From: www.mvps.org/winhelp2002/hosts.htm

Editors Note: 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.

To resolve this issue (manually) open the "Services Editor"

* Start | Run (type) "services.msc" (no quotes)
* Scroll down to "DNS Client", Right-click and select: Properties
* Click the drop-down arrow for "Startup type"
* Select: Manual, or Disabled (recommended) click Apply/Ok and restart. [more info]

You can see that the above "Service" is not needed (after a little browsing) by opening the Services Editor again, scroll down to DNS Client and check the "Status" column. It should be blank, if it was needed it would show "Started" in that column. [more info]

Editors Note: The above instructions are intended for a single (home-user) PC. If your machine is part of a "Domain", check with your IT Dept. before applying this work-around. This especially applies to Laptop users who travel or bring their machines home. Make sure to reset the Service (if needed) prior to connecting (reboot required) to your work Domain ...

JBF sends along this Tip: IPCOP running a DHCP server needs the local PC DNS Client enabled to function.

Apparently some DSL connections need it too... I still have dial-up, but when I tried to use my super-HOSTS in another machine it messed things up totally. Anyhowl, here are some useful links:

"not found" errors:
support.microsoft.com/kb/326155/?sd=RMVP
trouble-shoot connectivity:
support.microsoft.com/kb/314067/?sd=RMVP
more HOST material:
pgl.yoyo.org/adservers/serverlist.php
accs-net.com/hosts/get_hosts.html
www.dozleng.com/hpguru/