Yes. There's not just a hard limit - there is a practical limit. We've found that EXT3 that limit is around 20k. The limit has to do with some of the low level posix apis and how they are implemented, I saw a post some time ago about how to make this better, but for the time being it's generally inefficient in most filesystems to have large numbers of files/directories in a single directory.
Also, as you point out, it makes it next to impossible to easily add additional storage since there is only basically one mount point.