We're working on a project right now that brought up this question, which is both a technical and a business decision. Over at Digital Operative we use a subdomain for our blog in order to keep our content closer to the root domain, but also earn the SEO benefits in linking and saturating the organic listings. I was doing a little light research and stumbled upon this post from Rand Fishkin over at SEOMoz and the thread is not only informative, but there are so many scenarios that I felt it was valuable to share to see if any of you were also having the same questions.
SEOMoz post on Subdomains vs. Subfolders
Enjoy and hopefully this helps some of you readers out there!