For #1 you cannot use the USB wire as a serial device except over the arduino IDE
For #2 you are supposed to use /dev/ttyS0 or /dev/ttyS1 not USB0.
#3 Telnet requires an ethernet connection.
Also the USB wire is only accessible via the serial monitor in the arduino IDE. you cannot use the micro USB- USB as a serial wire except via an arduino sketch.
Some brilliant people have written a program enabling ssh like semantics over the arduino IDE. check them out.
Regarding the serial monitor, it is found in the arduino IDE -> tools -> Serial Monitor OR press Ctrl+Shift+M at the IDE
Again, serial monitor is exclusive to arduino but it is possible to write a program for ssh like functionality.
For your SD-card image, it seems that your system is not booting. Can you post the results of cat /etc/inittab over here.
There is a known bug that prevents the SD-card from booting and present in /etc/inittab.
If you use the supplied image then NO, you do not need to change anything. However the names of initramfs and the filesystem are prebuilt into the grub.conf. So if you rename them to say abc
then you will have to change grub.conf in the SD-card.