if you are in category C and you will select all images, then all images will be added into the category
if you are not in category C and you will select the whole C folder, then all images in the folder will be added and a category called "C" will be created... so it should work ...
Thank you, Jan
EDIT:
I have looked at the code now... the :
<!--[if !IE]> --> is specific hack for adding object into IE 7 so the java upload can be displayed there... This should work for xthml and there should not be problems
Jan