Installing multiples blogs on subdomains

Forgive me, I feel like I am missing something simple, but I have read every forum post and article on ww.wp.xz.cn about subdomains and multiple blogs.

I set up separate databases and subdomains with my host. I edited my config file. My first blog http://www.mydomain.com is installed to the root folder. When I created the subdomains with my host, it created folders in my root. mydomain.com/nameofsubdomain. So I put my second wordpress installation in this folder.

When I got to install wordpress, do I use

1. http://www.mydomain.com/nameofsubdomain/wp-admin/install.php
or
2. http://www.nameofsubdomain.mydomain.com/wp-admin/install.php (when I try this, it doesn’t work, says the website address does not exist – ?)

Once I get it installed, do I change the wordpress address/blog address under general settings? When I used address #1 (above) to install yesterday, it worked, but the blog was only accessible by going to http://www.mydomain.com/nameofsubdomain. If I tried inputting my subdomain into the blog address (under general settings in my dashboard) I got error messages that the site didn’t exist.