The big problem with a huge amount of files in a directory is not a result of the operating system itself but more of explorer that sits on top of the operating system.
Every time you move to a folder it will try to present to you on the screen the contents of the folder, however if you have your folder view sorted by file type it will then load the whole directory listing into memory, then sort it and then load it into the list so you can view it. It is not a "Windows" thing it is the fact you cannot sort a list until you have read the whole list.
This is where the DOS prompt can come in useful, by default it will list the files as they appear in the file allocation table, so will be marginally affected by a huge amount of files in a single folder - however we can replicate the same problem in dos using the system variables (I wont go into it here but anyone interested feel free to ask).
Reducing the number of files in any one single folder reduces the number of read operations required and the amount of memory to store the complete directory listing for sorting purposes. Thus my recommendation you break them down into sub folders - your breaking a big job down into chunks so it only loads what is in the current folder etc....
Glad you got it sorted for the time being.... you should not need to re-format your machine, just keep it tidy
