfile like S11syslogd to /opt/etc/init.d and make it executable (chmod 755 S11syslogd)

  #!/bin/sh

  if [ -n "`pidof syslogd`" ]; then
      /bin/killall syslogd 2>/dev/null
  fi

  /opt/sbin/syslogd -r -f/opt/etc/syslogd.conf

where -r enable remote logging and -f is the configuration file.

Understanding syslogd.conf:

See this HP syslogd website for the basics of using syslogd. You probably want something like this:

  *.info /var/log/syslogd.log

unfortunately the GNU website doesn't appear to have any documentation, otherwise I'd have recommended that

Question ?

It seems that syslogd sends DNS query to resolve IP address to hostname very often. Is there some flag to avoid this, since it generates lot of traffic (with non local DNS).