Embed or un-embed a linked file in an Illustrator CS3 document

The trick here is paying attention to the options in the Link screen. The symbol for showing that a file is embedded is , which will show up next to the file in the Link panel. If that symbol is not there, then the linked file is just that, linked only.

To embed the file, simply clear the Link checkbox at the bottom left of the window when you select the file to be linked. That will embed it rather than create a link. 

If you want to link a file rather than embed it, make sure the Link checkbox is checked when you place the file into your document. If you've already embedded it, you can go back in and check that box to change it to being linked.

Just watch for the "embedded" image, or lack of, to keep track of the status of your placed document. There's an Adobe article on how to do this same thing, and it can be found here.