Do routers go bad?

i have a D-Link Cable modem and a Linksys wireless G router and my computer uses Windows XP with SP2.  my computer is connected to the router with a cable (not wireless).  my router is secured with the code WPA-PSK and i have a password too.

i have never had a problem before now,  but a few days ago i got my new cell phone and it allows me to use the router in order to get a signal inside the home (the regular cell signal is super weak).

ever since adding my cell phone to the router i get numerous random internet connect drops.  i'll be surfing the web and for no apparent reason, my computer will lose internet and the cell phone loses the signal.

i reinstalled (updated?) the router CD to make sure everything looked ok.  it seems that i have to hit the reset button on the back of the router and then the internet comes back on.

when i do lose the signal,  and i tried to reconnect my cell would give message "unable to connet to DNS server"   or something similar...  the computer simply says "working offline"   ...nothing else.

i have been unable to get the PS3 to work with the wireless router...

Question:   i heard that routers/ modems do lose effectiveness (slowly die?) over time.  since the modem is about four years old and the router about three years old,  is this the likely problem? 

the salesman today (i bought a new router) said yeah, they go bad you should by a new one.  after thinking about it,,,  seems maybe it is just a software problem.

any ideas?