Convert Rasters to Vectors
Raster images, also known as bitmaps, have their place. JPEGs, JPGs, BMPs, GIF, TIFF, and PSDs are all raster images and work fine when used at the original size and resolution when printing brochures and other kinds of print media. But when trying to enlarge a bitmap image, you can run into problems. Raster images are made up of a fixed number of pixels. Enlarging the image means that these pixels will be made larger but will not increase in number. If enlarged to much, the pixels become visible, creating a low-quality image.
Thankfully, there is a work-around. Rasters can be converted to vector images, and a vector image can be enlarged without quality loss because vectors use equations to make up the image, rather than a fixed number of pixels. Logos and other such artwork that will need to be rescaled to fit different media must be converted to a vector image to avoid loss of quality. Here's an article for logo design using other software.
Illustrator CS2 and later versions have an amazing little tool called the Live Trace, which converts bitmap images to vector images. This tool is easily explained in CS3, but for those who have CS2 or CS4, you should be able to follow along without too many differences in steps.