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For what it's worth - I got the same error. Brand new Kobo H2O looked just fine out of the box and set up using wifi. Plugged it into my pc and got the same message " you need to format disk".
I called Kobo customer service and they said to go ahead and format the drive. I kept him on the line while I clicked the button. Now pc said "Windows unable to format drive"
Next try a factory reset then format - same result so hopefully they are now going to replace it - first they need photos to review.
Very frustrating and obviously common fault looking at the other posts.
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