I tried adding a site to my test MU blog. I added localhost/forums/, but it's returning 404 Not found when I try accessing localhost/forums/. localhost, localhost/wp-admin/, etc, all work perfectly, so it's not my hosts file. I think it could be a htaccess problem, does anyone know what to do?
You need to make sure mod_rewrite is turned on. You should also check your .htaccess file. Instructions are at http://codex.wordpress.org/Create_A_Network.
There are also issues when using just "localhost" with MultiSite (and yes, it is MultiSite now, not MU. If you say MU, we'll assume you are using version 2.9.2, which is old). Try setting up a localhost.localdomain entry in your hosts file.