That article really highlights one of the main problems with trying to instill horror in a fantasy RPG. So many of the stereotypical foes that players face during the course of the game fall into the transgressive realm, but in this particular context, we the players have largely become desensitized to this transgressiveness. We are literally "ready for anything" and nothing surprises us.
If you're worried about the player being able to ride the Roc, don't forget that flying creatures can only fly when carrying a light load or less. In the case of the Roc, that's 43 lbs (until level 7, when it jumps up considerably) which would include the characters weight as well as all the gear they are carrying. Halfling weight is 32-38lbs for males, 27-33lbs for females, which doesn't leave much left over for gear.
My interpretation is that Weiralai and Lowls have likely met at the caravanserai before for business (or he at least mentioned it to her). Since she knows that Lowls and the PCs are connected, so after she learns the PCs are in the Dreamlands (probably from Captain Vadrack) she'd look for them there. The Yellow King would give the whole thing away pretty easily when intimidated/tortured.
It was Weiralai who originally sold the PCs to Lowls. There's a point in book 2 where it mentions that Weiralai is trying to kill the PCs to correct the 'mistake' of selling them to Lowls in the first place (and also to help out Melisenn). Presumably she thinks he mishandled/mistreated them. Since the PCs then most likely kill her during book 2, she has a good reason to have it in for them in book 3. But as for her motivations regarding Lowls and the Yellow King in book 3, I'm just as confused as you are. It isn't explained very well.
Hit Dice: A skeleton drops any HD gained from class levels and changes racial HD to d8s. Creatures without racial HD are treated as if they have 1 racial HD.
Your fighter loses all class-based HD and comes back as a skeleton with 1 HD (unless he's getting additional racial HD from somewhere).
Everything else is correct. He can wear armor, use weapons, etc.