Hello there,
Yes, the red X icon is usually a sign of a bad or damaged hard drive. Sometimes, restoring the iPod will resolve the issue, but rarely. Other users were able to smack the ipod against the side of their leg and gain back full functionality of the iPod.
However, if no such luck with either, your next option would be to replace the drive. For this task, you can either opt to repair and replace the hard drive yourself, or opt to send it into a third party repair business to do the job for you.
I use the guides at [www.ifixit.com|http://www.ifixit.com> to help me replace broken parts on an iPod. These guides provide excellent step-by-step instructions as well as photos on how to repair any part from an iPod.
Some other good sites for purchasing repair parts include the following:
[iDemiGods|http://www.idemigods.com>
[RapidRepair|http://www.rapidrepair.com>
[iResq|http://www.iresq.com>
Lastly, I would also like to remind you that ebay also has several great deals on excellent iPod replacement parts. It's where I purchase a majority of mine. 😉
Hope this helps.
B-rock