I was setting up a Community Server 2008.5 staging site for a client today and needed to modify the hosts file. I went to
C:\Windows\System32\Drivers\etc
and opened up the hosts file in Notepad. I added the new entry and when I went to save it, I was told that the save failed. At first I thought that the file was write protected, but no. I eventually figured out that I needed to run Notepad as an Administrator.
Right click on the Notepad icon and select "Run as Administrator".
I guess I have a bit of a learning curve with regards to this new UAC in Windows 7 and Server 2008. Microsoft has taken a huge hit due to lax security in the past. We will all have to learn to live with these new restrictions. It actually seems much more Unix-like. I'm sure people will complain and moan about it, but if it makes Windows server more secure, then that's a good thing.