Simple fix! I ran ino this and found a solution.
fdisk /MBR
The problem is, the drive image did not copy the old disk signature, and there was probably a signature on there already (In the mbr) and when windows does not see the same signature as it expects, it will fail nd do this. Last known goodf won't help because it thinks yo have logged on properly... hehe
Fdisk/mbr will remove all signatures from the MBR (even on NTFS drives) and it will not destroy your data. When windows sees no signature at all, it will write a new one to the disk and all will be well.
Cheers.
BTW, you get fdisk /mbr from a win98 bootdisk. do it in dos.