OK, if 127.0.0.1 works and localhost doesn't something is broken...
In Terminal, try "ping localhost" and see if you get any responses back. Should look like:
[bartleby:~] wsanchez% ping localhost
PING localhost.knownow.com (127.0.0.1): 56 data bytes
64 bytes from 127.0.0.1: icmp_seq=0...
localhost is the name of the loopback address (127.0.0.1). It's a network address to your computer which does not actually go over the wire.
When you have IP over a network interface enabled, you get another address, and that address may also have a name, usually resolvable via DNS. 10.1...
I do this so that I can do a fresh install of the OS, because I've always had a distrust for software upgrades...
What I do is I keep a 4GB partition for the system, and use the rest for my data. On the data disk (I name it "data" because I'm clever), I create a Users folder and make a link...
Mac OS X 10.1 ships with Darwin kernel 1.4. The next standalone Darwin release, which is almost exactly the same, will be 1.4.1. The .1 accounts for the fact that standalone Darwin has some code disabled because it cannot be open sourced.
Software updates should bump the third version as...
Running any network service by default is bad for system security. That includes sshd.
However, the plan going forward is that the UI controls for remote login will enable sshd instead of telnetd; telnet is deprecated in Mac OS X. ssh got into the Mac OS X build just before Beta shipped, so...