This is continuation of the discusion on the old forums, on how to use a subdomain (blogname.domain.com) for each blog, rather than a directory.
I'm working on updating and testing my suggestions with the newest versions of WPMU, and am considering offering to code them into the application in a more thorough way. In the meantime, a quick reply to sallam and others:
Yes, you do need to seperately add a DNS record. There is no way for Wordpress to interface with your DNS (or at least, no easy way). I don't know cPanel, but on some systems it's possible to add a wildcard DNS entry, along the lines of "*.yourdomain.com", which will then work for any blogs you create. The problems people have been seeing are a result of this DNS entry not existing.
Then mike's suggestions (on the last page of the other forum's thread) on how to remove the "www" look reasonable, but I haven't tested them myself yet.