How to image a GCE instance with multiple persistent disks

Ok, so the answer happens to be Method 2 itself. It actually works but I had to wait over 30 minutes for the machine to come up. I never get to see the boot logs but maybe Windows schedules a disk checkup upon bootup and that takes a while? I don't know. I just waited, had lunch and tried afterwards and the machine was up :) !

Still don't know why method 1 fails.

The errors you got suggest that your file system is more recent than that supported by the kernel (most likely an ext4 on a kernel that only supports ext2/3). Some AMIs depend on a non-standard AKI (Amazon Kernel Image) to provide certain features.

In this case, the procedure you have followed seems correct, therefore, when combined with the error you received, there is a good chance that the AKIs do not match. Check the AKI used by the original instance, and compare it to that of the new instance. If they don't match, explicitly specify the AKI at launch time. (You can also manually create the AMI and in doing so, specify the AKI at that time so that it need to be specified at launch).

As an aside, a better AMI design will use PV-GRUB as a bootloader to load a kernel from the AMI itself (instead of requiring a specific external AKI), which simplifies the process of keeping the kernel up to date. The AWS documentation on user provided kernels is worth reading if you want to implement this in your AMI.