Hi Folks,
With help from friends I've now got a buildroot config which doesn't need busybox to be statically linked... telnetd also works properly too. Yay!
The major change is telling it not to use the daily snapshots of uClibc and busybox, as well as changing to gcc4.0.2.
You still need to comment out the startup scripts in inittab as before though.
Attached is the new buildroot config: