Hard drive crashed, does this mean all programs will be lost?

If you boot from the install media and do a basic install without making the manual step of telling it to wipe your drive, it will "upgrade" your current system, and not delete any of your data or applications. This works if there is something about the OS that has become corrupted and is keeping it from booting, and the OS just needs to be repaired. Also, once the install media has booted, before trying to reinstall the OS, you can select Disk Utility from the menu at the top and do a disk check on the drive, which may expose a hardware issue. If the hard drive has become physically damaged, reinstalling the OS will not help.

Definitely, connecting the laptop to another Mac via a Firewire cable would be a great step, and it would help you determine whether or not the HD is physically damaged, or there is just a software issue. You'd just need to connect the two machines via Firewire, then power on the laptop while holding down the "t" key for target mode, until you see the target mode indicator on the screen. The drive should then show up on the desktop of the other machine. Sometimes it will not show up, but then you can see if by going into the Disk Utility tool on the other machine in order to mount it, format it, etc.

If none of this works, I'd say the next step is to remove the hard drive from the machine, and put it in an external IDE enclosure, and then connect that to another machine. Sometimes this gets results. You can get these enclosures at a place like Fry's Electronics, or on eBay. Make sure to get standard parallel IDE, rather than the newer SATA standard.

Sometimes, you can salvage a drive by formatting it, but then again that would lead to a loss of your data. And sometimes, unfortunately, drives just end up broken, which is a total loss, unless you're willing to pay $1000 and send it to a data recovery center, where men in space suits take drives apart and somehow recover the data.

There may also be drive recovery software available, but others on this site would probably know more about that than I do.

Anyway, good luck!

John