The lack of response has been overwhelming, everyone must have been engrossed in the Olympics!!
For anyone who is interested; I persevered and eventually deduced the problem to be with the arg file, although I believe the way IT have configured user policies also to be an issue. Anyway I did a great deal of trial and error testing by deleting sections out and re-running until I eventually found a section that caused the error to appear. I can't say I'm comfortable with the solution and wonder whether something is going to come back and haunt me as a result but as far as I can tell everything is running well and performing as I hoped.
I'd be interested to know how others manage to deploy new client setups for user's individual logins without manually going machine to machine and using the user's credentials to ensure correct deployment, sigh...it was so much easier in MicroStation.