When trying to install my shrink-wrapped version of Mac OS 8.0 on my Twentieth Anniversary Macintosh, I get the error that "this machine is not supported by this installer. Please use the CD-ROM that came with your CPU". I asked a friend how to get the software installed and they suggested holding down the option key when clicking the install button.

After doing this, I was able to install Mac OS 8.0 on the machine, but now my front panel control buttons and remote control no longer work. Can you explain?

The original Mac OS 8.0 CDs exhibit the behavior you describe. The issue was corrected in subsequent releases of the Mac OS 8 CD.