The Hosts file contains the mappings of IP addresses to host names. This file is loaded into memory (cache) at startup, then Windows checks the Hosts file before it queries any DNS servers, which enables it to override addresses in the DNS. This prevents access to the listed sites by redirecting any connection attempts back to the local (your) machine. Another feature of the HOSTS file is its ability to block other applications from connecting to the Internet, providing the entry exists.

One of the best resources on the Hosts file trick to block “parasites” is over at mvps.org.  Its probably one of the most actively maintained hosts file on the internet today.

Link: http://www.mvps.org/winhelp2002/hosts.htm