Smeags on 05 May 2009
I'd go for the latter. I've never been a huge fan of cut scenes in a game, and I always appreciate it when a developer implements the story or important information in the actual game as you're playing it. Audio Diaries in Bioshock, Scannable objects in Metroid Prime... these are great examples of creative storytelling.
Speaking of images on walls telling stories, Sonic & Knuckles is another great example:
