I would be interested in hearing other webmasters' views on the use of subdomains and subdirectories. Does one have any particular advantage over the other, particularly with regard to SEO?
Google views subdomains as separate websites, so if you have content you don't want to be closely associated with other content, put it on a subdomain.
Subdomains won't adopt PageRank as readily as folder/subdirectories. So in effect you have more work to do, but the rewards can also be greater if you're careful linking the subdomains to each other and your main website.
Blossom is right about how Google sees subdomains and subdirectories. But be careful of using your subdomains too, like not associating it with bad content, etc.