Combining two runes will give you a random rune of the same tier. Combining 5 runes will give you a random rune of the next highest tier. You cannot combine 5 tier 3 runes at once (as there is no tier 4).
The rune combiner is random. It doesn't matter whether you combine marks, glyphs, seals, or quintessences -- they all work with each other, and the output can be anything.
The idea is that, generally, runes themselves are priced such that it is slightly cheaper to generate a tier 3 runeset from your old runes than by buying the tier 3 runes on their own. For instance, the level 1 +AD rune is 15 ip, while the level 2 +AD rune is 80 ip -- if you bought 5 of the level 1 runes, combined them, and wound up with a level 2 +AD rune, you would have saved yourself IP.
Unfortunately, as mentioned earlier, this process is completely random. If you have tier 1 and 2 runes, by all means, combine them to higher levels; the rune combiner is just a way to possibly recoup the IP you spent on runes you no longer find useful, but it cannot be counted on to give you what you want. You might luck out and combine 2 random runes into a +Dodge quintessence (very expensive!) -- or you might get a mana/5 Mark (with a tertiary stat, and probably not worth the IP cost of your combined runes).
It's very much a gamble, and you don't get anything exclusive from it, so use it if you need to get rid of T1 / T2 runes, and safely ignore it otherwise.
Here are the answers to this question(s) one-by-one:
What does [Pix's] damage scale from?
Pix's damage scales with Lulu's level. The formula for Pix's damage is:
Pix fires a barrage of 3 bolts, dealing 3 + (2 × level) magic damage each
Does it scale with AD, AP, etc.?
As you can see from the formula above. it does not scale with Attack damage (AD), Ability Powers (AP) or any other champion stat (Mana, Health, etc.) and is based solely on Lulu's level.
Is Pix's damage Magical or Physical?
Pix deals magic damage exclusively. Therefore his damage is dependent on the users Magic Penetration and the targets Magic Resist stats. There is some speculation about whose Magic Penetration Pix uses when making his attacks from an ally (not Lulu) as noted in this link.
Does Pix attack when the ally uses spells, or just for autoattacks?
Pix's attack is triggered by autoattacks only. Casting spells that refresh the attack animation (Nasus's Siphoning Strike, Blitz's Power Fist, etc) may provide additional attacks from Pix but to maximize the damage you probably want to target a champion with a higher attack speed.
For more information about Lulu and Pix check out her entry on the LoL Wikia.
Best Answer
The reason some skill-shot abilities still land even when flashing is the result of your character being hit during the wind-up animation, but before your character has been relocated.
Flash cannot be stopped once it has been initiated, so even if you get stunned/knocked-up/hooked, Flash will still move you the number of units it was designated.