I don't know about any limit, but many files in one directory affects performance. I would say, 1K of files is already too many.

http://www.pcreview.co.uk/forums/thread-1736383.php

http://answers.google.com/answers/threadview/id/218790.html

>Is there any limit (OS or best practice) on the maximum number of files to have in one single folder?
>
>I seem to recall that there was a limit, or at least a point at which it could become problematic.
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>I am running Windows Server 2003 as our primary file store on a 12-user LAN. It has multiple folders, but one in particular has grown to about 8,000 files. Each file is very small (1 - 5KB), but there are a lot of them.
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>The files are stored on the server in a shared folder, that is hosted in a DFS tree, and users access this DFS tree from a mapped letter on their XP machines on the LAN.