There is an implication that the person responsible must have suffered brain damage, because he should have known better. Calling something brain-damaged is really bad; it also implies it is unusable, and that its failure to work is due to poor design rather than some accident. "Only six monocase characters per file name? Now *that's* brain-damaged!"
2. [especially in the Mac world] May refer to free demonstration software that has been deliberately crippled in some way so as not to compete with the commercial product it is intended to sell. Synonym crippleware.