who creates the file system ?

OK so far.


not have

LILO/GRUB can be anywhere the BIOS will look for a boot program.
Modern BIOS have many options and will search through two or three
alternates before giving up here are just a few: 1. USB device - memory
stick, FDD, HDD, CDROM, etc. 2. Floppy disk. 3. CDROM - (el torito HDD
emulation, FDD emulation, no-emulation). 4. Alternate boot devices on
add-in cards.



Or some other directory, but /boot is the customary place for the kernel
boot image to be.



Yes.


Uday Mullangi does.



No and No.  You have to do it (create the file system). The first stage of
GRUB doesn't know anything about file systems, when you install
it, the installer saves the block address of stage1_5 which knows about
the file system you are using.  If you move stage1_5, you have to
re-install GRUB.

See "info grub":

GRUB consists of several images: two essential stages,
optional stages called "Stage 1.5", and two network boot images. Here is a
short overview of them. *Note Internals::, for more details.
                                                                                
`stage1'
     This is an essential image used for booting up GRUB. Usually, this is
     embedded in an MBR or the boot sector of a partition. Because a PC
     boot sector is 512 bytes, the size of this image is exactly 512
     bytes.
                                                                                
     All `stage1' must do is to load Stage 2 or Stage 1.5 from a local
     disk. Because of the size restriction, `stage1' encodes the location
     of Stage 2 (or Stage 1.5) in a block list format, so it never
     understand any filesystem structure.
                                                                                
`stage2'
     This is the core image of GRUB. It does everything but booting up
     itself. Usually, this is put in a filesystem, but that is not
     required.


LILO works the same way.  First stage prints LI on the console second
stage prints LO.