2nd Generation Touch Wheel iPod - iPod displays a folder icon with a ! mark

Hi,
My girlfriend has been using my old 2nd generation touch wheel iPod, and yesterday she was trying to listen to some music, and the iPod would load the name of the song, artist, album etc, and then skip to the next song without playing any music, and would keep skipping to the next song over and over and over.
My girlfriend showed me this with an album that she had recently just added to the iPod, from a CD that she purchased and ripped to mp3's using iTunes, so initially I thought maybe it was just a problem that occurred when the CD was being ripped, so some corrupt mp3's or something. However we tried a range of other songs on the iPod and the same problem occurred.
So I figured something must have gone array with the firmware on the iPod, and thought maybe the problem might be solved by resetting the iPod, which I did by holding down the menu and play / pause button until the iPod reset.
When the iPod reset, the apple logo came up on screen and interchanged between the apple logo and the folder with a ! mark icon. When I connected the iPod to the computer, iTunes wouldn't find it, and the screen on the iPod said it was in disk mode.
Listening to the iPod I could hear the disk spinning, and then make a click sound, and then repeat, and it is not possible to turn it off.
Does anyone have any suggestions as to what has caused the problem, and more importantly how it can be fixed?

f a sad iPod icon or an exclamation point and folder icon appears on your iPod’s screen, or with sounds of clicking or HD whirring, it is usually the sign of a hard drive problem and you have the power to do something about it now. Your silver bullet of resolving your iPod issue – is to restore your iPod to factory settings.
http://docs.info.apple.com/article.html?artnum=60983
If you're having trouble, try these steps at different levels one at a time until the issue is resolved. These steps will often whip your iPod back into shape.
Make sure you do all the following “TRYs”
A. Try to wait 30 minutes while iPod is charging.
B. Try another FireWire or USB through Dock Connector cable.
C. Try another FireWire or USB port on your computer .
D. Try to disconnect all devices from your computer's FireWire and USB ports.
E. Try to download and install the latest version of iPod software and iTunes
http://www.apple.com/itunes/download/
For old and other versions of iPod updater for window you can get here
http://www.ipodwizard.net/showthread.php?t=7369
F. Try these five steps (known as the five Rs) and it would conquer most iPod issues.
http://www.apple.com/support/ipod/five_rs/
G. Try to put the iPod into Disk Mode if it fails to appear on the desktop
http://docs.info.apple.com/article.html?artnum=93651
If none of these steps address the issue, you may need to go to Intermediate level listed below in logical order. Check from the top of the lists to see if that is what keeping iPod from appearing on your computer in order for doing the Restore.
Intermediate Level
A. Try to connect your iPod with another computer with the iPod updater pre-installed.
B. Still can’t see your iPod, put it in Disk Mode and connect with a computer, instead of doing a Restore on iPod Updater. Go and format the iPod instead.
For Mac computer
1. Open the disk utility, hope your iPod appears there (left hand side), highlight it
2. Go to Tab “Partition”, click either “Delete” or “Partition”, if fails, skip this step and go to 3
3. Go to Tab “Erase” , choose Volume Format as “MAC OS Extended (Journaled), and click Erase, again if fails, skip it and go to 4
4. Same as step 3, but open the “Security Options....” and choose “Zero Out Data” before click Erase. It will take 1 to 2 hours to complete.
5. Eject your iPod and do a Reset
6. Open the iTunes and click “Restore”
For Window computer
Go to folder “My Computer”
Hope you can see your iPod there and right click on the iPod
Choose “Format”. Ensure the settings are at “Default” and that “Quick Format” is not checked
Now select “Format”
Eject your iPod and do a Reset
Open the iTunes 7 and click “Restore”
In case you do not manage to do a “Format” on a window computer, try to use some 3rd party disk utility software, e.g.“HP USB Disk Storage Format Tool”.
http://discussions.apple.com/thread.jspa?threadID=501330&tstart=0
C. Windows users having trouble with their iPods should locate a Mac user. In many cases when an iPod won't show up on a PC that it will show up on the Mac. Then it can be restored. When the PC user returns to his computer the iPod will be recognized by the PC, reformatted for the PC, and usable again. By the way, it works in reverse too. A Mac user often can get his iPod back by connecting it to a PC and restoring it.
