Efficient Folder Structure for large amounts of Data

I am using a Dell Desktop to save all my family pictures. All my software on the system is licensed and updated with Norton antivirus. The detailed configuration is as below. In
addition to the HDD for the OS and Data, I have a separate 500GB HDD for storing about 25,000 pictures, organized in several folders.

My problem: The 500GB drive with the family pictures has got corrupted and is accessible sometime and not responding other times. I have bought a new 1TB Seagate drive.

My questions:
1. I plan to partition the 1TB drive in to 2 partitions of 500GB each and format both NTFS. Is there a better formatting standard for WinXP?
2. I plan to copy all the pictures from old drive to the new one. In the old drive, there are about 10 folders at the root level. One of these folders is "Family Pictures" and this has
about 40 (or more) folders with about 20,000 pictures in those folders totaling about 100GB i.e the Family Pictures folder size is about 100GB or more with several folders in it
and about 20,000 plus pictures in all. The question is: I hear WinXP has problems with large folders with many files with similar names (all pictures have similar names except for
a serial number at the end). So do I copy all the folders directly at the root level? I will be using this drive exclusively for pictures and some videos.
3. I know I will have to upgrade to Win7 sometime soon (within a few months) and am planning to recover my pictures, rebuild the catalog under Adobe Photoshop Elements and
then migrate the catalog and pictures to Win7. Are the folder structure issues similar in Win7?

I use Adobe Photoshop Elements for cataloging my pictures and have cataloged and tagged almost 80% of the pictures. I have used Picasa and find APE still better for my use.

My current configuration:
Dell Desktop with Intel Core2 Quad CPU @2.83GHz with 4GB RAM running WinXP Prof Ver 2002 SP3 with a 300GB HDD partitioned into 100GB(72GB Free) Software and
200GB Data (100GB Free) both NTFS AND a separate 500GB (333GB Free) Seagate Drive, NTFS for Pictures & Videos. The system was originally Windows Vista but I have
downgraded to WinXP.

Folders have long names, some videos have long names and most pictures have similar names.
At the root, there are two folders "b63c6077796528faed0906fd3204" and "21fcb9754d6bacb996ce" which have not been created by me and have no idea what they are.
At the root, there are two folders "b63c6077796528faed0906fd3204" and "21fcb9754d6bacb996ce" which have not been created by me and have no idea what they are.

These are left after a Microsoft update. The MRT.exe file stands for Malicious Software Removal Tool. You can delete it and it won't harm the system but it is not a virus, trojan, or otherwise malicious software. After several updates in XP it is not uncommon to see boatloads of these folders. Most folders only contain a text file log of what the update did and your system information.

for large files, I would first disconnect from the internet, disable your antivirus and then copy, sometimes it is a problem with the antivirus when copying large folders.
I regularly work with around 500,000 images, and XP has never failed,
I use the "windows explorer" hiearchy, of Files within Folders, within Folders.
Never had a problem with name characyer lengths, my files are generally
250Kb to 500Kb in volume with some as big as 20 Mb.

I use the dinosaur ACDSee version 3,1 for my "windows explorer" file organising
I find microsofts very dangerous for copying/moving files incorrectly.
ACDSee also has "bulk rename"