I feel really weird posting here because I'm a total newbie both to the site and to Android phones, but I'm bored at work so I'm gonna give you my $0.02 anyway =D
Personally, I am a very organized person so the more folders the better, for me. However, I think it should be a combo of 1 and 2. Maybe keep the folders on the really busy areas and just use the prefixes on the slowers one, where it really is not necessary for there to be folders.
Also, I agree with everything Martimus said =)