usually used by people who dont cuss, and are just TOO COOL to say "lmbo"
jen: ***bulimic. WHY DO YOU AND LAURELLZ MAKE SO MANY TYPOS?
laurellz: LMHO WYAT ARF TOI TALIING ABIUT?!
It was popularized after 1justin (me) posted said GIF (created by takumi_) on a large LiveJournal community (indiefucks). Predictably, much drama ensued.
lmho is typically used much less frequently than lmao and lmbo. These two are, for the most part, used much more often.
Person B: Really? What would be on it?
Person A: I'm not sure. But it would go at 100 revolutions per minute! *Rimshot*
Person B: LMHO!