1 year old 40 GB Ipod

Hi,
My daughter's 1 year and 1 month old 40 GB Ipod suddenly stopped working. You can hear the hard drive just spinning and spinning. There is a folder with an exclamation point on it. I can't restore the ipod (I have already reset it) because the computer won't recognize the ipod and the restore button is shadowed out.
Does this sound like the Ipod is forever dead? She only had a 1 year warranty one it (go figure the one time we didn't buy an extended warranty on something) but figuring we already paid over $400.00 for this, we figured it would work for a while.
Any ideas to fix this? I am willing to mail it in for repair but don't want to spend 250 to get it fixed.
Thanks so much,
Ellen

You could start with this if you don't have an Apple Store nearby that you could take it in to.
Your Windows PC doesn't recognize iPod
(50)
Colin R.
ps http://www.apple.com/retail/ardenfair/week/20051225.html

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