hey UW
i think its ok if they're hosted somewhere else, as this is very common for blogger. its a risk you'll take sure but if you've got a good linkbot and dont mind policing it a few times a week.
One of the biggest obstacles with listing blogs is having to police them for spam and content and updates and things. so once you're listing blogs you're taking on the added challenge of having to check them very, very often.
that said, I think linkbacks should be in good prominient positions but shouldnt be too terribly detailed. as long as its a good one ya know?
and finally I'd say that bloggers want to be listed in a blog category as they're often appealing to people who like to read rather than just skim photos so i'd personally want to only get traffic from people interested in blogs and blogging, not my subject matter first.