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Ok, here is a long update. I've downgraded to 1.6, and the blinking red light + green lights problem went away, or so I thought.
The next reset caused the always on red light problem, which is more comment then my three lights thing. So I said, let me go to 1.5 and see what happens then.
After I've copied files required to downgrade to 1.5, it asked if I wanted to restart, and before I could say yes, the three lights came back!!!
I knew that whatever I did, it would not be able to boot. So I said yes, it restarted and could not boot because of three lights thing. I had a 14 hour journey the next day, so I left it as it is, trying to boot, and it ran out of battery of course.
Yesterday, I've put it on charge, waited for about 4 hours or so, and booted it. Surprise suprise! It booted, got stuck on post install updates, and after a reset and a boot without the sd card, it worked. Suspecting that the auto shutdown was the problem, I turned it off, but that setting change did not get saved at the first time. I've left it open to do a few battery charging cycles.
Today, I've put it on charge, and screen got kinda scrambled, but did not boot. I've left it as it is, and after two hours, I've booted, only to face a very annoying double columns of ghosting on the left of the screen with a thinner vertical one close to top.
After a couple of resets, the columns disappeared but the horizontal one remained (slightly). Now the device is on and it is charging, and ghosting columns seems to come back if no screen refreshes happen for a while
I've sent an email to learn the status of my warranty, I bought the device on 18/10/2008, so I dont' have much hope.
I'm amazed at the amount of time I've put into identifying the pattern for the problem, and I'm still unable to have a single, reproducable problem. I'm writing all of this down, so that prospective buyers can be aware of the joys that wait them.
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