(n.) In versions NT and later of the Windows operating system (OS), a copy of a system’s hardware configuration and driver settings taken from the system’s registry when the OS successfully boots. This copy is stored in case a subsequent boot process fails, and the OS can use the record of the Last Known Good configuration to perform a successful boot. If Windows detects a problem in the boot process, it will add the Last Known Good configuration option to the start up menu.
This configuration record often comes in handy after the installation of new drivers or devices, which may cause system errors. Each time the OS successfully boots, it replaces the previous Last Known Good configuration record with the new one from the most recent successful boot.
See The History of Microsoft Operating Systems in Webopedia’s “Did You Know…? section.