Terminal is showing you the first label of your BSD hostname (assuming your shell is BASH). If your BSD hostname is "yourhostname.mynetwork.com" then Terminal will display only "yourhostname"
So from where does the BSD hostname come? It can come from several places:
• from the file: /etc/hostconfig
• else from the file: /Library/Preferences/SystemConfiguration/preferences.plist (System ▸ System ▸ HostName)
• else the result of a reverse DNS query for your primary IP address (so you might notice a totally different hostname showing up when you visit an internet café than when connected at home)
• else your "Bonjour" hostname in System Preferences > Sharing (preferences.plist again... System ▸ Network ▸ HostNames ▸ LocalHostName)
• finally, if none of the above have been set, the BSD hostname will be simply "localhost"
By the way, I answered the same question a while ago over here: I Mac OS X Terminal - where does the prompt name come from
hostnameinto the prompt and press enter. What do you get? – Blender Nov 14 '11 at 4:27