Update: I had abandoned the idea of repairing this iPod, I took it to a technician which soldered the Dock Connector, but the result was the same and even worse as the iPod didn’t charge when connected to the FW Adapter. As of last month, I purchased an used iPod Color U2 which had a fully working hard drive, after restoring it to factory settings on my Mac I got the same folder screen which the 3rd gen showed me. So after many hours of frustration and forethought, I decided to format the Hard Drive with Windows… Voila! I formatted both iPod Photo and the 3rd gen hard drive with a Windows and it solved the problem, I can now use them and sync the music on my mac. I guess it has something to do with the Read/Write permissions on my Mac or the quantity of iPods that I have synced to my mac (I’m a collector). I hope this helps some of you that are having trouble with the folder with exclamation mark and a working hard drive!
I’m having the same problem with my 15GB model, I’m thinking of replacing the dock connector and cleaning up the motherboard to avoid any possible shorting. You could try this: Connecting the iPod to the FW charger without the battery (open up the iPod and disconnect the battery), if it turns on then the battery might be faulty.