The 1.8" hard drives are pricy - google ipod replacement hard drive. Probably you could find the same model drive for less by googling around for the model number, i'm willing to bet that people selling them as replacement "ipod drives" are marking them up a little - but you are still looking at around $100 US.
If you put the iPod into hard drive access mode in iTunes, and format the drive (FAT32 on PC, HFS+ on Mac), does it format cleanly? That would be your first and best means of determining if the drive is shot.
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-Scott
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