You probably know that cutting involves lasing completely through a material while engraving involves only lasing on the surface, or a depth less than the thickness of the material.
There are two types of graphic files: raster images and vector images. A raster image stores a picture as a series of dots, or pixels. A vector image stores a picture as a series of instructions for how to draw the image.
Vector images can easily be scaled to any size since the software can simply take the instructions in the vector file and scale all of the instructions for drawing the shapes by the same amount. A raster image on the other hand, can usually scale down ok but has trouble scaling up because it effectively is only making the pixels bigger. You can try zooming in on a photo in a paint program to see this effect.
For laser cutting, the laser cutter software is able to tell the machine to follow the path of shapes in a vector image but it cannot tell it to follow shapes in a raster image since the raster image does not contain information on the shapes, it's simply a grid of pixels. For this reason, vectors are good for both cutting and engraving operations but raster images are only good for engraving.
Some common formats for vectors: .dxf, .svg, .ai, .wmi, .wmf
Some common formats for rasters: .bmp, .jpg, .png, .gif