using Postgres to store many small files

I am currently working on a Java web application.  We are making use of
the JDBC driver for Postgres 7.4.1.  Part of our application allows the
administrators to manage a large number of small images, most of them
not exceeding 5KB.  There is about a gigabyte of these small files.
We're currently storing the files on disk and the other information
about the file in the database (historical reasons that I won't
complain about here).
   I recently discovered the Hibernate project and was pleasantly
surprised how simple it was to store an image in Postgres as a bytea
using Hibernate's BLOB support.  I'm wondering if Postgres would have
any problem handling all of our files if we were to put them into
Postgres as bytea data.  And how well would Postgres scale as the
number of files increased?
   Our Java application and Postgres are currently running on the same
machine, a dual Xeon 2.6Ghz with 1GB of RAM.  We are currently not
working this machine very hard at all.
   Thanks,
     -M@