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I've had this exact same problem with the first dension gateway 100 i received. I had to get mine replaced with a new one that had a newer firmware which worked.
You won't be able to upgrade the firmware as you can't play the files cause the default mode is ipod gateway interface which disables the ipod click wheel.
just take it back to who you bought it off and ask for a replacement with the newer firmware.
Seik
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