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Have you tried actually sideloading and reading books on the Touch after resetting and skipping the setup?
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Yes. My book library is all on my computer and managed by Calibre. No problems in transferring books to the Touch.
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Whether or not the touch works after a factory reset will depend on when it was made, and what version of the firmware was pre-loaded in the rescue partition.
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Now I hadn't thought of this. I bought my Touch just after it was first introduced, so it probably has the earliest firmware. Version 1.9 (May 20,2011)