1) Categproes are a property of the item like any property. The main difference between Categories and, say, Subject, is that any item can have multiple categories, all stored in the one Categories property, but only one subject. The technical term for this is that Categories is a "keywords" property.

2) You don't have to set anything up. You can just type in the name of a category or multiple categories, separated by commas or semicolons, in the box provided on any item. If you click the Categories button, you'll have the opportunity to set up a Master Category List, which you can then pick from to keep your category choices consistent. But you don't have to set up a master list.

3) Not if your DLs contain people who are already in your contacts folder. You'll need to modify each one by hand.

4) The information in Outlook Help and at http://www.slipstick.com/outlook/olcat.htm should be helpful.