Dvips, as originally conceived, can only import a single
graphics format:
encapsulated PostScript (eps files).
Dvips also deals with the slightly eccentric EPS that is
created by MetaPost.
Apart from the fact that a depressing proportion of drawing applications produce corrupt EPS when asked for such output, this is pretty satisfactory for vector graphics work.
To include bitmap graphics, you need some means of converting them to PostScript; in fact many standard image manipulators (such as ImageMagick’s convert) make a good job of creating EPS files (but be sure to ask for output at PostScript level 2 or higher). (Unix users should beware of xv’s claims: it has a tendency to downsample your bitmap to your screen resolution.)
Special purpose applications jpeg2ps (which converts JPEG files using PostScript level 2 functionality), bmeps (which converts both JPEG and PNG files) and a2ping/sam2p (which convert a bewildering array of bitmap formats to EPS or PDF files; sam2p is one of the engines that a2ping uses) are also considered “good bets”.
Bmeps comes with patches to produce your own version of dvips that can cope with JPEG and PNG direct, using bmeps’s conversion library. Dvips, as distributed by MiKTeX, comes with those patches built-in, but assuming that capability destroys portability, and is only recommendable if you are sure you will never want to share your document.
This question on the Web: http://www.tex.ac.uk/cgi-bin/texfaq2html?label=dvipsgraphics