Also, Back when VS2003 was used, and you want to make your controls look more like the XP interface, the manifest will contain the common controls with the appropriate version 6.x which is used along with your application, then the GUI gets a "nice updated look and feel of XP" instead of the old clunky windows 2000 controls. For that reason, you can have the manifest embedded as a resource so you do not have to lug around a manifest file (ok, it is a quite small file) but nonetheless, it makes the application distribution neater.
And also, there was a bug in the .NET 1.1 runtime (now fixed in 2.0+) where if a manifest is used at your application fails to update the GUI to give it more of an XP look and feel. The workaround at the time was to call Application.DoEvents before doing an Application.Run(new form());
Now, with Vista and Win 7, the manifest is used to specify elevated permissions to get around the UAC thereby minimizing the chance of Vista/Win 7 having to pop up an UAC dialog box.
Hope this helps,
Best regards,
Tom.