The traditional way of using graphics with TeX does not include the graphics data directly in the DVI file. Instead, the DVI file contains only a link to a graphics file which resides on the hard disk. The advantage of this procedure is that the DVI file stays small, and that the graphics file can be modified indepent of the document's TeX source. The method, however, becomes fairly inconvenient if you intend to archive the DVI file, or if you wish to send it to someone else: rather than handling a single file, you have to deal with a multitude of files, which need to be kept in exactly the place specified in the DVI file for everything to work.
For that reason, KDVI allows you to embed external PostScript® files into your DVI file. To embed all PostScript® files into a DVI file, use the menu entry
DVI files with embedded PostScript® work fine with most other DVI handling software, e.g. xdvi, dvips or dvipdf. One notable exception is the dvipdfm program, which currently ignores the embedded PostScript®. Since dvipdfm is used internally by the "Export to PDF" function of KDVI, expect problems when you use that function. The same issue shows with other software that uses embedded PostScript, e.g. the TeX xy macro package.
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