When any image is reduced in size, detail is irretrievably lost due to discarded pixels. Blowing it up does not restore the lost data. At best it uses filters (http://www.amiravis.com/usersguide31/hximproc/HxImageEditor.html) to interpolate the remaining pixels, filling in the blanks to give an illusion of detail. It smoothes out "jaggies" and pixellation, but does not restore the lost information.
Another heavy contributor to image degradation is JPEG compression, which reduces image size at the expense of fine detail. Strong compression results in the familiar JPEG "artifacts. The composite graphic below, made of screen grabs, shows the differences. (The image is reduced by HTML to fit on any standard screen size - it will save at its full size of 885 x 371.)
<img src="http://img.photobucket.com/albums/v349/DocDoom777/Compare.png" width="442" height="186"/>
The top is the best JPG available. The compression is minimal, and there is only slight alteration of the screen image.
The second is what you might see on a website where storage space is at a premium. Note the "halo" of extraneous pixels around the text, similar to what is seen around the text in the "letters". The effect is usually not noticeable at normal size. These are blowups.
The third, almost unreadable, is at maximum compression. It's all but useless.
The bottom one is the PNG (Portable Network Graphics) (http://www.w3.org/TR/PNG-ColorAppendix.html) format. Like a GIF, it is "lossless", but unlike a GIF with 256 colors maximum, a PNG's color "palette" is in the millions. It preserves every pixel, achieving compression by reducing strings of identical pixels to one data value. A PNG is presently the next best thing to a BMP (bitmap). Note: the colors in the text are due to the "Clear Type" function that improves the appearance of screen text, not to the file format.
The PNG format is far superior to JPGs for inclusion in Word documents.
For scanner outputs, it's the best format for preserving detail, but it creates huge files, almost as big as bitmaps, if the scanned image is complex.
One "use" of strong JPG compression is to conceal altered images by masking the alterations with artifacts. I've seen a number of UFO photos that do this to hide the fakery.
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For digital camera pictures, the RAW format is ideal for the preservation of detail, since it saves the "raw" image directly from the CCD without processing it. However, it's not commonly found in consumer-level cameras. The best compromise is to set the camera to "superfine" or whatever its maximum resolution is called. It reduces the number of pictures one can save on the memory card, but the quality is at a maximum.
And, it's strongly recommended to store the original image and work with copies of it, for exactly the reason stated in the first sentence. Lost data is gone foever.