The revised html needs to be:

function cycleImages(){
	  $('.cycler').each(function(){
		  var $active = $(this).find('.active');
		  var $next = ($(this).find('.active').next().length > 0) ? $(this).find('.active').next() : $(this).find('img:first');
		  $next.css('z-index',2);//move the next image up the pile
		  $active.fadeOut(1500,function(){//fade out the top image
			  $active.css('z-index',1).show().removeClass('active');//reset the z-index and unhide the image
			  $next.css('z-index',3).addClass('active');//make the next image the top one
		  });
	  });
    }

    $(document).ready(function(){
      // run every 7s
      setInterval('cycleImages()', 7000);
    })

with each div assigned a class of cycler instead of the id portfolio_cycler as in the main example.

No – it should work fine however many images are stacked up.