IMac crashed & on reboot I get the folder with a question mark

This happened last night when I went downstairs to put my computer to sleep, it was frozen. On reboot, I would get the chime, but not the apple logo—just the gray screen. Finally, after a minute or two, the folder with a question mark appeared. I tried resetting my PRAM and that didn't seem to work. I tried rebooting from the install disk to repair permissions, but my volume wouldn't even mount. It wasn't there.
Since this was 10:30 at night, I just went to sleep and when I woke up this morning, I turned it on just to see what would happen and lo & behold, it turns on, apple logo appears and ultimately takes me to my login screen. Needless to say, I was thrilled.
However, when I went to login on either my account or my husband's account, neither of our passwords will work now.
I have tried everything—typing the letters one by one. Nothing. How on earth am I supposed to login now? I'm afraid of restarting for fear of that infamous folder with the question mark appearing.
Any suggestions on how I could possibly login? Not only that, why are our passwords no longer working? Our names and avatars show up (they're custom avatars), so something is showing up on my HD, but why don't our passwords work? Weird.
Any advice would be greatly appreciated.
Oh, my specs are below and the only thing that I have done differently is I upgraded to v10.5.6 a few days ago. Otherwise, this never happens. No, I have not installed new RAM or anything like that.
Thanks!!!
Suzanne

Thank you so much for your replies, but I wanted to give you a heads up.
After speaking with tech support yesterday morning, and trying to verify disk via install disk, it was recommended that I bring my computer into Apple to have my HD replaced. I took it to the Genius Bar yesterday and yup, I need my HD replaced. Pain in the butt, but oh well, it could have been worse.
I pretty much back up all of my work (I'm a graphic designer) on a regular basis, but hadn't backed up my recent iTunes purchases, which I was told yesterday I could easily transfer from my iPod back to my "new" iMac—since they're purchased from iTunes. What a relief.
I guess the only thing that's a pain is pretty much all of my bookmarked websites (and there were a lot) and my photos, which I believe for the most part, were backed up.
Regardless, a lesson learned—never take advantage of the fact that your computer is what you think brand new (less than a year and a half old), and thinking it won't die, because you never know. This guy that was sitting next to me at the GB had a brand new MacBook Pro and it died after one week. Ouch!
I am going out right now and purchasing an external HD and having Time Machine back up on a regular basis. What a pain, but a harsh lesson learned.
Thank goodness for Apple Care.

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