<p>I've always struggled with how to best include classes into my php code. Pathing is usually an issue but a few minutes ago i found <a href="https://stackoverflow.com/questions/4369/how-to-include-php-files-that-require-an-absolute-path">this question</a> which dramatically helps that. Now I'm reading about __autoload and thinking that it could make the process of developing my applications much easier. The problem is i like to maintain folder structure to separate areas of functionality as opposed to throwing everything into a general /lib folder. So if i override autoload to do a deep search of a class folder including all subfolders, what performance hits can i expect?</p>

<p>Obviously this will depend on scale, depth of the folder structure and number of classes but generally I'm asking on a medium scale project will it cause problems. </p>

__autoload is great, but the cost of stating all the files in a recursive search function is expensive. You might want to look at building a tree of files to use for autoloading.  In my framework, I consistently name files for their classes and use a map that is cached for the data.
Check out
http://trac.framewerk.org/cgi-bin/trac.fcgi/browser/trunk/index.php
[
dead link
] starting at line 68 for an idea of how this can be done.
Edit: And to more directly answer your question, without caching,  you can expect a performance hit on a site with medium to heavy traffic.