Niel has already answered how to proceed when you have that folder. If I may expand a bit on this.
The (nineteen) files from the Apple http site are in MacBinary (.bin) format. Once decoded, these (one .smi and eighteen .part) can be placed in a common folder on the hard disk where one wants to install the operating system (or for that matter in a folder on another hard drive). The nineteen files constitute one large disk image. When you double-click on the first (.smi) file, the total disk image will mount. As a result, something which looks like a variant of a floppy icon will appear on the Desktop. If you drag-copy that mounted disk onto a hard disk, you will get the "CD" folder in question. Since internal compression is involved, the size of the latter folder is approx. double that of the total size of the nineteen files.
It is possible to run the installer directly from the mounted disk, even if the disk image itself (the decoded nineteen files) and an existing system are on the hard disk where you wish to install the new system. This seems to be logical, since the mounted image actually is an independent (virtual) disk.
If you on the other hand try to install with both the whole "CD" folder and an existing system on that hard disk, the installer will probably complain and ask you to remove the system folder first.
Normally, it is better anyway to start from the Network Access disk, remove (or manually inactivate) any existing system folder on the hard disk, (mount the total image) and run the installer. Alternatively, a key combination can be used to clean install.
For example, in the text file for the System 7.5.3 download
here, System 7.0.1 or later is said to be required to mount self-mounting images (.smi). On numerous occasions I have experienced difficulties with anything earlier than 7.5, though. What you are referring to is probably that Mac OS 8.1 is needed to create .smi files.
Regarding volume sizes, see KB article #
11333.
Jan