iWeb 3 can open iWeb 1 files simply by double clicking it.
It will convert it to an iWeb 3 file => .sites2
If that doesn't work, use iWebSites.
If the domain file is already in the default location, iWebSites will recognize it.
Click Open now to open it in iWeb.
If the file is not in the default location, first change the extension from .sites to .sites2
Then drop it on the iWebSites window.
Proceed from there.
iWebSites works with the latest flavor of OS X.
See this page for info about how to open a Domain.sites2 file when using Mountain Lion...