I got WP3 working with subdomains, after moving my existing web site to an add-on domain and installing WP in public_html. Techs at LunarPages worked with me to get it going, turned out what they thought wouldn’t work, worked easily, including setting up Wildcard DNS through CPanel. Maybe your server provider actually can do it? I documented what to do, on a “normal Apache” host, WordPress 3.0 Multi-Site Installation with Existing Web Sites. (Used the Domain Mapping 0.5.2 plugin, of course, thank you Donncha!)