In SharePoint 2007, are there any side effects to having 10,000+ folders in a document library?
The question should probably be rephrased to be more specific.
Generally you need to apply some organization to your content. There shouldn't be more than about 2,000 items in a given object. So if you had 10k+ folders they should be spread across multiple folders.
There are two ways to organize content, build it into the user experience so that users are filing things where they belong, or hiding that from the user and doing it on the back end with the folders suppressed in a view so that they show as if they are not in a folder. I prefer the later as I hate folders from a user experience perspective.
It is also possible to organize your content (and folders) in different document libraries, which is probably a better idea if you have that many. It is also possible to build custom solutions that will store documents in multiple site collections, each within their own content database, and then put an intuitive interface on top of that which hides the back end content storage structure.
Absolutely agree this is not good for your farm - basically because of SQL locks with a large queries. but I would say it depends on your hardware and user activity. I've worked with a customer with >250k documents in a root folder of a Doc Lib. Fortunately these documents were not so popular to browse via DL views, and all operations with documents they were doing via Search. And they were happy with this until upgrade to SP2010. Please try to avoid this using Mike's suggestions.
Just to add to what others have mentioned. I experimented with uploading 1 million text files, each being 1 KB in size.
The performance issues I encountered were:
Extremely slow upload speeds when trying to upload all these files.
Extremely slow browsing (sometimes the SP sites would simply timeout).
FYI; In SharePoint 2010, the maximum recommended list view threshold is 5,000, now.