Flashing folder on 2010 MBA

I came home today to hear a loud noise from my wife's office and when I went in her 2010 MacBook Air was spinning its drives loudly and the screen was grey with a flashing folder with a question mark on it. Not good. I have an external DVD drive and an external USB drive with a clone of my MB Pro so I tried the typical Option key boot figuring I could run a hardware test and see what it found or do a recovery but it won't give me the boot manager but instead gives me a lock icon and it won't take the admin password.



I should note we bought this machine used months ago from a guy that seemed legit and it's been great for us so far until today.



What do I try next?

via ehMac.ca http://ift.tt/1bkYSOj