Grummy,
are you sure that you are not using your ISP's proxy services? (Check under Edit - Preferences in K-Meleon).
In my case, hosts file worked "too well" for K-Meleon under Win98SE, as I had to click on all those notices - ads were correctly prevented because of the hosts file, though. Maybe it's different in some other versions of Windows? (like 2000, NT, XP???)
According to my experience, if you have a hosts file in your C:\Windows and you are not using any kind of proxy with your browser, the hosts file definitely works. It is Windows-specific, not browser-specific. And if the hosts file works, all correct entries therein must work too, both ad-blocking and favourites. If you have just renewed your hosts file, you need to reboot.
BTW, there is an app called Hostess for better editing of the hosts file. There is also a good hosts file update/download site at
http://www.smartin-designs.com/ but you probably knew that