Grey scene on start up. Error message on disc utility?

If you're getting a failure on exit message, that sounds like you were either able to run a verify disk, or more likely were able to boot from your original OS X DVD, bring up Disk Utility, and run a repair disk. If Disk Utility can't fix a disk error, it usually gives a message and then says "failure on exit".

One of two situations exist ... either there is a data issue with the structures on the hard drive, which can usually be fixed by Disk Warrior or TechTool Pro, with Disk Warrior being the more popular solution. However, Disk Warrior can't repair an issue that is caused by a hardware problem. In that case, you can try zeroing the hard drive by writing zero's to the surface and restoring from a backup, or you can just get a new hard drive. Writing zero's to the hard drive may be a temporary, not long term, solution.

Have you tried to run the Apple Hardware Test? Run the extended test when prompted, and the test can take over an hour to run.

I would use Disk Utility to do a secure erase by writing zero's to the hard drive, then do your installation, followed by any restore needed from backup. If that completes, download SMARTUtility and see what it says about the health of your hard drive.

Or you can spend $99 and buy Disk Warrior, too.