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Note that I said "embedded" :-) It puts a copy of the file in the database, and you'll sync it all around, if you are syncing. If it is a file you are going to change, you need to proceed with caution or you will be burned sooner or later by not getting your changes back into the database copy. I don't recommend embedding files that you plan to edit unless you really understand how it all works. Safer to put it somewhere like MobileMe or Dropbox where you can edit it directly, and just have a link to the file (or even just the name). On the other hand, if it is a file you are only going to reference, not change, and the size isn't too large, you shouldn't have any trouble.

If you do embed a large file, note that you won't be truly rid of it until after all of your syncing devices have synced the change where you delete it and had an opportunity to compact the database (normally at least an hour later).

If you've linked a file instead of embedding it, if the file is no longer present at the same location, attempts to open it will get you a file chooser dialog along with a warning that the file cannot be located at the old path. If you navigate to the new location, the link in the db gets updated, or you can cancel and deal with it at some other time. If this behavior makes you think "hmm, maybe they just store the path to the file at the time I attached it" you would be 100% correct. A nice side effect of doing it this way is that if you've stored the file in a place that has the same path on any system you use (MobileMe, for example), you don't actually have to cart the payload around.