*
*  This text describes the rough procedure I used to create
*  the small footprint linux installation from a larger
*  fedora installation.
*
*

I started with a flash based IDE-HD-compatible disk prepared
with a DSL (Damn Small Linux) installation. I then wiped the
whole disk, just leaving the disk formated for Linux. (So, if
you have such a disk, just format it with EXT3, in one large
partition...)

NOTE! The flash disk is identified with /dev/hdc

I mounted the disk as /mnt/flashIDE1/ in my current file tree.
mount /dev/hdc1 /mnt/flashIDE1
Then I created a boot directory:
mkdir /mnt/flashIDE1/boot

The next step is to create the boot-loader, I used GRUB like this:
grub-install --root-directory=/mnt/flashIDE1/ /dev/hdc

Then I copied the grub-configuration from my current installation:
cp /boot/grub/grub.conf /mnt/flashIDE1/boot/grub/
The modifications I made are specific for my setup, see the part about
configuration in the grub documentation. (info grub)

then I copied the kernel and initrd from /boot to /mnt/flashIDE1/boot/
(feel free to use your own kernel...)

filesystem population:
cp -r /dev /mnt/flashIDE1/
mkdir /mnt/flashIDE1/lib
mkdir /mnt/flashIDE1/lib/modules
cp -r /lib/modules/<modules directory> /mnt/flashIDE1/lib/modules/
cp -r /etc /mnt/flashIDE1/
mkdir /mnt/flashIDE1/tmp
cp -r /dev /mnt/flashIDE1/
mkdir /mnt/flashIDE1/proc
mkdir /mnt/flashIDE1/sys
cd /mnt/flashIDE1/
# below I will create symlinks for /root and /var
mkdir /tmp/root # yes, /tmp/root and not /mnt/flashIDE1/tmp/root..
mkdir /tmp/var
ln -s /tmp/root root
ln -s /tmp/var var

From here I decided to try busybox to populate the most common binaries
and here I discovered that busybox comes with it's own init. So I will
use that instead of SysVinit. So you have to create your own inittab file
in /mnt/flashIDE1/etc/ according to the busybox documentation. (man busybox)

It is possible that you have to modify the initrd, I found some good examples
on this in a document called "Booting Linux off of a USB drive", by Simon Illyushchenko. The essential parts for me where:
(to unpack initrd to a directory)
cp initrd /tmp/initrd.gz
cd /tmp/ ; gunzip initrd.gz
mkdir a; cd a; cpio -i < /tmp/initrd

from here you can modify /tmp/a/init for example (which in my case was a sh-script).

To create your custom initrd-image:
cd /tmp/a
find . | cpio -c -o | gzip -9 > /tmp/myinitrd

the myinitrd-file can then be moved into /mnt/flashIDE1/boot/

Then, what you have left is to copy all other necesarry binaries and libraries
and then I recomend that you create a rcS-script that you call from busybox-init
the rcS-script will take care of stuff like loading modules, mounting /tmp /proc
and /sys. Also, since I created symlinks for /var and /root, the corresponding
directories must be created in /tmp, and this is also idealy done in the
rcS-script. And if you want to start your network interfaces, do it here to.

Copying binaries and libraries:
use strip on everything, and when you copy libraries, remember:
copy the REAL library file, and re-create the necessary symlinks...
(for libld.so: remember, libld needs the files /etc/ld.so.conf and
  ld.so.cache and ld.so.conf.d/* )

for bash (for example):
mkdir /tmp/tmp_binNlib
ldd `which bash` # this tells you which libraries you need.
# ldd returns, amongst others, /lib/libtermcap.so.2
ls -l /lib/libtermcap.so.2 # reports it as a symlink to libtermcap.so.2.0.8
cp /lib/libtermcap.so.2.0.8 /tmp/tmp_binNlib
cd /tmp/tmp_binNlib
strip libtermcap.so.2.0.8
mv libtermcap.so.2.0.8 /mnt/flashIDE1/lib
cd /mnt/flashIDE1/lib
ln -s libtermcap.so.2.0.8 libtermcap.so.2
# after you've copied all necessary binaries like above
cp /sbin/bash /tmp/tmp_binNlib
cd /tmp/tmp_binNlib
strip bash
mv bash /mnt/flashIDE1/bin/