Yeah, it's not exactly intuitive. The rub is that the system folder on the CD-ROM that is used to boot the Mac isn't the same system folder that gets installed onto the Mac with the installer. The one that gets installed is compressed into an installer archive or "tome" that the installer reads, decompresses individual pieces from, and installs them to the host Mac.
That makes sense. Linux installs do a similar stunt. A Debian boot floppy gets you enough of a generic system to run the CD and/or TCP/IP over the Ethernet jack, so you can do the install over the 'Net from any archive site.
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