Sad Mac :(
It happens to the best of us. Yes even Mac hard drives go bad on occasion. I can't stress the importance of backing up. That being said, I recently was kicking myself for not backing up. :P I had one go out on a Macbook and when I took it to the Apple store they told me it was dead and I'd have to buy a new drive. :(
Fortunately I came across this software called Data Rescue II.
Not only did it restore the entire drive it let me download a demo and see if it would work for me before I purchased it. I was then able to reformat the drive and reinstall OSX. I'm keeping my fingers crossed that I won't have to buy a new drive.
Hopefully this tip can help someone else too!