I have registered a domain with godaddy. This points to a sub domain on app spot (google app engine).
When i visit my domain I see the blah.appspot.com rather than mydomain.com
Can I hide the app spot url somehow?
Did you purchase your Domain through Google Apps?
The answer to your problems isn't domain masking. If you have GoDaddy, you can set this up without hurting your site's SEO with domain masking.
Basically, you need to do the following:
If you purchased your domain through Google and GoDaddy, your A records should look as follows:
Your CNAME should have:
In Google Apps, you can then configure the subdomain www to point to the App Engine project.
This is the recommended way of configuring your application for your domain. Here is the link again: http://code.google.com/appengine/docs/domain.html
Note that if you don't have Google Apps, you just have to prove to Google that you own the domain.