Are you using #PRE in the file? The LMHOSTS file is supposed to be the last place checked to resolve names. It is however read at startup to get all those items that are suppose to be PREloaded into the cache.
Try using 'NBTSTAT -R' (The "R" is case sensative.) to flush/reload the name cache.
LMHOSTS is the netbios name file and the HOSTS file is for DNS names.
