Been working with Cisco tac, apparently there is a bug in 7.0(2) running on 525's with Syslog. The bug prevents sending syslog messages to more than one host at a time. You have to remove all you logging host entrys and just put only one and that will work. If you put more than one logging host it will ignore them and only log to the first one you entered.
TAC sent the issue to the DE's to see how they can fix.