After many hours spent in thought regarding this, the best situation I could find is the one I had originally. Keeping as few notebooks as possible and tagging everything with precise and accurate tags.
I've tried creating notebooks for projects, and other topics but I was just not happy with the look and feel of it. So I've attached a screen of my new structure and coupling them with the following rules;
Projects will be tagged with !Projectname instead of folders. This allows much more flexibility. Action items start with a # to keep them near the top but below projects (I class projects more important to see). Interests (such as guitar, photography, etc...) will be prefixed with @ to keep them together and under action items. Source tags are prefixed with S. to find web articles easier and such.
Tags are kept in a flat structure as this keeps things simple.
Thanks to everyone for their comments and suggestions. I've taken on Grumpy's suggestion of note title structure. I prefix all my notes with the date (120204 for today) followed by 3 or 4 keywords
I will post somewhat of a guideline to creating an evernote structure following this post. Hopefully this will make things easier for newer users.
The real task comes in sticking to discipline and working hard at it in the beginning.