How much you install and how much you configure depends on how easy you want the creation of the SLS process to be, and how much freedom you have with the computer.
The optimal configuration should only be employed if you are sure about going through the learning experience of creating SLS. To get the full process of creating a Live Linux CD, three partitions are needed. Install a full Fedora 3 Core installation with all options enabled. This will be the development system that will be used. This will take up about 6 gigs of HD space. Install Fedora 3 Core again, and this time, use the minimal installation. This system will be useful in having a minimalized filesystem, so using files from the minimal system will be easier than trying to sort out all the files in the full system. This should take about 600MB of space. For the third partition, you should leave empty until time to create the SLS system. You can copy files from Fedora onto this partition, and then test to see if it is bootable. This will be explained in further detail in the next section.