Do I need to partition the drive because it's a tray loading iMac?
I had to check this to make sure as my slot-loading iMac doesn't have this limitation.
If you have a hard drive over 8 GB in size, you must partition it, and the partition containing OS X must be completely within the first 8 GB of space or you will not be able to run OS X. (If you are creating the partition within OS X, it must be 7.45 GB or smaller as reported by Disk Utility, because sometimes a GB is billion bytes and sometimes it's 1,073,741,824 bytes.)
The drive that's in the computer now has a 7gb partition for Panther
If you continue with 7GB that should be fine.