Embedded Images no matter what I try... Not Good.

Im getting a dialog box upon placing PSDs into Illustrator.
It asks if I want to convert Photoshop layers to objects or Flatten Photoshop layers to a single image.
Never seen this before and all it will do is import the image as an embedded file.
And I have tried relinking the file and it remains an embedded image.
This is making Illustrator even slower than it already is!
What is the deal?
- T

How are you placing the images?
Drag and drop? Is caps lock on? That will make them embed. Odd, I know.
File -> place? There is a checkbox there to "link" Make sure that's checked.

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