"So how are folks with subdomains making their site appear as subdirectories?"
Uh, they aren't. They're using subdirectories to start with.
People pick subdomains over subfolders because the SEO is better. most plugin incompatibilities have been ironed out.
If you're reading over threads int he forums, please be aware that the search on the *front* page is a little broken. there's a sticky thread also on the front page that details this. That search will give you a ton of old and outdated threads.
So, please pay attention to the dates on the threads you're reading.
I have to ask *why* you want to do this and if there were specific plugins you were looking at as being incompatible. Often people ask a question on one topic, but they are really trying to accomplish something else. :) Would help a lot if we knew what you were aiming for.