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The system files are a part of the firmware - they are replaced when you do a reflash. As you say, it could be due to a corrupt file system in the internal memory - the user should check this using "chkdsk" (if it gets as far as displaying a checkerboard it should mount as USB). Reformatting the internal disk (as FAT32) and then doing a reflash (to restore the system folder) should get things working again.
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