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If you want, you can replace the hard drive yourself (it doesn't void the warranty). First of all, you can choose between different hard drives in OWC > http://eshop.macsales.com/shop/hard-drives/2.5-Notebook/
After choosing one, you can buy an enclosure to put your actual hard drive onto it, so you will be able to recover your data, and put the new hard drive onto the MacBook. After that, hold Command, Option (Alt) and R keys while your Mac is starting, and install OS X (you may need to format the hard drive before installing).
After installing OS X, you will be able to connect the old hard drive by the enclosure to your computer, so you will be able to recover all the files you need
If you need to reformat the hard drive:
Drive Erase for Lion/Mountain Lion
1. Restart the computer and after the chime press and hold down the COMMAND and R keys until the menu screen appears. Alternatively, restart the computer and after the chime press and hold down the OPTION key until the boot manager screen appears. Select the Recovery HD and click on the downward pointing arrow button. Select Disk Utility from the main menu and click on the Continue button.
2. After DU loads select the volume you wish to erase from the left side list. Click on the Erase tab in the DU main window.
3. Set the format type to Mac OS Extended (Journaled.) Click on the Erase button and wait until the process has completed.
If you are successful:
Reinstall Lion/Mountain Lion: Select Reinstall Lion/Mountain Lion and click on the Continue button.
Note: You will need an active Internet connection. I suggest using Ethernet if possible because it is three times faster than wireless.