I personally use the "Walls mounted on the edge of a 1-inch tile" method, because then I have half a tile for accessories such as barrels, sacks and other things on the wall side, and the miniatures have more room to maneuver. I have no need for room on the outside of the walls, because the whole thing is taking place within the dungeon, the other side of the wall is not important unless there is a secret room / compartment. The walls are there to indicate the space inside the dungeon.

I've said it before, and I'll say it again...aye carumba!