
JiCi |

No it should not lose its abilities, and it can be done. It should be able to speak also.
As for benefits I guess it could be good depending on the circumstances.
Scry on Familiar would be an awesome benefit, since it could infiltrate a building as a normal person instead of a stray animal. You scry on it... and nobody would suspect a person.
Deliver touch spells would be problematic, since the familiar has to be in contact with the master.

Phasics |

Yes it can be done
and yes you could Dragon Form III it if you wanted, however it still only has half your HP ;)
however If you have a look at the Diabloist PrC you notice your familiar becomes an imp and is treated as an animal companion NOT a familiar so it gets it full d10 HD worth of HP
Better still it retains the share spells ability, so all those lovely polymorph spells with a target of "you" can be used on this full HP imp.
Enjoy ;)