To change the syslog.conf file to log every attempt like (Failed Login Attempts), what severity level must it be at? is it .notice or .err....not sure on this....

I'm not positive, but I don't think the standard telnet daemon has provisions for logging each and every single failed login attempt. It will however log repeated login failures. (Maybe there are custom telnet daemons that will?)

Most people I know use system accounting to keep track of logins.

Your syslog facility should log repeated login failures as it is.

Basically, if a particular daemon (telnet for this case) doesn't have logging that specifically provides for logging of everything to syslog, changing the syslog.conf isn't going to do anything to help you. It only tells syslog which message levels to log and which to ignore pretty much.

I hope this isn't too confusing.

As I recall, telnetd and in.telnetd (your example) uses /bin/login to manage user logins. There is a configuration file for /bin/login called login.defs :

and in the man page, the configuration for the logging behavior of /bin/login is configured (just a few examples):

Does this help, or were you looking for more generic syslog.conf information not related to login and telnetd?

Also, see if your system supports btmp. It's kind of like wtmp, but for bad logins. You can usually test this by finding your wtmp file (in my case it's in /var/log), and :
Now try opening another session to your box, and purposely fail to provide the correct password. If the file grows in size, you're now keeping track of failed logins.

Although:
You must be careful who has the ability to read this file... A common scenario is when you accidentally put your password in as your username... someone who reads that file can keep an eye out for that.