Went to download the latest update of FeedWordPress and I see that the new version supports WordPress MU:
WORDPRESS MU COMPATABILITY: FeedWordPress should now be compatible with recent releases of WordPress MU. Once FeedWordPress is made available as a plugin, each individual blog can choose to activate FeedWordPress and syndicate content from its own set of contributors.
Yeah noticed that and it works fine..the only problem i see is if you have the same feed for syndication for many blogs many times that feed is ignored..
