Hi Jeff,
KID 1.1 has two redundant methods of trying to reboot a computer into our Linux PreOS for cloning. (A "belt-and-braces" strategy.) What you call the "PXE environment" is our Linux PreOS... it can be booted by PXE, or from a CD, or from our disk boot technology. If you look at the top left of the screen as the computer is booting you will see if it is using PXE, or disk boot, or CD boot.
We run a PXE server so computers set to PXE-boot will download and run our PreOS from that. In your case, for some reason, this is failing. So then it falls back to our disk boot technology.
We use the Kaseya Agent before rebooting to download our PreOS to the client computer and set up the volume boot record (VBR) to boot into it on the next reboot. This is what is succeeding for you.
The only problem with this, is if you want to use KID 1.1 to deploy to new computers which do not have a Kaseya Agent on them, disk boot will not work. In this case you will either have to work out why the computers are not able to reach the PXE server, or use the CD image on the VSA Kaseya\WebPages\ManagedFile\VSAHiddenFiles\ImageDeploy\kid11.iso.
You do need the PXE server (which is on the KID repository) to be in the same broadcast domain (connected to the same switch) as the computer you are trying to PXE boot.
If you are happy not using PXE, you could even switch PXE-booting off in the BIOS which would make booting a bit quicker.
This diagram shows the relationship between the different KID boot methods and operations.
It is also described in this help file. help.kaseya.com/.../index.htm
Let me know if you want to know any more gory details 
.
David.