256 MB is barely enough to run Windows XP and one decent sized program at the same time.
An "Insufficient Memory" error message refers to the amount high speed solid state RAM is built-in and or plugged into the motherboard. It has nothing to do with the amount of free space you have on the hard drive. Without knowing how much RAM was installed on the computer before the tech got his hand on it, you really have no way of knowing if they took some out.
If the fading problem was really in just the LCD portion of the computer, then the tech probably did not know what he was talking about when they said you could not use and external display. They may have have assumed that you needed to activate the external video while looking at a settings window on the laptop's screen.
Glad to hear that you found the documentation. Did it include any information on the switch that detects a closed cover?
Separate names with a comma.