Forum Moderators: open
Would the PR transfer better?
Would SE's prefer the subdomain, given that the subdomain could include keywords in the leading part of the url?
I think if you are looking to transfer PR, do not do it this way, more PR will be transfered inside your domain than externally.
As to the search engines picking up kw1kw2.domain.com, this does seem to work well, but I dont know that it works any better than domain.com/kw1kw2.
All this having been said, I do use subdomains on my site for the purpose of creating different sites for different locations (travel site with 3 main islands) and for getting backlinks that are more relevent; IE
a site about kw1, I ask for a link to kw1.domain.com and make the anchor text "kw1", this seems to work well, but I have limited myself to 3 subdomains as Google higher-ups have said not to cross-link more than 4 domains or else....
Just my opinions.