Ipod just shows folder with ! icon... but windows detects it fine

while disconnected from your PC, toggle the hold button on and then off. Then hold down the menu button and the center button at the same time. hold them until the screen flashes. then release. You may have to try this several times.
If that doesn't work, try doing a restore. You can do this from the summary page in itunes. Once itunes has found your ipod, click on 'restore'. all your music will be erased, but you can just do a sync and re-load it later. Follow the instructions once restore is complete.
If that doesn't work then your hard drive needs to be reformatted.

The problem could be a bad hard drive. Try getting it replaced. It could be that the hard drive is on its last arm.