Image Issues

Dear Support,

I imported my blog from WordPress.com to a WordPress.org blog hosted with bluehost. There are a couple issues. First it uploaded 300 blank catagories. ?? Also, the image links are set like this:

http://bagblog.com/files/2006/12/paris-hilton-bags.jpg

I can change this by hand if I absolutely have to but is there a better way? The other major issue is uploading images to a new post. Unlike wordpress.com it appears I must hard code in HTML and upload each new image to the image folder on the server. Is this correct or is there a way to do this when creating a new post, using an image saved on my desktop. Thanks so much for the help!

Joel