Don't take my post as the only answer here. While it could be the HDD, taking it to the shop to install a HDD could run more than what I see refurb MacBooks going for. Right now at Geeks I see models for 399 that are in my opinion a good replacement for the old iron. Link? Sure -> http://www.geeks.com/products_sc.asp?cat=608
That's 399 and skip the B and C grade models for quite a step forward without the full price for the new models.
-> Your iMac did actually boot according to what your wrote so if you wanted to try replacing the HDD that's not an expensive item if you do it yourself but as a "New Mac user" I worry about this.