The two scripts are almost identical. Actually the only difference is the action the shell script should call (add or remove). The rest of the scripts are completely the same.

I call this file addhost.

using terms from application "Quicksilver"
	on process text txt
		set the_password to "YOURPASSWORD"
		repeat with delimiter_position from 1 to (length of txt)
			if character delimiter_position of txt = " " then exit repeat
		end repeat
		if delimiter_position = (length of txt) then
			set hostname to txt as string
			set ipaddress to ""
		else
			set hostname to characters 1 thru (delimiter_position - 1) of txt as string
			set ipaddress to characters (delimiter_position + 1) thru (length of txt) of txt as string

		end if

		do shell script "sudo hosts.sh add " & hostname & " " & ipaddress password the_password with administrator privileges

		return nothing
	end process text
end using terms from

I call this file removehost.

using terms from application "Quicksilver"
	on process text txt
		set the_password to "YOURPASSWORD"
		repeat with delimiter_position from 1 to (length of txt)
			if character delimiter_position of txt = " " then exit repeat
		end repeat
		if delimiter_position = (length of txt) then
			set hostname to txt as string
			set ipaddress to ""
		else
			set hostname to characters 1 thru (delimiter_position - 1) of txt as string
			set ipaddress to characters (delimiter_position + 1) thru (length of txt) of txt as string

		end if

		do shell script "sudo hosts.sh remove " & hostname & " " & ipaddress password the_password with administrator privileges

		return nothing
	end process text
end using terms from

Now I am able to create a local domain by opening Quicksilver (double-control in my case) press period, write the domain name, press tab, and select the addhost action (ad is enough in my case). Removing is just as easy – the last step is just to select the removehost action (re is enough in my case).

#! /bin/bash
DEFAULT_IP=127.0.0.1
IP=${3:-$DEFAULT_IP}

case "$1" in
  add)
        echo "$IP $2"  >> /etc/hosts
        ;;
  remove)
        sed -ie "\|^$IP $2\$|d" /etc/hosts
        ;;

  *)
        echo "Usage: "
		echo "hosts.sh [add|remove] [hostname] [ip]"
		echo
		echo "Ip defaults to 127.0.0.1"
		echo "Examples:"
		echo "hosts.sh add testing.com"
		echo "hosts.sh remove testing.com 192.168.1.1"
        exit 1
        ;;
esac

exit 0

As you can see the script defaults the ip to 127.0.0.1 for easy creation of local domains. Next step is to create a quicksilver (and a gnome do) plugin for easy creation without ever touching the terminal. (Even though we all love the terminal, right?)