After playing around with Windows Vista, I decided to look into Windows PE 2.0 (it's based on Windows Vista). Having worked with it for a couple of days, I can say that Windows PE 2.0 is so much better than Windows PE 1.*. As a result I was able to fully integrate the Microsoft .NET Framework v2.0.50727, with the size of the image being increased by only 24MB! (uncompressed the Microsoft .NET Framework 2.0 takes about 70 MB) That just totally rocks!

 

On the included screenshot you can see that it is able to run an application with Windows Forms and Reflection without any problems at all.