\windows\i386\hosts is not used
In W9x/Me the active hosts file is \windows\hosts
In NT\2K\XP it's \windows\system32\drivers\etc\hosts
The default hosts file has a bunch of comments and one entry
127.0.0.1 localhost
If you edit hosts in windows anyway the hosts file is scanned before any dns lookups are done, so you can override a dns lookup with a local value.