IPod Touch 1G v. 3.1.3 Wi-Fi Problems

I would like to preface this post with the statement: I know that there are extensive posts on this topic already, and I have diligently reviewed most of them, but I am still having trouble; so please bear with me.
I just bought a used iPod Touch 1G from a friend last week. It worked perfectly for him for the year he had it; having had no problems with the wi-fi ever. He decided to reset the entire device so it would be "clean and fresh" for me. The wi-fi was working fine for the entire evening, but the next day it started arbitrarily dropping the connection. (The router was fine as my laptop was still online.) So I went into settings to manually reconnect it, which it did/would do - but the connection would drop before I could even get back to the App Store or Safari. Then all of a sudden the iPod couldn't see my network anymore, and it just kept searching for any available networks.
I made a thorough search for possible causes and potential solutions. I tried resetting the network settings, shutting down and restarting the device - and after this several times with no progress: suddenly instead of the wi-fi simply telling me I was not connected and refusing to see my home network, the wi-fi button was greyed out and I couldn't do anything to change it.
At this point I emailed my friend (PC and web consultant by profession) and he could not think what might have happened. I went over to his place and he managed to get the wi-fi button usable again (but he didn't do anything I hadn't already tried), and the device performed exactly the same for him with his network as it did for me.
Then I realised that I was not on the most current O/S; so I paid the $4.95 to upgrade to 3.1.3 thinking this would certainly solve the problem, but it didn't -or at least not right away. The wi-fi button went back to being greyed out and usable, but the next day (again all of a sudden) the wi-fi was working flawlessly; it never dropped the connection once, and it continued like this for two days; I thought for sure the problem was fixed for good. Sadly, I was mistaken and the same problems I had at the start are repeating. And now that I am on the final O/S for the 1G, I fear that whatever bug it has will never be resolved by Apple.
I am hoping that there is something still left to try. I have not tried completely resetting the device again, since that was done just before I bought it, not to mention seems to be the cause of the problem in the first place; however if the general consensus of experience iPod Touch users is to try this again I will. Honestly, I didn't think this would be as disappointing as it has been since I only bought it to have an iPod again (I had an iPod Mini for many years and it finally died; since I had acquired a Zune I couldn't justify spending money on an iPod even though I loathe both the Zune and its software), but ever since the first night with wi-fi I feel like I'm missing out on a really fun feature. Any and all help with this will be immensely appreciated.
Message was edited by: wyldoxz
I did forget to mention that this happens with all networks, not just my home network. I've tried it at my friends place, my son's daycare centre, and random public networks I've come across.

wyldoxz wrote:
... And now that I am on the final O/S for the 1G, I fear that whatever bug it has will never be resolved by Apple. ...
Your problem is not caused by any bug in the O/S but with a failing WiFi chip in your iPod. The problem might start out as intermittent but develop into complete failure.
It's probable that your friend had the iPod 1G for considerably more than a year. The 1G hasn't been on the market since late 2008. It's also possible that this problem was starting to show before you got it.

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