I have a 40G mono Ipod. The click wheel began to have problems, and I could toggle the hold button to fix it. It began to happen more often, but now only 3/4 of the wheel would not work (all the buttons worked, but could not scroll around). I tired to download latest software (didn't help), then I tried to restore it (didn't help - actually made it worse, now 100% of the scrolling doesn't work. Someone please help before I go postal!!!!!
Sorry buddy, but I suspect it is a technical issue - it's a faulty scroll wheel. Seeing as you have reset & restored it, I don't you have addressed all the possibilities of it being a software issue. It's likely to need refurbishing/repairing - are you still under a warranty?