I use a real Kingston Japanese 2GB card, formatted with FAT16 (which is faster than FAT32). And yes, putting the .nds files on the root will cause all sorts of problems (I have mine in a single "games" folder).
With about 30 to 40 games or more, I do notice some lag in the menu with the scroll bar and stylus. The lag is far less noticeable if you scroll a page at a time, but seems to be worse the more files that are on the microSD card.
To compare, the same microSD card on my Acekard 2 scrolls through the menu completely smoothly regardless of the number of files. I think the difference is that the DSTT scans the file list for the files it will display each time the scroll bar is moved whereas the Acekard scans the file list once beforehand and then displays it.
-Bri