Importing images?

Can someone help me a bit with the import feature?

How does the xml file import images to the new installation? I noticed there are links pointing to the images. Does WordPress download them to the new server? Or do you need to have the images uploaded on the new server so the import tool just links them with the posts.

If the first case its true, then the links are pointing in the wrong url since my domain now points to the new host not the old one. In that case, I can still access the old host with a subdomain but if I change the links on the XML file will it break something or is it completely safe?

Thanks in advance! 🙂