The partition only has to be as large as the data, plus some space if you want it to be bootable (15-20%). Making it the same size as the source is best, if you have the space.
As far as excluding folders, yes, you can do that. See the section of the User's Guide entitled "Excluding a folder from a backup". That goes through the process step-by-step.
Hope that helps!
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--Dave Nanian
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