1. In my experience of using my PSP for video it will play just about every type of video I come across; although there is an occasional format that wont play, I just download some random free converter (google is your friend).
2. I don't think VSH stands for anything important, it was probably named after a folder in the flash0. The USB Device function basically allows you to change what you see with your computer when you enable USB mode in the XMB (Memory Stick, Flash0, Flash1, Flash2, Flash3, UMD Disc).
3. The UMD ISO changes the driver for the UMD drive, you only change this when you run .iso/.cso 's.
4. Flash0 is where the PSP firmware is stored. Don't mess with the Flash0 too much without backups in the case that you semi-brick. Most custom themes for 3.51 semi-brick my PSP. Flash1 is where your network settings and theme settings are saved. The other flashes are used for Sony's official PSOne games and can be redirected for custom fonts.
5. I've really never used (or seen the point) of the LE plugin; so I can't help you there.
6. You can't do too much the the icons in the XMB, except for the skins. Sony released an official skin creation tool for the PSP, and there are tons of downloads for different skins for the icons. You could look into IRShell, IRShell is a great bit of homebrew you can a ton, just goto the IRShell webiste (google it). But I know that you can have like four icons in the GUI of IRShell that you can map to different hombrew applications.
7. I haven't ever seen a catagorization tool for the PSP, but I use PSP Content Manager v1.5 to reorder the icons for GAME, MUSIC, VIDEO, or PICTURES.
This has to do with question 3:
In order to run .iso/.cso you need to rip YOUR OWN UMD, pirating is illegal, don't do it. You need to download UMD dumper from Dark_AleX.
http://alek.dark-alex.org/filez/dax/Clear like 1800 MB of your memory stick in case the game is big. It sucks to be in the middle of a rip and you run out of space, although I think you can continue where you left off. The biggest game I ripped was just over 1750 MB so be prepared. Then you can just put it in your ISO folder (if you have to create and ISO folder make sure it is at the root of the Memory Stick and there is an empty folder inside it called VIDEO). If you want to save space you can convert the .iso to a .cso which can shave off any where between 60 MB to 300 MB.
When you get the game ripped all you do is goto the recovery menu and enable the 1.50 Kernal for the Game folder (I think it's under Configuration). And change the UMD driver to Sony NP9660. And it will run under the Game folder in the XMB.