"list or library contains a large number of items"

Hi all,

am using sharepoint 2007. if any list contains large no. of items. if we click on settings then it will show warning in red bar: "list or library contains a large number of items"

whats this warning saying and its related to what, pls anyone can explain me in detail.

will it affect the performance, if so how can we overcome?

Thanks in Advance,

Karthiga.