The cpu will still go to sleep while the device is charging, so I don't see that as a valid test of anything.

What we're dealing with here is not a problem with the watchdog. That's just the feature that reboots the device for you once it freezes. From the comments Nokia devs have made on bug 6334, it is apparently some kind of linux kernel bug involving the CPU power management that is triggered much more frequently for certain N900s depending on some unknown component variation in the electronics.