I'm seeing a similar issue with 8.10.  My solution was to disable
network manager:

$ cd /etc/rc2.d
$ sudo mv S28NetworkManager K01NetworkManager

This is a very bad solution for those who want to manage their networks
from within Gnome, but since I don't, it works for me.

Some details:

$ dpkg -l network-manager | grep net
ii  network-manager           0.7~~svn20081018t105859-0 network management 
framework daemon

$ lsb_release -a
No LSB modules are available.
Distributor ID: Ubuntu
Description:    Ubuntu 8.10
Release:        8.10
Codename:       intrepid

$ grep "Setting system hostname" /var/log/syslog  | tail -1
Sep  9 19:09:19 foobar NetworkManager: <info>  Setting system hostname to 
'localhost.localdomain' (no default device) 

$ cat /etc/hostname 
foobar

$ cat /etc/hosts
127.0.0.1       localhost.localdomain   localhost
127.0.1.1       foobar
127.0.0.1       localhost.localdomain   localhost

# The following lines are desirable for IPv6 capable hosts
::1     ip6-localhost ip6-loopback
fe00::0 ip6-localnet
ff00::0 ip6-mcastprefix
ff02::1 ip6-allnodes
ff02::2 ip6-allrouters
ff02::3 ip6-allhosts

-- 
NM 0.7 sets hostname to localhost.localdomain instead of what is in 
/etc/hostname
https://bugs.launchpad.net/bugs/276253
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