For Drupal 7 sub-domain installation is sites.php the same as 6's use of symbolic link folder?
sites.php exists so you can fake out the normal multi-site operation, like mapping 'localhost' to 'foo.mysiteroolz.com'. Ideally you wouldn't use it in a production server.

In a live-to-the-internet site, you don't want to have sites.php (unless you specifically know why you do), and you want your subdomain to resolve to the same IP and directory as the domain. Then just have a subdirectory in /sites. So:

drupal/sites/default/ will have settings.php and files for mydomain.com

drupal/sites/mondo7.mydomain.com/ will have settings.php and files for mondo7.mydomain.com.

Then in your dev setup, you'd have a sites.php file that says something like 'localhost' =&gt; 'mondo7.mydomain.com' This tells Drupal which site directory gets the attention when a request comes for localhost.

HTH.