Sorry for the late reply.
It saves it to mpeg2 format, yes because the onboard encoder encodes the video
No, there is no choice either way, the video must run through the onboard encoder before it gets to any of the outputs for the 350 to be able to play it back (I guess I should say without any hardware modifications).
If you are comfortable with using something as involved as Cinerella, go for it. Kino does have somewhat of a storyboard format, but I think it's somewhat limited compared to Cinerella and it sounds like that is what you are describing. There are other tools as well, but each have their own caveats while Cinerella's just seems to be a steep learning curve.