Update: It's a bad hard drive. I installed Panther on an external drive and it booted to the external and has been running happily for over an hour now.
I wonder what my options are now. I sure do hate to have to go through the hassles of returning it when a hard drive replacement will fix it!
its fairly easy to install a new internal. just make sure you have all the necassary screwdrivers. they are very very very very very very small, so dont strip the screws!