You don't have to be out of Canada to have your application processed through Buffalo. That comes by virtue of your status as a US citizen. You would have to include a US residential address on the application, but they don't use that address to contact you - so it can be the address of a family member. You can use your address in Canada as your mailing address and then they will send all correspondence to you in Canada.
If you want to get valid temporary status in Canada again, you'd have to leave Canada. You're not supposed to stay in Canada longer than six months without applying to extend your status - but they don't track departures so they're not going to know if you left or not. If you had understood the requirements of the inland process, you could have included an extension/OWP application WITH your inland PR ap to protect your status, and then they would have issued the OWP as soon as your first stage assessment was completed. Now that will most likely be delayed; by how long depends on how busy your local CIC office is.
I'd say wait and see what happens. There won't be any notification either way until they have opened the application and begun the assessment. Right now they are beginning assessment on applications received on October 12, 2010, so it's probably another month before you hear anything. It's after they begin assessment and they discover that you are out of status that a transfer is likely to happen - they will send you a letter telling you that the application has been transferred to your local CIC office. At that point you can contact the CIC call centre and they should be able to tell you what the processing timeline is for finalizing a spousal case through that local office. Then you can decide whether it's best to withdraw and start again outland - which will take approximately a year - or wait out the inland processing. If you decide to keep the inland application, DON'T leave Canada - if you can't get back in, the application is forfeited.
Believe me, the Canadian process is a lot less complicated than the US immigration process, so my advice is to hang in there and wait it out. You can always come back here for advice, or visit the
US2Canada website for more info.