Have you tought on use Damn Small Linux (DSL) instead Fedora/Ututo/Tuquito?
DSL is useful too, includes a variety of necessary applications, and it’s only 50 mb. DSL provides functionality with minimum requirements (like the laptop’s features), and with 128 mb of RAM it’s very fast. It’s opensource, so you can take it as a base for the XO software. You can write code for WiFi support and optimizations for the XOs intercommunication, create a coolest graphic interface (of course it will increase the size of the OS, but it will still be so smaller than Fedora/Ututo/Tuquito), and add/remove/change the software that you want. It will save money, because will need a less-capacity ROM device (that’s cheaper), and maybe these saved money can be used to implement a 1 gb flash storage device instead the 512 mb one (something that is so useful and necessary!).