What is a Windows lmhosts file?

lmhosts stands for LAN Manager Hosts file. This host file is called 'hosts' and can be found in C:\WINDOWS\system32\drivers\etc

To put it very simply, it is a file that maps IP addresses to the NetBIOS host names of the machines. For example, write this into your hosts file:
192.168.1.1 Test-Machine

Hence, when 'Test-Machine' is pinged, it will be translated to '192.168.1.1' without needing to check your DNS.