This is expailned in the Kernel-Howto:
The kernel sources should be in the /usr/src directory. They are either in the the /usr/src/linux directory, or/usr/src/linux is a link to the folder. The Howto expalins how to install. After compiling your kernel, copy it to the /boot directory, and put an entry for it in your lilo.conf or grub.conf. For lilo, run lilo to apply the changes. There is an easier way to configure instead of make menuconfig called make xconfig.