To me, this sounds like software corruption. Broken folder usually means it started to try to boot the machine, but then something went wrong, usually corruption.
Zap the PRAM by booting with apple-option-p-r held down, till you hear the boot tone at least 3 times, then follow these instructions:
Hold C to try to boot off the CD again, with fresh PRAM.
If that fails reboot again holding Apple-Option-Shift-Delete down, this will tell the comptuer to only try to boot from the CD drive, even if it does not think it is bootable.
If this fails, it can possibly still be software corruption on that drive.
I then suggest that you take it into a repair shop, because physically getting to that hard drive is a pain that you don't want to ever experience.