There has been a couple of reports on this before. I would try connecting to the PC without the Kobo desktop running and removing the ".kobo" directory from the device. When it restarts, it should replace the directory and then take you through the setup.
If that doesn't work, you will probably need to do a factory reset again. From the state you are in, power off by holding the power switch in the off position for at least 15 seconds. Them hold the Home button down while turning it on. When the LED start flashing, release the Home button.
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