Are there more walls or terraces as you go up? Your wall on the bottom is holding back a lot of force if there is a lot of hill above, even if that hill is gradual or terraced, etc.

No,there are not any other walls or terraces. I will try and take pictures tomorrow and post. Right now I am thinking I will tear out old wall and put new wall in front of where the old wall was and make the drain in the space between new wall and hillside where that old wall was. Does this make sense? That way I don't have to dig so much. There is a concrete patio the same length of the wall and I was thinking I would make the new wall on that, so I have a nice level surface. I am guessing the new wall will take about 8" from my patio space, but that's fine. Am I thinking this through wrong?

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Here are pictures of the wall and hillside. Thanks

You can remove the wall and replace with a dirt slope. But slopes are work to maintain, plus there will likely be erosion of dirt onto your patio after every rain. Do you want a dirty patio?

It's hard to tell from the photos what materials are in the existing walls. Is it concrete block construction? Solid cap block?

Probably not a good idea to build a new wall on the patio edge. What is the patio made of.

Is the existing wall ok except for one failed end area?

The wall is just cinder block with mortar. The caps are just concrete,but I like them. I would like to keep them and use them on the new wall if I could. The patio is nice and is concrete.

You are right, I do not want a dirty patio and that's what I am worried about having without a wall.

Yes, all of the wall is good except for the first section. I thought about just replacing that with new block. I also thought about digging behind the wall for the drain so the wall stays straight,but that's seems so hard to me. That's why I had the idea about the drain going where this wall is.

I have thought about covering the block with stone,paint,stucco,etc... I just don't know.

I have an estimate to replace and tear down and do the drain for $1800.00 if I didn't do it myself.

The patio is 82' x approx 15'

What do you get for $1800? Could be a good price, or could be a wall that falls down quick.

Do you want a project you can do yourself?

I think you should do some research so you will have an idea what the project entails when done to last and so you will know if your contractor is speaking nonsense or not (or so you can do it yourself).
The bottom course of the wall certainly needs to be level but well below the soil line (and below the frost line). There is a lot of prep work that goes into making a wall that wont' blow out such as levelling, installation of gravel, perforated and wrapped pipe behind the wall for drainage, etc. If you lay your bottom course on the patio, the retained soil and moisture will just push the wall across the patio. Also, although it will look straight and plumb, the wall is actually supposed to lean back into the slope a bit (a "battered" wall). An alternative to a poured in place concrete wall or cinder block wall would be a segmental block wall. You can also put in a wall made from treated landscape timbers but it will eventually rot. Segmental block walls are nice in that they let some of the water out and flex a bit without breaking so easily since they are not mortared. Segmental block and timber walls are a lot more viable as do it yourself projects but it's still a good piece of work. FYI, $1,800 actually sounds a bit cheap to me. As always, finding a competent contractor is difficult and usually costs more than some local "handyman". There are lots of web sites out there with instructions on making a low height wall.
Here is the web address for Erosion Control magazine which you can read for free online: http://www.erosioncontrol.com/ec.html
Good luck.

Thank you for the insight everyone. I guess there is more to this than I thought. The guy who I was thinking about and wants $1800 (1/2 the price of others I had quotes from) seemed like he knew what he was talking about. He doesn't want paid until job is done,which I thought was different. He has a nursery and his plants are also less than everyone elses and nice. The price includes tearing down and hauling away old wall,digging into hill and laying drain pipe,fabric and gravel,then putting up new wall. The block included in his price is the castle rock evryone seems to use. I am looking for other options on the block type. I guess I'm thinking I can't do this now. The hardest thing in my mind is the digging and getting the first row level. I don't want to use wood. The wall actually won't be as high as the one there now. The dirt behind the wall is actually a foot lower behind it,due to settling over the years,I guess.