1) You can't. You can add a graphics card, that will free up your chip memory.
2) It will fit, but it will not be healthy for your card unless you provide some cooling for it, so a tower will be the recommended solution. It's better to use a Blizzard 1260 than a Blizzard 1240 though.
3) Yes, again with a graphics card. Then you can have resolutions up to 1600 x 1200. Without a graphics card you will be limited to around 640 x 480.