Ok,
1) I have K&N pancake filters on my car and love them. Personally I would go a pancake filter before putting a K&N element in the stock housing. It is up to you but for a engine that is otherwise totally stock, I'd stick with the paper element.
2) Pancake filters replace the standard filter housing. Have a look at Hanra's post of his car. You can clearly see how pancake filters attach.
http://www.ausmini.com/forums/viewtopic.php?t=29758. You don't need an adaptor, the mounting plate just screws directly to the mouth of the carb.
Here is a pic of my air filters:
3) My car has only ever used standard oil filters changed regularly (I do oil & filter changes every 1,000 miles). If buying an expensive oil filter makes you feel warm and fuzzy inside feel free to use it. I've never had any problems with my $8 oil filters. The engine in my car was last rebuilt in 1988, it spent 5 years off the road but other than that, has been an everyday driver - so it has done a few miles!
