Q1)
One thing that a lot of people don't realise though with .tar.gz or .tgz files is that you generally get better compression - particularly when you have alot of little files. tar joins them all together into one big file and gzip compresses them. bzip2 is also coming into use a bit now and seems to provide even better compression again.

Q2)
This kinda confused me too, but since it was not hard at all to get working I didn't investigate it any further. Just do exactly what the readme says and you will compile kernels fine.

When it comes to custom apps I simply compile with arm-empeg-linux-gcc which is in the PATH the README tells you to set up. I'm not sure about that second path you have found.