You are right, the ISSetup.dll on the Disk1 folder is always required because it implements the external UI handler, among other things. There has been actually been talk in the past of Windows Installer impelementing a way that you could call an external UI handler inside of the MSI package, but so far it has just been talk. Certainly nothing that we will see in the 4.0 timeframe. Perhaps beyond that, but who knows.
Addtionally, as you noticed in Beta 1, the code always streamed ISSetup.dll into the Binary table, regardless if it was needed or not (e.g. regardless if you had custom actions or not). In a new project (or an upgraded one) it is not required by default, so I changed the code to only include it if it is used in the Beta 2 version. Of course, for Basic MSI (w\ any InstallScript CAs) it is always required as before.
Another thing you might be interested in related to InstallScript, we were able to reduce the engine size since Beta 1, so check it out when you get a chance.
Note: Everyone in this community should have received (or will very soon if you haven't already) information about how to obtain Beta 2.