I'm not sure about your i686 kernel issues (tho I have heard of them before...). But the Install CD has limited space, they do not have room for i686 kernels as well, so they go for the lowest common denominator and install i386 which should work on all machines. This isn't isn't a mistake from the installer. Just so you know.
As far as I know, Pentium 4 M's should be i686... Don't know what's causing your problems there...