I think in game cut scenes are better because they're more connected to whatever you're doing in game. Although different genres might benefit more from videos (RTS for example).

The jumping issue could be fixed by suppressing cheat codes during cut scenes or whatever works.

Lots of games do one, the other, or both. Do whatever you want

We just used the Game Engine for our cutscenes. Keep in mind that our games are 2D.

In any case, avi are large files. Why bother having them when a couple of simple scripts could handle the movies?

What we do is just create separate cut scene objects that look just like the regular units.

The greatest benefit (except maybe for the small file size) to doing in-engine cutscenes is that you have the ability to include some interactivity, be it walking around freely, just looking around etc.