"Localhost" refers to the local computer that a program is running on. For example, if you are running a Web browser on your computer, your computer is considered to be the "localhost." While this does not need to be specified when using a single computer, the localhost does need to be defined when running programs from multiple computers. For example, a network administrator might use his local machine to start a Web server on one system and use a remote access program on another. These programs would run from computers other than the localhost.
In the example above, the two non-local computers must be defined by their IP addresses. The local machine is defined as "localhost," which gives it an IP address of 127.0.0.1. This is considered a "loopback" address because the information sent to it is routed back to the local machine. Localhost is often used in Web scripting languages like PHP and ASP when defining what server the code should run from or where a database is located.