Create domain record

I have done this before and it worked, I am not sure what I am doing differently now..

1. Enable url alter
2. make required change to settings.php as described in readme:

/**
* Add the domain module setup routine.
*/
include './sites/all/modules/domain/settings.inc';

3. add to host.ics:

127.0.0.1 localhost
127.0.0.1 newsite.mainsite

4. create domain "newsite.mainsite"

I get a not found error.

I have search the board and followed the advice of many but don't seem to be able to crack this one..