The Ps2 Slim was modified with a modchip, and a either had a dev.olution (elf) flash, start a usb loader. Then the modchip was able to load the iso file (ps2 game image). I may be mistaken but from my knowledge thats the only way i know of.
Is usb loader just another name for USBeXtreme or USBAdvance? If so then I can see how this is easily done. Not sure if there is a tutorial in these forums, but Afterdawn has a tutorial on it here.
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Yes that is just a reskinned USB advance/eXtreme.
"Any" FAT32 formatted USB stick should work. Of course there are probably some that won't so check the pen drive compatibility charts before purchasing a drive specifically for this purpose.
Many DNAS based games can be made compatible that are not normally compatible, if the "USBA trick" is used to rebuild the ISO. See console exploits site for that info.