Yep Serial number is engrained in it. And they can track who actually has it by the IP of the host machine when it connects to iTunes.
No, No they cannot. They can figure out who has it if someone logs into iTunes, but an IP does not identify a person.
If people track the serial numbers of your hardware and report it to them they can disable it and potentially find it. Guaranteed they will be this time.
What people are tracking and reporting serials? and disabling and finding the device are pretty mutually exclusive. As others have pointed out, Apple will likely prefer making money from app sales on these devices, while some insurance company covers the monetary loss of the hardware.
Any given program will expand to fill available memory.