A Dynamic Directory is where all pages are generated by the scripts on 'the fly'. In other words, the scripts generate all content shown to end users on 'the fly'.
A Static Directory is where the complete directory tree with all it's pages are generated before-hand as normal HTML files. This enables users to browse your directory like they would ordinary web pages - resulting in saving a lot of CPU resources on your host/server. A static Directory also has the advantage where the pages generated are friendly to Search Engines Indexing your Directory. Many Search Engines don't like or have difficulty in crawling URLs containing scripts. The static option also solves this problem.
Yes. You can upload one image per link (by default) or have submitters upload an image with their submissions. You can also add additional images, videos, files, etc. to link listings by creating extra 'Upload Fields'. You can also set things up so that end users can submit videos, files, images, etc. with their new submissions.