People find information in a Portal in two ways: Browse and Search.

That said, Departments are one potential method of organization. Be cautious
however, that is only one slice of the overall taxonomy of your Portal. You
need to ask yourself, what hierarchical structures will people need in place
to find the content that they will be looking for. This will take some
research and some planning. Fortunately, SharePoint Portal Server is fairly
forgiving (bucket Webs aside) when you want to reorganize your Areas.

You also want to consider how people will actually collaborate with one
another, how cross-functional teams will be served, security considerations
that impact access, etc.

I generally recommend grouping document  libraries by functional
areas rather than by department although for some organisations
there is not a difference. I also recommend that document libraries
that are used for reference information are placed within a portal
area but normally use a document libraries  in WSS sites for working
documents since this is a more collaborative environment.

Yes, permissions are setup by document library in 2003 and I am
often hard pressed to think of a reason to have folders in a
document library. You are better off using a view to dynamically
group items by the value of a particular document property. This
also means that security is a major factor in planning what document
libraries you need and where they should be placed.