Your host file is in your C:\WINDOWS\system32\drivers\etc directory. It is just called "hosts" with no . extension. It is a plain text file so if you edit it, make sure to save it as such. Don't save it as a Word document or something like that. And make sure whatever editor you use does not automatically put some kind or .txt extension on it or something when you save. All it is is a TAB or space delimited file mapping host names /aliases to IP addresses. Like so for example:
localhost 127.0.0.1
Which tells the system that the URL or hostname "http://localhost" for example, goes to 127.0.0.1 (which is the "local loopback" ip address in the IP protocol which means "myself")
You can map any other hostnames or URL's you want to 127.0.0.1 in this file so that when they are accessed, the system tries to go back to itself to find the server, which it will not find and you'll get the standard "Server not found" display in IE. So you could add on a new line:
www.p0rnsite.com 127.0.0.1
Which will cause this URL to always resolve to IP 127.0.0.1 thus "intercepting" more than blocking the request. Really you can redirect to any IP address you want, the system doesn't really care.