They're virtual because I can't find them in my file structure :-P To set up subdomains, which as you pointed out is how WP-MU is usually configured, with my webhost would have required some extensive communication at the time that I wasn't interested in bothering with. Therefore, I went with the alternative WP-MU setup, not default but certainly part of the base program, that creates blogs as subdirectories rather than subdomains. From what I can tell, redirects aren't done through .htaccess because WP-MU isn't creating actual subdirectories in the file structure. Rather, it's storing the location at the database level and navigation is handled by the primary WP-MU setup.
This means that you don't actually need mod_rewrite for MU to work, but it also creates issues with a variety of stats/analytics programs as I mentioned in my blog entry. Most programs don't recognize URLs that are formatted as a subdirectory structure (domain.com/sub) as being separate sites, but WP-MU is handling them as if they were, in fact, separate (if not autonomous) websites. Therefore, something that would crawl/track the entire site (Google Analytics, Woopra, etc.) can't follow those links through to sub-blogs/subdirectories/other sites because Woopra (et. al.) can't access the database that is actually managing navigation.
Let me state that the above estimation is purely hypothetical. I have a few ideas for testing this and might try that next week when I'm on vacation, and I'm going to look into subdirectories and how WP-MU handles them more in-depth. Of course, there's always the option of forcing or moving to subdomains rather than subdirectories, but for my purposes I tend to prefer the (virtual) subdirectory structure.