At the moment, no the clients do not consult the LMHOSTS file - the process they go through uses pretty much exactly the same code in both DOS and Windows and it isn't set up for that particular thing.
I do plan to make some changes to the way clients and servers do find each other in the next version of GSS, and I hope to be able to made this more transparent for most people.
I'm certainly open to suggestions about specific mechanisms, but given that discovery is already pretty complex, my preference is to concentrate on using more of the mechanisms in DHCP and DNS to resolve this if possible since that would seem to give the most bang for the buck. In particular, I'd have a strong preference for techniques that work for Ghost & the GhostCast server as well as the console clients and server, since they already share a lot of discovery code.