Edit:
I tried it again (same VM) but this time in the "real" filesystem.
I created /tmp/a/ and /tmp/b/ and /tmp/c/ and ran this command in all three dirs:
echo {1..32000} | xargs mkdirThis time it only came up with an error on 31999 and 32000 (seems correct, see #1: "There is a limit of 31998 sub-directories per one directory, stemming from its limit of 32000 links per inode.")
My best guess is that 20MB just is not enough to store that amount of directories.

Source: http://ubuntuforums.org/archive/index.php/t-1445914.html

ext3 see more is not a preferred filesystem if you are running dolphin on 32bit OS. If you upgrade to 64bit OS, the problem is solved.

Regards,
DosDawg