jjyiz28 just about had it spelled out in his edit #2. The OS can be installed anywhere. The BIOS just starts the bootloader that is installed on the MBR of the boot drive, and then the bootloader can boot an OS from any disk.
For example, when I installed Linux on my primary IDE drive and WinXP on my PCI RAID, Windows wrote a bootloader to the IDE drive's MBR telling it where WinXP was installed. Linux also installed GRUB to the same drive's MBR, which let me pick whether to boot Linux from that disk or Windows from wherever XP's bootloader said it was.