I remember Vista trying to give me a rough time with the hosts file.
I renamed it, did my business ,then renamed again.
When working on the hosts file, i make a back up of it and just toss a extra letter at the end of the file name,I keep them in the same directory.
If i am having suspected problems of hosts file relation..i rename the current one...then rename a backup to hosts.
I was getting prompts along the way but i was winning however.
I had spybot as well....However I dont know if it was the cause of having to combat the prompts