It doesn't seem to matter whether a blog is on a subdomain, subfolder or it's own domain in terms of search engine ranking.
I ended up placing the blog on its own domain.
1) This is eaisier for link building. Some sites and directories only link back to the homepage.
2) Another issue is pagerank. Unless the main site has enough pr juice, a blog with a couple hundred posts in a subfolder will probably go into the supplemental index.