To Folder or Not to Folder
With SharePoint 2003, I discouraged clients from using folders in document libraries. I thought it was a better user experience to group the documents by a metadata element so that it was easier to traverse the structure tree and see the documents (and associated counts).
With SharePoint 2007, I'm on the fence...
POSITIVE: I like the fact that you can assign security at a folder level. This is a good compromise between having mulitple libraries and getting too granular with item level security management.
POSITIVE: I like the ability to set an alert on a folder. Again, this is a good way to be notified about only the changes you are interested in.
NEGATIVE: I hate the user experience! Why? Create a bunch of folders in a document library, drop in some files, and start the experience by clicking on your first folder. You're staring at a bunch of files (or subfolders). What if you want to go back up? There is no up button! That's right; unlike SharePoint 2003, the full toolbar does not include an 'up folder' icon. You are forced to use the browser back button. UGLY! The best alternative I have found is enabling the tree view on the left side. It works (for navigation) but is far from intuitive.
Bottom line... when designing with library folders, beware the user experience...
UPDATE: My colleague, Marc Anderson, had another perspective when reading the above... content types, content type, content types!... Yeah, that too!