Distributed File System (DFS) currently has a size recommendation of 5000 folders with a target in a domain-based namespace. In Windows Server 2008, this limit has been lifted and you can now use the DFS Management MMC snap-in to create namespaces that support more than 5000 folders.
In order for the domain-based DFS namespace to support more than 5000 folders, you should create the namespace in Windows Server 2008 mode. As of now, there is no hard limit on the maximum number of folders, although Microsoft is doing performance tests. The new version supports access-based enumeration, full configuration using DfsUtil, and scales pretty well.
To create a domain-based namespace in Windows Server 2008 mode, the domain functional level should be at least Windows Server 2008 and all the servers hosting your DFS namespace should be running Windows Server 2008.