I would vote for a third option ... both (agree with @Chip: I voted for using a pre-existing install, but really, I think both methods are useful.); or, even a fourth option: a custom XML import and both new and existing blog installations.

I believe a theme should have merit on a fresh install with little to no content; it should also be able to handle the basic posts and pages of a blog with content. This would also be a great place to have a custom XML import so the prospective reviewer would have a better idea of what the theme can really accomplish, although not very functional for the average user. (Adding a lot of random posts and pages to their blog just to "test" a theme is quite excessive given they would have to be removed somehow afterwards.)

All that being said, it may be best from a review perspective to have a separate "test" blog to do reviews with. One that contains a fair amount of "sandbox" posts and pages, perhaps five to ten of each, as well as a few "standard" widgets and plugins for example purposes only. This would help lessen the bias that could be created by content, widget, or plugin that may not be commonly found in WordPress installations or not be directly compatible with the theme being reviewed.
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