Below u can see my result of the great Mech Tutorial by Tim Bergholz / chamferzone. I really enjoyed that great tutorial and can absolutely recommend it.
Found a tutorial which explains how to do that with xnormal aswell. http://www.donaldphan.com/tutorials/xnormal/xnormal_occ.html a bit scrolling and your there. nice for highlights it seems.
search for pixel art tutorials. The hand painted tutorial torch referenced is good too - the same fundamentals apply you're just working at a smaller resolution.
bumping because I also am following this tutorial and having similar problems. Up to date tutorials for making hair for games are woefully hard to come by!
Look at this tutorial/thing, it has a fairly dense sub div mesh with displacement, probably 30k? http://www.cgarena.com/freestuff/tutorials/xsi/monster/index.html