Portfolios are a small collection of your BEST work. This is where you put your best foot forward to show someone what you can do. You don't want it to be filled with 100 images of your life's work. Often it does not take long for an art director to make up their mind whether you meet their qualifications or not. So ideally you want 10 - 15 quality print outs of your best work. Remember to start strong with your best piece, and to constantly update your portfolio. As you improve, so should your portfolio. Along with the representations of your art, it is good to include a cover letter, business card, and résumé. You want to ensure that if they do want your art that you have assured them of your professionalism and a way to contact you.
Many office supply places sell cheap plastic portfolios. You may want to send some to publishers or leave one with an art director so don't worry about getting the big expensive ones unless you have an appointment or interview where you will be bringing it in with you and taking it when you leave. Many art directors go to conventions such as Gen Con and have portfolio reviews. This is a great way to get contacts and feedback, even if it doesn't always lead to work.
Contracts - Covering your Art
Even if you really like the person you are working for and have a great relationship, at the end of the day, this is a job. If you don't treat it like one, it's likely they won't either. You need to be compensated for your time and work. They need to be able to rely on you to do your part. The only real protection either side has is a contract.
Always read the contract, no matter how much you trust the person. People who are weird about you wanting to go over their contract should be a red flag.
There are things that you want to ensure when you are doing illustration. First of all, they are receiving "first publishing rights" and that is all. You want to retain the original (unless they include that and pay for it), the copyright (unless it is shared because of copyrighted characters), retain promotional rights to display your work, and you want to make sure that you have the right to make prints. Your art should remain your art, and they do not own the image itself. If they do, they should pay handsomely for it or no deal.
Honestly, illustration on its own, is often not where one makes their money. Often you get paid by how big the image is printed such as a quarter page is less than a full page. This really has no bearing on how much time and materials goes into the production of the artwork, just what the publisher has to pay for that image. Publication does make the prints and original more valuable, and basically offers advertising for your work. This is why it is worth it, and where you make up the money. The exception is for cover artwork which pays much better than interior illustration.
Speaking of money, it's good to have a time limit on when you should be paid, after they receive the finished, approved work, around 30 days is normal. The industry can be a little remiss about that part, which is why a contract is a necessary evil even with good people.
The Art Order - Receiving the Work
The first thing you will often receive is an art order and deadlines for preliminary sketches and probably the finished piece. The art order will include a description of the image content, and often what size it will be printed. If you are doing an 8th of a page image, it's often not worth doing a huge 18x24 inch painting. Save yourself the time and effort for the bigger pictures.
The purpose of preliminary sketches are to ensure that you are on the same page with the publisher before you delve into the paint and make a finished product. These don't have to be full shaded drawings, but good enough to present all the elements requested in the art order. Don't get too caught up in them, because inevitably, you may have to change it several times before you ever get to creating a finished piece.
After you have finished the artwork, you still have to get it to a file format that the publishers can use. If you have done a large oil painting and need it scanned, you may have to take it in to have it done. You're looking at somewhere between $50-$100 for a high quality scan, so make sure that you are being compensated enough to make it worth the investment before you go painting big! There are two places I recommend in the Southeast for getting this done. In Nashville http://www.chromatics.com/ and in Atlanta http://www.colorchrome.com/
Most publishers have a place to upload the finished digital image these days. Usually the suggested file format is a TIF for quality. Make sure that the file name matches the name on the art order.
Prints - Making your Money
Now that everything is sent in, hopefully meeting the deadline, you may have to wait till you can make prints to sell. Some publishers insist that you not publish prints until after the book has been released. Once you have the green light you can sell them on the web, either through your site, or there are other sites that will do them for you such as Deviantart.com, Cafepress.com, and Zazzle.com . There are also places that you can get things printed and send product to you such as sidekickprinting.com.
Still, for those to work, you will need to promote yourself. A good way to do this is in person. People will not hunt you down over the internet to buy your art if they don't know that you exist. This means conventions and art shows. This is expensive, and a risky investment. There's really no way to tell if a convention will be worth the investment or not. However, most conventions have an art show, where you can mail in your artwork. This gets it out there for your audience to see, even if you can't be there. Also art shows usually have art tables in the art show that are less expensive than the vendor rooms.
There's no real secret to making it in this business, and there is a lot of competition out there. The people I know that are making it, are exceptionally busy and hard working people. They travel constantly and have a thick skin to the politics of any industry. It's not all roses, but it can be very rewarding. Few things are as rewarding as when you see someone happy, because of something that you made, or when you hold a book in your hand for the first time with your art on the cover.
Best of luck to anyone out there starting out in this industry!