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When setting the action of my guitar should it follow the fretboard radius? I've got Dan Erlewine's book and DVD on setting up guitars and he sets the E strings to the desired height and these uses the radius cut out tools in the back of his book to match the radius of the fretboard, in the case of a Baja 9.5". If this is the case am i right in assume the strings should form a sort of arc?

Yeah, the strings should arc over the fretboard. Don't worry so much about being terribly specific to the radius, just look down the neck from the bridge and make sure that it arcs sensibly in relation to the curve of the fretboard.