I turned on the computer one day to find that Windows was no longer looking up hosts in the HOSTS file. Oh yes, the hosts file was still there, but Windows just wasn't looking at it. For a long time this was a nagging mystery to me, but the mystery has been solved!
It seems that some kind of malware or adware program I had picked up had changed the registry value that tells windows where the hosts flie is located. The entry is at HKEY_CURRENT_USER\Software\Microsoft\Windows\CurrentVersion\Internet Settings\Digest\Hosts. The default value is %SystemRoot%\system32\drivers\etc\hosts for Windows 2000 or XP, or %SystemRoot%\hosts for Win9x. This is very important since many ad blockers modify this file to remove ad banners from websites. If you're not up for changing this regitsry value yourself, I've made a .reg file which you can get here. Just double-click to add it to your registry.