Well it wont run bad, the trick is not in Dell (nothing special there), but in WinXp.
When it has less ram, it also uses a bit less (at elast thats what I noticed checking task manager), but eventually you will get less and less ram avilable, so after working for say couple of hours or more you will basically run out of ram. Comp will still work but will get slower.
As for WC3, forget it with 256MB of ram, it will slow down to the crawl, you will need 512MB at least.
BTW if your dad wants to play poker online make sure you reboot before he starts and then has only poker program opened, couse you definitely wouldnt want to get some problems while betting.
And last but not least after you instal SP2 to get at least some sort of fire wall (not bad, but does nothing for programs contacting the net from your computer), you will also need some sort of anti virus software which will impact the amount of ram available.
Dell will of course say everything is fast, but trust me 512MB is WinXP minimum for satisfactory working enviroment and with todays ram prices it shouldnt really be a problem. You dont need to get the ram from Dell, local comp shop will install one for you and most of the ram will work without problems.
You can of course do the upgrade yourself as well. Dell should have a manual on their site for where the ram is, then all you have to do is get the right kind of speed (preferably check with the shop if it plays well with particular Dell laptop and/or Intel motherboard and if you can exchange it) then slide it into the empty slot and gently push it down, so it locks. Simple

I think this should not impact the warranty in any way, but check with Dell if you are not sure. I know HP has no problem with ppl installing ram.