My 3GS all the sudden started losing signal on the AT&T network.

The signal bars randomly go up and down not able to make or hold a call. A majority of the time it just says "Searching..."

3G service goes in and out as well but is mostly off or E.

WiFi and everything else works great all the time. But the service makes the phone unusable as a primary phone. I went to AT&T where they replaced the sim card- which didn't help, and they said there was no IM number in there or something, which they fixed. But ultimately they told me to go to the Apple store.

Apple genius restored from original on their computer and the first time it gave an error just before completing which really amazed the rep. This same error happened the first time to me at home as well, but the second time it restored without error at home and in the Apple store. After the restore, it still says "Searching..." Apple says it's the hardware. I'm out of contract and don't want to upgrade so I'm just going to get by using an old 3G for now, but I'm just wishing I knew what happened with my trusty 3GS.

I guess they are right that it's the hardware, but I am just looking for others that have had experience with this as I'm just wondering what went wrong with it? The phone has never been dropped or near water. I can't remember the exact day this started (a couple of weeks ago), but I did a re-install of Windows 7/iTunes and updated the software on the phone around the same time.