The External reference checkbox
User's Guide - Key Concepts
An internal reference is a path that points to where the file will be at build time. We call it an "internal" reference because AutoPlay Media Studio will build a copy of the file right into your AutoPlay application.
In other words, you're specifying where the file exists now on your system, so that at build time AutoPlay Media Studio can go get the file and build it into your AutoPlay application. It's like saying "this is where the file is currently located; at build time, put a copy of this file into my AutoPlay application for me."
AutoPlay Media Studio uses internal references whenever the External reference option is disabled.
The External reference checkbox
Files that AutoPlay accesses as internal references are known as internal files.
Next: External References