I'm afraid I am unfamiliar with the K200 settings so I can't advise you there.
#1, it looks like his hair and ears are in focus so it may be that you just missed it.
#3, like I said, the eyes are in focus and that is the main priority.
Don't be frightened of softness for portraits, it can actually make the shot.
You're right about a smaller aperture but with that you also need the light.
Best way to adjust your diopter is use a tripod and focus on something that is easy for the camera to focus on. Once it is focused, take the shot, then you can adjust the diopter until you can see that it is focused in the viewfinder. To check this, now put it in manual focus and try and take a shot of the same object, again using the tripod. If auto focus and manual focus produce the same sharpness, your diopter is adjusted.
If you're interested, Pentax make a magnifying eyepiece that fits directly over the on camera eyepiece. People who have it seem very happy with it, I'm planning to get one myself as I prefer manually focussing.
Hope this has given you some help.
Did you have shake reduction on by the way?