The install or readme file tarred with the kernel image gives instructions on this, which I stick to.
This is how I do it and it always works for me:
everything on the root ( / ) partition apart from the swap and /boot.
% cd /usr/src/linux/
(the README actually says copy the source out of this area)
% make mrproper
% make xconfig
% make dep
% make bzImage
In the menu.lst on the grub floppy (for test purposes to make sure that it's pointing to the right place) give the path to the bzImage.
If you need some more details on how to configure grub, have a look at an old post of mine under an old alias here
Hope this is of some help.