diff --git a/pkg/blobserver/localdisk/localdisk.go b/pkg/blobserver/localdisk/localdisk.go
index 136ecf795..b5ad869e9 100644
--- a/pkg/blobserver/localdisk/localdisk.go
+++ b/pkg/blobserver/localdisk/localdisk.go
@@ -33,7 +33,11 @@ package localdisk
 import (
 	"fmt"
 	"io"
+	"log"
 	"os"
+	"path/filepath"
+	"sort"
+	"strings"
 	"sync"
 
 	"camlistore.org/pkg/blob"
@@ -75,12 +79,98 @@ func New(root string) (*DiskStorage, error) {
 		dirLockMu: new(sync.RWMutex),
 		gen:       local.NewGenerationer(root),
 	}
+	if err := ds.migrate3to2(); err != nil {
+		return nil, fmt.Errorf("Error updating localdisk format: %v", err)
+	}
 	if _, _, err := ds.StorageGeneration(); err != nil {
 		return nil, fmt.Errorf("Error initialization generation for %q: %v", root, err)
 	}
 	return ds, nil
 }
 
+func (ds *DiskStorage) migrate3to2() error {
+	sha1root := filepath.Join(ds.root, "sha1")
+	f, err := os.Open(sha1root)
+	if os.IsNotExist(err) {
+		return nil
+	} else if err != nil {
+		return err
+	}
+	names, err := f.Readdirnames(-1)
+	if err != nil {
+		return err
+	}
+	f.Close()
+	var three []string
+	for _, name := range names {
+		if len(name) == 3 {
+			three = append(three, name)
+		}
+	}
+	if len(three) == 0 {
+		return nil
+	}
+	sort.Strings(three)
+	made := make(map[string]bool) // dirs made
+	for i, dir := range three {
+		oldDir := make(map[string]bool)
+		log.Printf("Migrating structure of %d/%d directories in %s; doing %q", i+1, len(three), sha1root, dir)
+		fullDir := filepath.Join(sha1root, dir)
+		err := filepath.Walk(fullDir, func(path string, fi os.FileInfo, err error) error {
+			if err != nil {
+				return err
+			}
+			baseName := filepath.Base(path)
+			if !(fi.Mode().IsRegular() && strings.HasSuffix(baseName, ".dat")) {
+				return nil
+			}
+			br, ok := blob.Parse(strings.TrimSuffix(baseName, ".dat"))
+			if !ok {
+				return nil
+			}
+			dir := ds.blobDirectory(br)
+			if !made[dir] {
+				if err := os.MkdirAll(dir, 0700); err != nil {
+					return err
+				}
+				made[dir] = true
+			}
+			dst := ds.blobPath(br)
+			if fi, err := os.Stat(dst); !os.IsNotExist(err) {
+				return fmt.Errorf("Expected %s to not exist; got stat %v, %v", fi, err)
+			}
+			if err := os.Rename(path, dst); err != nil {
+				return err
+			}
+			oldDir[filepath.Dir(path)] = true
+			return nil
+		})
+		if err != nil {
+			return err
+		}
+		tryDel := make([]string, 0, len(oldDir))
+		for dir := range oldDir {
+			tryDel = append(tryDel, dir)
+		}
+		sort.Sort(sort.Reverse(byStringLength(tryDel)))
+		for _, dir := range tryDel {
+			if err := os.Remove(dir); err != nil {
+				log.Printf("Failed to remove old dir %s: %v", dir, err)
+			}
+		}
+		if err := os.Remove(fullDir); err != nil {
+			log.Printf("Failed to remove old dir %s: %v", fullDir, err)
+		}
+	}
+	return nil
+}
+
+type byStringLength []string
+
+func (s byStringLength) Len() int           { return len(s) }
+func (s byStringLength) Less(i, j int) bool { return len(s[i]) < len(s[j]) }
+func (s byStringLength) Swap(i, j int)      { s[i], s[j] = s[j], s[i] }
+
 func newFromConfig(_ blobserver.Loader, config jsonconfig.Obj) (storage blobserver.Storage, err error) {
 	path := config.RequiredString("path")
 	if err := config.Validate(); err != nil {
diff --git a/pkg/blobserver/localdisk/path.go b/pkg/blobserver/localdisk/path.go
index 1bc16dee8..cb59d36c7 100644
--- a/pkg/blobserver/localdisk/path.go
+++ b/pkg/blobserver/localdisk/path.go
@@ -30,10 +30,10 @@ func blobFileBaseName(b blob.Ref) string {
 
 func (ds *DiskStorage) blobDirectory(b blob.Ref) string {
 	d := b.Digest()
-	if len(d) < 6 {
-		d = d + "______"
+	if len(d) < 4 {
+		d = d + "____"
 	}
-	return filepath.Join(ds.root, b.HashName(), d[0:3], d[3:6])
+	return filepath.Join(ds.root, b.HashName(), d[0:2], d[2:4])
 }
 
 func (ds *DiskStorage) blobPath(b blob.Ref) string {
diff --git a/pkg/blobserver/localdisk/path_test.go b/pkg/blobserver/localdisk/path_test.go
index 6ea231601..c181c6c33 100644
--- a/pkg/blobserver/localdisk/path_test.go
+++ b/pkg/blobserver/localdisk/path_test.go
@@ -24,14 +24,14 @@ import (
 )
 
 func TestPaths(t *testing.T) {
-	br := blob.MustParse("digalg-abcd")
+	br := blob.MustParse("digalg-abc")
 	ds := &DiskStorage{root: "/tmp/dir"}
 
 	slash := filepath.ToSlash
-	if e, g := "/tmp/dir/digalg/abc/d__", slash(ds.blobDirectory(br)); e != g {
+	if e, g := "/tmp/dir/digalg/ab/c_", slash(ds.blobDirectory(br)); e != g {
 		t.Errorf("short blobref dir; expected path %q; got %q", e, g)
 	}
-	if e, g := "/tmp/dir/digalg/abc/d__/digalg-abcd.dat", slash(ds.blobPath(br)); e != g {
+	if e, g := "/tmp/dir/digalg/ab/c_/digalg-abc.dat", slash(ds.blobPath(br)); e != g {
 		t.Errorf("short blobref path; expected path %q; got %q", e, g)
 	}
 }