I have experienced a similar effect. I have an rtl-8185 as described above. 
currently running ubuntu 8.10, kernel linux 2.26.27 -7
The performance and display icon show the signal as a weak signal, 
approximately 10% strength, even when within a few feet of the source.
previously I was using 2.26.24 with ndiswrapper and windows xp driver from the 
manufacture, with none of the symptoms described above.
I cannot compare as I do not wish to back-grade the kernel, but I suspect the 
rx/tx strength of the signal is being lowered by perhaps a power-saving feature 
or improperly set setting?
info gained from iwlist under 2.26.27-7  Could someone compare this to a kernel 
that didnt have previous support for this chip?

$ iwlist txpower

wlan0     unknown transmit-power information.

          Current Tx-Power=27 dBm       (501 mW)

if anyone wishes more info, I will be happy to provide it. please
provide instructions for the information which you need. I will be
receiving email updates to this bug report.

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rtl-8185 wifi card shows very weak signal
https://bugs.launchpad.net/bugs/275230
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