Hello,
It sounds like most likely your issue is that your iPod's hard drive is messed up somehow. I'm presuming this because you accidentially dropped it, and now it's sounding "scratchy" when connected to your computer...
Yes, the best thing to do now would be to send it back to Apple. Note that they will probably say that this issue was due to "owner's abuse" of your iPod, so they may not cover for it.
There are other places which can do this for you, though. For example, try checking out
iPod ResQ, or
Broken iPods.
But before you send it off to Apple or someone else, have you tried all those Five R's yet? (linked to in previous poster's post).
I hope this helps,
-Kylene