I just went through that exact same thing for a friend, removed everything from the hardrive that I even thought would conflict, like video, sound, modem, etc. spent about three hours preparing the drive, scandisked it, defragged it, put it in the machine it still wouldn't work. Save yourself the hassle, backup the files to transfer to CD or whatever, and do a clean install, I quarantee you one way or another you will end up doing a clean install. One other option is to get yourself a new hardrive, do the clean install on it, then install your old drive as a slave and transfer the files you need to transfer, to the new drive.
Good reason to consider an upgrade to XP. The settings transfer wizard is cool because all your color and font settings, tweaks etc are transfered to a new PC or if you do a clean reinstall. Yea backup everything, shouldn't be that much of a hassle. Only time an exact drive image is any good is if you're installing to the exact same system, windows 98 doesn't like major hardware changes. XP isn't as fragile when it comes to hardware config changes except for maybe it asking you to re-activate, which doesn't even happen if you have the bootleg )
If you now refresh (reinstall windows from to original setup CD over the top of it) the transferred copy of 98 should be fixed with all the settings and installed programs saved. There is no guarantee however that all the hardware of the new computer will be detected however as the devices could well have been made since 98 was released, therefore there won't be native drivers in windows 98 for them. This will be fine if you have the manufactures setup disks for the devices if not you'll have to track them down the internet.
-boot into safe mode
-go to device manager and remove everything (might want to leave mouse and keyboard for last)
-move the drive, or use ghost to transfer to a new drive
-boot up the new computer and start installing hardware again.
-if anything has a problem, boot into safe mode, remove doubles, reboot and try again.
A fresh clean install of windows is better, but sometimes you just want to get it done rather than spend hours setting up your machine again. You can always do a fresh install later.