>HOWEVER -- the question is: what is better for rankings?
>
>Creating sub-domains or not?

I'll answer this from a technical perspective.

I use both but I do avoid sub-domains at all costs. Why? Number one cause of tech support tickets trying to get things to work.

If you can't build, you can't rank.

I am following up on your master massive site plan Matt and made the decision to build it out with subfolders.

A portal type site for a broad niche that has a subfolder install of the following:

WordPress MU
Article Dashboard
OsCommerce Shopping cart
etc.

Everything works fine out of the box as subfolder installs.

I can't think of any advantage to use subdomains - ranking or technical.