But my question is this:
What is 'emerge system' actually doing. Is it grabbing every package
under the sun. I might not want all this stuff? Can someone explain why
we need to do 'emerge system'?
You can add and remove some things from the list by altering your USE
flags in /etc/make.conf. There is a very good explanation of the USE
flags available at http://www.gentoo.org/dyn/use-index.xml. The purpose
and configuring of USE flags is described at
http://www.gentoo.org/doc/en/handbook/handbook-x86.xml?part=2&chap=2.
I would recommend leaving the USE flags as is if this is your first
install of Gentoo until you feel comfortable doing things "The Gentoo
Way". It will install the packages needed to get the system running,
and not a whole lot more. (I can't remember exactly what is on that
list; I haven't done a default install in a long time.)