I agree that diagram is seriously mislabled. Adding to the confusion is that from what I've seen there are two different types of headsets used on 1" threaded forks, differing mainly in the cup/bearing/race arrangement on top:



In this diagram the lower headset (#10) is considered the "Deluxe" model, where a fixed race (#13) is inserted into the top of the headtube, followed by the bearing retainer and an adjustable cup (#11).

The upper headset (#3) is considered the "Standard" model, and differs from the Deluxe model in that instead of having a fixed race and adjustable cup, it has a fixed cup (#7) and an adjustable race (#5). Note that the upper and lower cups and bearings in the standard model are identical parts.