Thanks for pointing me to the ticket. It seems the recommendations all rely on not setting the height and width initially. But I don't see how that helps if the browser window is resized once the dialog is shown.
It seems to me that the root cause is the jquery height and width functions on the document return the wrong answer on IE8. I took a look at version 1.4.2 to see if any change was made. There are differences but it still returns the max of client, scroll, offset height/width.
I don't yet know if this is an IE8 bug or not. But something - either jquery or jqueryUI dialog needs to work around it.