/sys/ is a virtual filesystem. It is built in runtime by the kernel and represents the current kernel state. In other words, the information in /sys is only _represented_ as files, whereas it is not present on some kind of physical medium.
So what you see is Ok.
Take into account, that there are additional virtual filesystems (/proc, /dev, one can mount a compressed file ...), and there might exist empty folders that will be used for mounting other physical filesystems (the most popular is /mnt).
I have managed to resolve the issue, although I'm not entirely sure what I did to mess things up in the first place.
When I tried to restore the file system image initially I decompressed the tarball on my windows system and then copied it to the Linux development system. When I un tared the filesystem image on the linux system, the problem was solved.
I found this solution by accident, someone mentioned about that fact that they have had problems copying from one file system type to another, which appears to be true in this case.
Yeah, great !
Sounds reasonable - 'init' exists, but has no execution permission.