http://support.microsoft.com/kb/958808 says that you need to use a different location other then %_SMSTSUserStatePath%. I understand your saying that it is straight forward and that may be so, however, I'm still attempting to figure this out and only getting more confused because the example just doesn't seem to be working properly for me. I also read http://technet.microsoft.com/en-us/library/bb680631.aspx and this essentially says that _SMSTSUserStatePath is a variable of its own, is that true?
Operating System Image
1.Deletes all content on the target volume except files under the folder specified by the _SMSTSUserStatePath task sequence variable.
2.Extracts the contents of the specified .wim file to the specified destination partition.
3.Prepares the answer file:
A.Creates a new default Windows Setup answer file (sysprep.inf or unattend.xml) for the operating system that is being applied.
B.Merges any values from the user-supplied answer file.
4.Copies Windows boot loaders into the active partition.
5.Sets up the boot.ini or the Boot Configuration Database (BCD) to reference the newly installed operating system.