I opened one PNG file in Inkscape and exported it as SVG. When I opened that file with notepad I came to know that the PNG file is embedded within it. If the conversion happened then the resulting file should have only SVG related tags. It shouldn't embed the image within it. Or Am I doing anything wrong.
Note: Save as option also producing the same kind of file. I am using Inkscape version 0.48 in Windows 7 - 64 bit.
A .png file is a raster image file. In order to convert it to a vector graphic based format like .svg and have it be "native" svg rather than an included image you are going to either have to use a program that can rasterize it or in Inkscape trace the bitmap and turn it into paths. Inkscape provides information on tracing: http://inkscape.org/doc/tracing/tutorial-tracing.html