there are many possible defects - but the only part you can change is the clickwheel.
many clickwheels problems are software related - and this can not be fixed with a simple restore. my 1st gen nano had extreme graphic related problems, i fixed it with the installation of [http://www.rockbox.org/|rockbox (click)]
i would try that first on a nano 1g - you can uninstall rockbox at any time - so you have nothing to lose