In PrestaShop v1.4.2 and earlier, when you upload a product image, the image is saved in the img/p directory using the product ID and image ID. For example, in a default PrestaShop install, the second iPod Nano image is stored as img/p/1-2.jpg. PrestaShop also generates thumbnail images as specified on the Preferences > Images tab. Each image size that has "Products" ticked will cause a thumbnail image to be created. For example, in a default PrestaShop install, the second iPod Nano image will also have thumbnails img/p/1-2-home.jpg, img/p/1-2-large.jpg, img/p/1-2-medium.jpg, img/p/1-2-small.jpg and img/p/1-2-thickbox.jpg. That's a total of 6 images that are stored for each product image by default.
This system works well when there aren't many product images, but when there are thousands of product images, it may cause problems. Some hosts put a limit on the maximum number of files a subdirectory can contain, so product images may stop working after reaching the limit. Also, some FTP clients have a maximum number of files per subdirectory, which will cause all product images created after the limit was exceeded to become inaccessible.
PrestaShop v1.4.3 gets around these issues by using a new image system that divides product images into subdirectories using the image ID. For example, in a default PrestaShop v1.4.3 install, the MacBook Air product image is img/p/1/5/15.jpg and the thumbnails are img/p/1/5/15-home.jpg, img/p/1/5/15-large.jpg, img/p/1/5/15-medium.jpg, img/p/1/5/15-small.jpg and img/p/1/5/15-thickbox.jpg. So by default, there are 6 images in each subdirectory, which won't ever exceed any maximum file per subdirectory limits. Having only 6 images per subdirectory instead of thousands of images in a single directory will also improve the performance of loading the images.
To switch to the new image system, go to the Preferences > Images tab and click the "Move images" button. Depending on how many product images you have, it may take a while to move them all into subdirectories.

Once it's finished, go to the Preferences > Products tab and change the "Activate legacy images compatibility" option at the bottom of the page to "No" to use the new image system.

Lastly, go to Tools > Generators and regenerate your .htaccess file so that all the new product links work.