Problem happens here in a brand new Ubuntu 8.04, with Gnome. 
I edited /etc/default/rcS as it is shown below and problem persists: 

#
# /etc/default/rcS
#
# Default settings for the scripts in /etc/rcS.d/
#
# For information about these variables see the rcS(5) manual page.
#
# This file belongs to the "initscripts" package.

TMPTIME=0
SULOGIN=no
DELAYLOGIN=no
UTC=no
VERBOSE=no
FSCKFIX=no

===

Also I tried symlinking or copying the timezone from /usr/share/zoneinfo
to /etc/localtime, rebooting several times, but no success. The only
thing that worked for me was setting the time by hand.  I have no "UTC"
option on the applet, looks like gnome removed the checkbox, as I
verifed with some other users.

-- 
clock applet shows UTC time not timezone time when NTP used
https://bugs.launchpad.net/bugs/15514
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