Tips
a. It does not matter whether the format is completed or not, the key is to erase (or partly) the corrupted firmware files on the Hard Drive of the iPod. After that, when the iPod re-connected with a computer, it will be recognized as an fresh external hard drive, it will show up on the iTunes.
b. It is not a difficult issue for a Mac user to find a window base computer, for a PC user, if they can’t find any Mac user, they can go to a nearest Apple Shop for a favor.
c. You may need to switch around the PC and Mac, try to do several attempts between “Format” and “Restore”
http://discussions.apple.com/thread.jspa?messageID=2364921&#2364921
Advance Level
A. Diagnostic mode solution
If you have tried trouble shooting your iPod to no avail after all the steps above, chances are your iPod has a hardware problem. The iPod's built-in Diagnostic Mode is a quick and easy way to determine if you have a "bad" iPod.
You need to restart your iPod before putting it into Diagnostic Mode. Check that your hold switch is off by sliding the switch away from the headphone jack. Toggle it on and off to be safe.
Press and hold the following combination of buttons simultaneously for approximately 10 seconds to reset the iPod.
iPod 1G to 3G: "Menu" and "Play/Pause"
iPod 4G+ (includes Photo, Nano, Video, and Mini): "Menu" and "Select"
The Apple logo will appear and you should feel the hard drive spinning up. Press and hold the following sequence of buttons:
iPod 1G to 3G: "REW", "FFW" and "Select"
iPod 4G+ (includes Photo, Nano, Video, and Mini): "Back" and "Select"
You will hear an audible chirp sound (3G models and higher) and the Apple logo should appear backwards. You are now in Diagnostic Mode. Navigate the list of tests using "REW" and "FFW". The scroll wheel will not function while in diagnostic mode. For further details on Diagnostic mode can be found at http://www.methodshop.com/mp3/ipodsupport/diagnosticmode/
Try to do the 5in1, HDD R/W and HDD scan tests. Some successful cases have been reported after the running the few tests under the Diagnostic mode. In case it does not work in your case, and the scan tests reports show some errors then it proves your iPod has a hardware problem and it needs a repairing service.
B. Format your iPod with a start disk
I have not tried this solution myself, I heard that there were few successful cases that the users managed to get their iPod (you must put your iPod in disk mode before connecting with a computer) mounted by the computer, which was booted by a system startup disk. For Mac, you can use the Disk Utility (on the Tiger OS system disk), for PC user, you can use the window OS system disk. Try to find a way to reformat your iPod, again it does not matter which format (FAT32, NTFS or HFS+) you choose, the key is to erase the corrupted system files on the iPod. Then eject your iPod and do a Reset to switch out from Disk Mode. Reboot your computer at the normal way, connect your iPod back with it, open the iPod updater, and hopefully your iPod will appear there for the Restore.
If none of these steps address the issue, your iPod may need to be repaired.
Consider setting up a mail-in repair for your iPod http://depot.info.apple.com/ipod/
Or visit your local Apple Retail Store http://www.apple.com/retail/
In case your iPod is no longer covered by the warranty and you want to find a second repairing company, you can try iPodResQ or ifixit at your own risk
http://www.ipodresq.com/index.php
http://www.ifixit.com/
Just in case that you are at the following situation
Your iPod warranty is expired
You don’t want to pay any service charges
You are prepared to buy a new one
You can’t accept the re-sell value of your broken iPod
Rather than leave your iPod as paper-weight or throw it away.
You can try the following, but again, only do it as your last resort and at your own risk.
Warning !!!! – It may or may not manage to solve your problem, and with a risk that you may further damage your iPod, which end up as an expensive paper weight or you need to pay more higher repairing cost. Therefore, please re-consider again whether you want to try the next level
Last Resort Level
1. . Disconnecting the Hard Drive and battery inside the iPod – Warning !! Your iPod warranty will be waived once you open the iPod.
In Hong Kong there are some electronic shops offering an iPod service for Sad iPod, the first thing they do is to open up the iPod’s case and disconnecting the battery and the Hard Drive from the main board of the iPod. Wait for 5-10 minutes and reconnecting them back. The reason behind which I can think of is to do a fully reset of a processor of the iPod. In case you want do it itself and you believe that you are good on fixing the electronics devices and have experience to deal with small bits of electronic parts, then you can read the following of how to open the iPod case for battery and HDD replacement (with Quicktimes)
http://eshop.macsales.com/tech_center/index.cfm?page=Video/directory.html
2.Press the reset button on the Hard Drive inside the iPod – Suggestion from Kill8joy
http://discussions.apple.com/thread.jspa?messageID=2438774#2438774
Have I tried these myself? No, I am afraid to do it myself as I am squeamish about tinkering inside electronic devices, I have few experiences that either I broke the parts (which are normally tiny or fragile) or failed to put the parts back to the main case. Therefore, I agree with suggestion to have it fixed by a Pro.
