What is "Encapsulated PostScript"
PostScript has over the years become a lingua franca of
powerful printers; since PostScript is also a powerful graphical
programming language, it is commonly used as an output medium for
drawing (and other) packages.
However, since PostScript is such a powerful language, some
rules need to be imposed, so that the output drawing may be included
in a document as a figure without "leaking" (and thereby destroying
the surrounding document, or failing to draw at all).
Appendix H of the PostScript Language Reference Manual (second
and subsequent editions), specifies a set of rules for PostScript to
be used as figures in this way.  The important features are:
-  certain "structured comments" are required; important ones are
  the identification of the file type, and information about the
  "bounding box" of the figure (i.e., the minimum rectangle
  enclosing it);
-  some commands are forbidden - for example, a showpagecommand will cause the image to disappear, in most TeX-output
  environments; and
-  "preview information" is permitted, for the benefit of things
  such as word processors that don't have the ability to draw
  PostScript in their own right - this preview information may be in
  any one of a number of system-specific formats, and any viewing
  program may choose to ignore it.
A PostScript figure that conforms to these rules is said to be in
"Encapsulated PostScript" format.  Most (La)TeX packages for
including PostScript are structured to use Encapsulated PostScript;
which of course leads to much hilarity as exasperated (La)TeX users
struggle to cope with the output of drawing software whose authors
don't know the rules.This question on the Web: http://www.tex.ac.uk/cgi-bin/texfaq2html?label=eps