Using ".local" as your hostname breaks Kerberos (and other services) in Mac OS Server 10.5 Advanced because the server will only do Bonjour lookups instead of checking with the DNS Server(s). There is an old Apple knowledgebase article (from OS 10.3) that says adding the string "local" to the "Search Domains" section of the Network System Preference Pane will force your computer to lookup via a DNS server instead of just Bonjour...
...which sounds like it would also allow you to use "server.local" as your hostname - can anyone confirm this is the case, or is there some other drawback with this workaround?