I'm running 8.04 64bit on a Dell XPS M1530 with Intel 4965 wireless.
I set up a LinkSys WAP54G and tried to set up WPA2 encryption on the laptop.

In the Network dialog, I unlocked it, as you have to do, with my user password, where it says 'Authenticate'.

I set the option to WPA2 and all seemed ok. When I went to connect, I couldn't get through. I was double checking my settings and it had reverted to WPA. I reset it to WPA2, but it won't stay there.

So, I'm running my system with WPA mode for now since I haven't figured out why it won't stay at WPA2.

Anybody else seen this behaviour?

Thanks...

Are you using a testing version of NetworkManager from Launchpad by chance? I had the exact same thing with it - re-entering the password usually helped but it was annoying so I reverted to a stable version.

Nope, no NetworkManager or Launchpad, that I am aware of. Just going through the Network Settings dialog under System / Administration / Network.