Disabling the HOSTS file just renames the file by adding an extension of ".Hostess". Enabling it returns it to its original, extensionless name. This can be useful for troubleshooting purposes. With the HOSTS file disabled, you can tell whether a site is unreachable because it's listed in the HOSTS file or because it is actually offline.
Note that just renaming the file may not actually disable the HOSTS file immediately. Caching of the HOSTS file may be taking place and some time or a reboot may be required before the change is recognized by the system.
When the indicator is green and the menu option is unchecked, the HOSTS file is
enabled. When the indicator is red and the menu option is checked, the HOSTS
file is disabled. If the indicator is grey and the menu option is disabled, it
means that you have neither a HOSTS file nor a renamed copy.