WinPE (as it is known) is the Windows Preinstallation Environment. It is a subset of Windows XP which boots off a CD-ROM with a partial subset of Win32 functionality available. All out-of-box supported mass-storage drivers and network drivers are supported under WinPE, and others can be loaded off floppy (by pressing F6) as in the standard Windows setup.
WinPE is intended to allow OEMs to develop and work within the familiar Win32 development environment on their factory floor. With WinPE, an OEM floor worker can boot a new machine and copy a new hard disk image over the network.
WinPE might also be used for system recovery discs and other end-user tools.
Most importantly, WinPE has full support for the IA64 platform, something its chief competitors (DOS and linux) cannot claim any or great support for.
The original internal name for Windows PE was MiniNT, but MSFT's lawyers nixed that name.
You'd think the Microsoft naming gurus would have learned their lesson after Windows CE ("wince"), but no: they go and pick a name that contracts to "winpe" ("wimpy"). Maybe they thought they were being clever...