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Because that’s all it needs. Much of the important data is compressed, which can nearly double the amount of data that can be stored. A typical pressed CD can hold about 650 MB, but even the full version of, say, Windows XP Pro w/o SP1 or SP2 only takes 488 MB. Plenty of room left over.
Short answer: Data compression technology.
Long answer:
MS compresses all of their OS and system files into Cabinet files (.cab). If you search any MS operating system cd from 95 up through XP for files ending in .cab, you will find a whole slew of them. In fact, you can copy all of them to a directory on your hard drive and then when the OS asks for you Windows XP (or other OS) disk, you can point it to that directory and it will continue.
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- It’s even possible to cram several different Windows OS installers onto one single CD. The reason is that (in the past) most of the files were identical between all the OS’s. The general public first found out about this when word of Microsoft disks got out that MS techs used, these single CD’s had Win95, Win98, WinNT, WinME and Win2K all on one CD, and you just inserted it and picked which OS you wanted to install from a menu. Something like 85% of the installer files of all these OS’s were identical. These were called “all-in-one install CD’s”. There are unofficial hacker pages online that still have instructions for doing it, however Win2000 is really the only one of the bunch I’d tell you was generally worth installing now.
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- Now (I see) most of the online guides use a single DVD instead of a CD, so it may be that Win2003 and XP/XP Pro have differentiated to the extent that it’s not practical to heavily combine them. Of course DVD writer drives are common now too.
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An outstanding amount of pure code can fit on a CD. It is things like audio and video that take up space. I was reminded of this recently when I bought a database book and it contained the full versions of Oracle, SQL Server, IBM’s DB2, and a couple of other databases for teaching purposes all on one CD. This is all software that is at the at the heart of major corporations and they spend millions on it. There it was, just a plain CD for all of them.
In general, executables, dlls, and other pieces generated from source code will compress to about 50%. Windows XP vanilla is right around 1 GB, so compressed it should fit on a CD.
Of course, it’s a bit more complicated than that because multimedia content is already heavily compressed, but this is a back of the envelope calculation.
The standard industry metric is about 10 - 20 lines of code per 8 hour day. Assuming 1 line of code is 50 charecters, that means each programmer can produce 1000 bytes of data per day. A CD is 650MB, which is 650,000,000 man days of code or approximately 1.7 million man years. In short, if the windows CD was comprised completely of source code, we would be nowhere near close to filling it up.
Heck, it wasn’t all that long ago that an entire operating system could fit on a single floppy disk!
I can boot my current computer from a 540 MB Type III PC Card, which has MacOS 8.6 and a couple of disk utilities such as Norton Utilities and Disk First Aid.
You can actually put enough of MacOS 8 on a hi-density floppy to boot from it into a full GUI (not, admittedly, the entire full-fledged OS, it was a very stripped-down version with zero bells and whistles).
As for Windows on a CD, correct me if I’m wrong, but I think the installation CDs have not only Windows for i386 (Intel standard family architecture computers) but also Windows for Alpha RISC processors and so forth – ??
Microsoft dropped support for the Alpha chip several years ago. A lot of folks at the time saw it as the final nail in the coffin for the Alpha architecture. Windows only runs on i386 processors and has only run on them for quite some time. NT 4.0 was the last version of windows to support other processors (Alpha, MIPS, Power PC). I think there were beta versions of windows 2000 that made it out to developers for the Alpha chip, but I don’t think a public version was ever released.
Heh, reminds me of the Windows 95 installation CD with the Weezer video and trailer for Rob Roy 
My old computer that I replaced last December came with two discs for reinstall and could do it with one for a less complete reinstall. My current unit didn’t come with discs but encouraged me to make a set. I had a couple new CD-Rs laying around so decided to create recovery discs one day. After I started the utility it said I needed six CDs to make the set, plus another to make a tools CD.
How in the world can it take six CDs if the OS can easily fit onto one? Do the various apps that come on most computers take up that much room?
Wouldn’t the real question be: Why does the Windows OS require an entire CD? 
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- It’s because the image you tried to copy was the runtime image–not an installation CD, the files you were attempting to copy off were not at all compressed, and the factory install “disk” that the techs use was probably a dual-layer DVD, not a CD. That way, at the factory they can “reinstall everything” just by sticking in one DVD and rebooting and hitting a couple buttons, instead of having to insert six CD’s one-after-the-other.
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- It’s because the image you tried to copy was the runtime image–not an installation CD, the files you were attempting to copy off were not at all compressed, and the factory install “disk” that the techs use was probably a dual-layer DVD, not a CD. That way, at the factory they can “reinstall everything” just by sticking in one DVD and rebooting and hitting a couple buttons, instead of having to insert six CD’s one-after-the-other.
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Because it’s really hard to get half a cd to balance right in the drive?