Well, I decided to just buy a 120GB HDD on my way home from work (for ~$65+tax) and get my PS3 fixed (and upgraded) quickly rather than wait for whatever fix I can get from Sony under warranty. Swapping the HDDs was quick-and-easy, and seems the 120GB HDD was already formatted in the way that the PS3 needed, so the PS3 "formatting" was a breeze (taking maybe less than 1/2 minute, probably just running quickly through the drive to verify the format and maybe write a few needed system files). Applying the latest v2.3 system software update, OTOH, took a good while over my WiFi network much like the first time I did an update (and it failed on 1st try), but everything seems to be working nice and smooth again now. I guess the original HDD probably did go bad or something. Also, the new HDD -- a Western Digital Scorpio -- seems to run quite a bit cooler than the original one -- a Seagate Momentus I believe -- even though performance should be very similar. If you're looking for a HDD upgrade, definitely give some consideration to the Western Digital Scorpio.
BTW, oddly, swapping in the new HDD didn't lose most of my settings or even the v2.1 system software. Only thing I noticed losing was some bookmarks from the web browser -- but other settings for the browser, etc. seem to still be there, including the homepage I set for it. I really thought I'd lose all settings plus the v2.1 software -- I think it originally came w/ v1.6xx something. I guess all that stuff must actually be stored somewhere else in the PS3, not on the HDD.
Anyhoo, now that I have bigger drive in the PS3, maybe I should start looking into running Linux off it too, LOL.
_Man_