Just bought a 120 becuase I could not get mine to play. My zune pass was current and the play button would not play, but did power off my zune. It justy showed a paused button. I had done the software update that brought down games etc too. I have a gen 1 that is only 18 months old, software version 3.0 (225) bootloader 435.
I just did the reset like you said (back button and up on the doughnut deal) and bamn, I could play my songs again
Still pissed I shelled out $250 for a new one, though now I can put movies back on it.