I think I have something... The last bullet looks interesting...

When multiple names or IP addresses are used in the (hosts) file, the DNS Client service must be
running for all entries to be returned or used in answering queries. If the DNS Client service is
not running, only the first entry in the file is used to resolve the query.

Try giving your test case a unique IP address, or move your test case to the first line in the file, or turn the DNS Client on again...

Useful commands from MS:

ipconfig /flushdns - flushes your DNS cache
ipconfig /displaydns - shows your DNS cache
nbtstat -r : shows a count of all names resolved by broadcast or WINS