2. Do a search on Google and some topics on this discussion forum about “Sad iPod”
Exclamation point and folder and nothing else
Spank your iPod
http://www.youtube.com/watch?v=3ljPhrFUaOY
http://discussions.apple.com/thread.jspa?messageID=3597173#3597173
Exclamation point and folder and nothing else
http://discussions.apple.com/thread.jspa?messageID=2831962#2831962
What should I do with my iPod? Send it or keep it?
http://discussions.apple.com/thread.jspa?threadID=469080&tstart=0
Strange error on iPod (probably death)
http://discussions.apple.com/thread.jspa?threadID=435160&start=0&tstart=0
Sad Face on iPod for no apparent reason
http://discussions.apple.com/thread.jspa?threadID=336342&start=0&tstart=0
Meeting the Sad iPod icon
http://askpang.typepad.com/relevanthistory/2004/11/meeting_thesad.html#comment-10519524
Sad faced iPod, but my computer won’t recognize it?
http://discussions.apple.com/thread.jspa?messageID=2236095#2236095
iPod Photo: unhappy icon + warranty question
http://discussions.apple.com/thread.jspa?messageID=2233746#2233746
4th Gen iPod Users - are we all having the same problem?
http://discussions.apple.com/message.jspa?messageID=2235623#2235623
Low Battery, and clicking sounds
http://discussions.apple.com/thread.jspa?messageID=2237714#2237714
Sad faced iPod, but my computer won’t recognize it
http://discussions.apple.com/thread.jspa?messageID=2242018#2242018
Sad iPod solution
http://discussions.apple.com/thread.jspa?threadID=412033&tstart=0
Re: try to restore ipod and it says "can't mount ipod"
http://discussions.apple.com/thread.jspa?threadID=443659&tstart=30
iPod making clicking noise and is frozen
http://discussions.apple.com/thread.jspa?messageID=2420150#2420150
Cant put it into disk mode
http://discussions.apple.com/thread.jspa?messageID=3786084#3786084
I think my iPod just died its final death
http://discussions.apple.com/thread.jspa?messageID=3813051
Apple logo & monochrome battery stay
http://discussions.apple.com/thread.jspa?messageID=3827167#3827167
My iPod ism’t resetting and isn’t being read by my computer
http://discussions.apple.com/thread.jspa?messageID=4489387#4489387
I am not suggesting that you should follow as well, but just read them as your reference. You are the person to make the call.
Finally, I read a fair comments from dwb, regarding of slapping the back of the iPod multiple times
Quote “This has been discussed numerous times as a 'fix'. It does work, at least for a while. In fact I remember using the same basic trick to revive Seagate and Quantam drives back in the mid to late 1980's. Why these tiny hard drives go bad I don't know - could be the actuator gets stuck in place or misaligned. Could be the platter gets stuck or the motor gets stuck. 'Stiction' was a problem for drives back in the 80's. Unfortunately the fix can cause damage to the platter so we temporarily fix one problem by creating another. But I know of two instances where a little slap onto the table revived the iPods and they are still worked a year or more later.”UnQuote

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    http://docs.info.apple.com/article.html?artnum=60983
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    http://www.apple.com/support/ipod/five_rs/
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    http://docs.info.apple.com/article.html?artnum=93651
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    http://discussions.apple.com/thread.jspa?threadID=501330&tstart=0
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    http://discussions.apple.com/thread.jspa?messageID=2831962#2831962
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    http://discussions.apple.com/thread.jspa?threadID=469080&tstart=0
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    http://discussions.apple.com/thread.jspa?threadID=435160&start=0&tstart=0
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    http://discussions.apple.com/thread.jspa?threadID=336342&start=0&tstart=0
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    http://askpang.typepad.com/relevanthistory/2004/11/meeting_thesad.html#comment-10519524
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    http://discussions.apple.com/thread.jspa?messageID=2236095#2236095
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