Cannot recover from flashing folder w/ question mark

Hello,

I have a 2007 iMac running Mountain Lion, and I went to use it yesterday and it did not respond. I rebooted it and it came up with flashing folder with a question mark. I have tried following options, and all resulted in the flashing folder:

• Booting with cmd-r
• Booting with option key
• Booting while holding c with disk 1 from my Leopard installation

I did successfully reset the PRAM and was able to eject the disk, so while I thought it may be a keyboard issue (it's a USB) that does not appear to be the case.

Is something totally fried beyond repair? Is there anything else I can try?

I have a time capsule which is great if I want to buy another computer, but I'm not sure it will help me get past my current issue.

Any suggestions would be appreciated.

Thanks

Mark