When the system boots, rc.bootup generates the hosts file in /var/etc/hosts
There should be a symbolic link from /etc/hosts pointing to it.
currently freenas-etc.tgz and the svn repo both include a 0 byte file in /etc/hosts
Currently working around this issue by having the following two lines at the end of both prep_etc() and use_svn() routines.
rm -f $FREENAS/etc/hosts ln -s /var/etc/hosts $FREENAS/etc/hosts
I guess the permanent fix would be to change the 0 byte file to a link in both the tgz and in subversion.