It's working fine, you are just encountering a change in algorithm when Windows starts to see a lot of files with the same prefix. See MS KB article http://support.microsoft.com/kb/226403/ which describes the issue:
 Quote:
However, unlike Windows 95/98, if more than four files result in the same first six characters, Windows 2000 uses a different procedure starting with the fifth file. Windows 2000 then:
  • Uses the first two letters of the long file name.
  • Generate the next four letters of the short file name by manipulating the remaining letters of the LFN.
  • Appends "~1" (or another number).