Sounds like a transmission issue. Was this ipod dropped or was the battery replaced. Because the transmitter of the unit has to contact the router and have a good handshake session before the unit can tell you it is connected and if the transmitter is broken or the antenna connector for the transmitter is not making contact it could receive the good signal but never connect.
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== Update ==
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Check the posting "I Pod Touch has WiFi problems" four or five postings below this one.
Sounds like a transmission issue. Was this ipod dropped or was the battery replaced. Because the transmitter of the unit has to contact the router and have a good handshake session before the unit can tell you it is connected and if the transmitter is broken or the antenna connector for the transmitter is not making contact it could receive the good signal but never connect.