It's probably the memory.
The big problem is the fact that the clamshell iBooks only have 32 MB of RAM onboard, so if you remove the third-party memory, you're down to 32 MB, and OS X will refuse to boot with 32 MB of RAM. (I don't know if it will kernel panic or what. I've never tried it.)
As for the size of OS X, I have Panther installed on a 3 GB hard drive of an iMac G3 (yes, it also has OS 9 on there,) as well as a clamshell iBook with a 4 GB hard drive (again, it also has OS 9.) I have four CD disc images (my daughters games,) in my "Applications (Mac OS 9)" folder. So here are my folders:
Applications (Mac OS 9): 1.08 GB
Applications: 147 MB
System Folder: 231.1 MB
System: 692.9 MB
Library: 95.3 MB
Users: 77.5 MB
bin: 3.3 MB
sbin: 2 MB
usr: 129.5 MB
private: 68.2 MB
(The last four are hidden folders. The remaining 7 root level folders on this iBook are less than 1 MB each.)
So if you add together all the OS X-specific folders, we get 1142 MB. I can't imagine that 10.1 would take up more space than 10.3.
Unfortunately, my only 10.1 install disc is a nonbootable 10.0 -> 10.1 upgrade disc, so I can't tell you the exact install size of 10.1; but if you want, I can tell you what the install size of 10.0 followed by a 10.0 to 10.1 upgrade is.