This article is from the VW Performance FAQ, by with numerous contributions by Jan Vandenbrande others.
A:It's a washable (i.e., reusable) air filter made out of
an oiled cloth like material over a wire mesh matrix. It
is supposed to let through more air while retaining the
same filtering capabilities. More air => more power,
especially at higher rpms.
In practice however, the reviews have been mixed. Hot VWs
(Dec 92) reported a 3-5 HP gain on the high end in a
Jetta. Others have reported no difference or even a
slight degrade in performance. My *speculation* is that
some cars require to see some vacuum to get the right
amount of fuel, kind-a like a choke (e.g., carbureted
cars). The same is true with some FI cars (measure
vacuum) while other FI cars measure air flow. By the way,
a 3-5 HP difference is within normal daily variance of an
engine because of external factors such as gas quality,
viscosity of the oil, ambient temp, etc. You can probably
gain as much from pumping up your tires harder to reduce
rolling resistance (but increase wear).
From Mark Sirota: I put a used K&N on a flowbench against
a couple of other filters, including both types of Bosch
filters. The used K&N flowed FAR better than anything
else I tried -- by a very significant difference. So the
K&N filter alone is definitely an improvement, *if* the
air filter is the most restrictive element in the system.
I have no idea if that's true.
 
Continue to: