For anyone who does not know what PXE (pixie) boot is, it is an environment to boot computers using a network interface independently of data storage devices (like hard disks) or installed operating systems. [1] In the BIOS, rather than booting from CD, or Hard disk, you would select Network.

A very simplified explanation is that the PXE enabled network card (almost all modern network cards support PXE, desktop and servers), can make a DHCP request (outside of an operating system), download via TFTP, then boot a kernel/initial ram disk, say for example an OS installer, a LIVE CD, or CoreOS.

    +-----> #1 PXE makes DHCP request, 
    |          redirects to TFTP server,
    |          loads kernel/initial ram disk via TFTP
    |
    |  +--+ #2 PXE boots kernel/initial ram disk 
    |  |
    +  v
  +------------------+
  | PXE Network Card |
  |------------------|
  |     server       |
  |   hardware/os    |
  +------------------+

So, with a little infrastructure (DHCP, TFTP, and elbow grease), you can boot many things over the network without even having a hard drive or cd-rom in a machine. I use this often for installing new desktops and servers. Just boot into the PXE menu and then select the installer that I want. Then you use something like puppet to configure the machine as needed. A typical RHEL install can take ~5 minutes.

In summary, it looks like CoreOS provides you with their kernel and initial ram disk [2], then you can just boot the machine over the network without actually installing anything. Basically running everything out of RAM, just like a LIVE CD, most likely with the option to install to disk for persistent storage of your images, etc.

ps. It is common to use NFS to mount persistent storage in these environments too, or if you are using a HPC environment, then Luster or something like that.

[1] http://en.wikipedia.org/wiki/Preboot_Execution_Environment

[2] http://coreos.com/docs/pxe/