The Hosts file is more of a legacy of early IP networks and was never really designed for large-scale blocking of unwanted sites. IE-Spyad, SpywareBlaster and Peer Guardian are better alternatives for blacklisting outbound connections.
Hosts File FAQS: http://www.mvps.org/winhelp2002/hostsfaq.htm
How to Use a Hosts File:http://www.bleepingcomputer.com/tutorials/hosts-files-explained/http://castlecops.com/article-5660-nested-0-0.html
Blocking Unwanted Sites with a Hosts Filehttp://www.mvps.org/winhelp2002/hosts.htm
Editor's Note posted at mvps.org: In most cases a large HOSTS file (over 135 kb) tends to slow down the machine. This only occurs in W2000 and XP. Windows 98 and ME are not affected.
(scroll down the page about halfway)
LOCATION OF HOSTS FILE:
Windows XP = C:\WINDOWS\SYSTEM32\DRIVERS\ETC\hosts
Windows 2K = C:\WINNT\SYSTEM32\DRIVERS\ETC\hosts
Win 98*Grinler = C:\WINDOWS\hosts
These files are normally located in the ETC folder:
To block a site with the HOSTS file, browse to its location and open in notepad.
Under "127.0.0.1 localhost" add 127.0.0.1 www.name_of_the_site_to block.com.
If you'd like to block www.hotporn.com, text would look like this:
Example HOSTS file: http://www.bleepingcomputer.com/misc/hosts