What are the advantages and disadvantages of installing high performance air filters (K&N,Green cotton,etc.) over original filter?
What are the changes/working occur internally?
Normally the idea is to get more air into the engine using a less restrictive air filter. As an engine is basically an air pump, getting more oxygen and more fuel into the engine usually equals a bigger bang and thus hopefully more power.
That said, in order to get a meaningful improvement using a performance air filter, the main restriction needs to be the air filter in the inlet tract and the head and exhaust need to be able to cope with the increased airflow. If that's not the case you won't see any performance improvement. You should also tweak the mixture to deal with the additional airflow unless your bike has fuel injection with a lambda sensor and basically can enrich the mixture automatically. If you don't adjust the mixture and you get a meaningful increase in airflow, chances are that your engine will run lean at the top end and the bigger bang might be a piston's bid for freedom.
An advantage that doesn't have much to do with performance is that these filters are often washable so instead of throwing the paper filter away and buying a new one, you can clean (and usually re-oil) the filter. So in the long run it might work out cheaper.
Typically the main difference between a 'normal' stock filter over a high performance one is airflow.
They are designed to retain the filtering capability, but have superior airflow (design, materials, shape of filter internals etc) to allow more oxygen to the engine, which means you can get superior burn and greater output power.