I had the same issue when I upgraded to the new firmware, and indeed, a factory reset was required. I have to admit that I should have done that from the start, going by my experience with PC motherboard and other PC type firmware upgrades; In most cases, a reset of any device to factory defaults that has had a firmware upgrade generally recommended, both prior to, and after, just to make sure all settings are being applied properly (some settings might not exist anymore, or might be handled in a different way). It would seem E-readers are no exception to this rule
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Also, make sure you're running the most up to date version of the Software client. Grab the *.exe from the kobo ereader itself and let it download and install the latest version. I haven't had a problem with windows 7 as of yet, but if you're running into a wall, try right clicking and running the app as admin. normally it shouldn't be needed, but at least give it a try.