Spaces are the devil - I strong suggest against using white-space in a filename or directory. 'Course, I like unix/linux and do my browsing from the command line, meaning the qualified path needs to be put in double-quotes, or all spaces need to be preceeded by a blackslash.
Also, if you ever make a webpage from your directory structure, all spaces will show up as "%20" and that's dern hard to read out loud. "file:///c:\Documents%20and%20Settings\firstname%20lastname \My%20Pictures\This%20was%20a%20bad%20idea.jpg"
[edit: and I still have spaces in there when I view from my computer.... :P ]
ugly.
Also, databases are often much easier than an ordered file structure, so long as you always use the database/metatags to find your files. In other words, if you want to use iPhoto or Lightroom or Picasa, etc., make sure you know what you're getting in to, and have a way of backing out or migrating to other software. (Generally not that difficult, but important to remember)
All that said, thanks for the original post - I find a lot of my filesystems end up very structured like this. You spend a lot of time browsing to the destination, but the file is nearly always where you think it should be. I do find now that newer OSes and software (google mail, OS X spotlight, I think Vista's new searching features) make finding things much quicker.
