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Hugoli is right. User should have the right to choose between 1-level and deep-level browsing. Of course when browsing tons (thousands and more files) might be cpu-demanding, but when dealing with 200-500 files... no problem at all. Just give an option to decide to recurse directories or not.
Regarding confusing names ? No problem - FastPictureViewer deals with it without fail, the current directory path is visible - any possible doubles still exist in separate directories.