Methodshop, which offers iPod tech support and repairs, cites several stories in its warning about a surprisingly common iPod toilet trap:

Wow, the toilet dropping appears to be a common problem! I hope the toilet was full of clean water. Always wait until the iPod is completely dry before plugging it in, or using it. Water and electricty don't mix. It might work fine after it dries out. Cross your fingers. If you are having issues like the Folder icon or Sad Face, you should probably try to erase and restore it. That might work if the hard drive just got a little whacked. However, you may need to replace a few parts inside depending on what exactly happened.

Sounds like a great business opportunity, producing a new accessory iPod water wings