I propose that there is no other way for Analytics to handle subdomains than what you describe, because there is no way for Analytics to be certain that domain.com and sub.domain.com belong to the same site.
Of course, an option to inform Analytics of this fact would be nice, but out of the box I really don't see how it could work differently.
pageTracker._setDomainName(".example.com");
Warning, warning: when you start playing with Google Analytics you will quickly learn that it is Enterprise software: built to be infinitely customizable using massive amounts of work to just short of your actual needs but no farther, and filled full of sharp edges to cut yourself on.
That said, it is a very impressive piece of software in a lot of ways. (My internal analytics are a lot more useful to me, but my heart aches for how easy it is to dig into arbitrary things in GA.)
https://www.google.com/support/googleanalytics/bin/answer.py...
That's the relevant page in the support area.
My mistake, I should have realized their default is set to treat subdomains as different sites because that is probably a more common use case.
Or, of course, prepended.