What's the best way to structure URL's for SEO points?

A number of people say that pages should be close to the root of the domain. So we could have:

xyz.com/product-one-keywords.html
xyz.com/product-two-keywords.html

and others say that a logical URL directory structure should be used, such as:

xzy.com/category/subcategory/product-one-keyword.html
xyz.com/other-category/subcategory/product-two-keyword.html

Which I prefer seo point of views.

Thanks in Advance.

According to me the pages which close to the root of the domain are more useful as compare of logical URL directory structure.

Check out the following link for more detail about URL Structure.

http://support.google.com/webmasters/bin/answer.py?hl=en&answer=76329