| This only works on the machine you are working on; for a local network you have to set things up for each computer or use a DNS server. |
I just found out how easy it is to make screen captures with Grab so my cryptic instructions should be easier to follow. The pictures are in PNG format, if you're browsing in OSX they should be no problem.
Run the NetInfo Manager. Find it in the /Applications/utilities folder.
Click the lock at the bottom of the window and give it your password.
select /machines/localhost

Choose 'duplicate' from the edit menu. You should have a machine called localhost copy.
select (double click) the IP number field

change it to 192.168.0.1
select (double click) the name field

change it to www.domain.com
click another folder, it will pop up a window asking you to save it.

it will also ask if you want to really update. do it.
Make only one machine folder per ip address, to add more domains to that ip address:
select (single click) the name field
Choose 'insert value' from the directory menu.

select (double click) the new_value field
type domain.com
repeat to add more subdomains like test.domain.com, bob.domain.com, etc. or even other domains like www.otherdomain.com, as many as you need.
save it
in the network control panel set your ip address to the same number you used above