The inventory is a list of items a resident "carries" around. The inventory can be organized using folders and it is virtually unlimited in size. Items are automatically placed in folders based on type (i.e. objects go into the "Objects" folder). The more items in the inventory the longer it will take for it to load when searching.
The inventory is also split into two main folders: "Library" and "My Inventory". The library folder contains Linden-created items that anyone can use freely (but only Lindens can edit this folder).