I don't know why FoV doesn't install in the D2:ED folder. Different releases of D2:ED use different default install folders (ie the Steam version installs to the Steam game folder, etc), so maybe they figured it was easier to keep FoV separate.
Did you go through the graphics options and check if there is an option to use the desktop resolution for the UI? Maybe that setting only gets added to the graphicoptions.xml file if you change the default value. I have the Xbox version, so am not familiar with the PC options.
I believe with the conversion patch you need to continue using the FoV patches. In any case the conversion patch was released after the second DKS patch, so I think it should bring the game up to the latest version without needing any additional updates.
