These were tiny graphics to begin with, and while they do show up, they do not scale well. I found another blog online that suggested using font creation software to make fonts rather than using pictures. Is that really the way to go here? What are the pros/cons of using fonts rather than picture markers?

If your original images are tiny, then when they are scaled up, the resolution doesn't improve. It's probably something you are already familiar with regarding images. PROS: Fonts (True Type) fonts are scalable, which means you get the sharp resolution that you want from a marker symbol created from a glyph (vector image inside the font character map). CONS: Can you afford to spend the time making a font? Most font editing applications can import a gray bitmap into the background of a font glyph-cell as a reference. If will take a bit of time on your part, but the results may be more to your satisfaction, since they are scalable.

Oh, I can definitely spend the time making the font.

Can anyone recommend an affordable font creation package that works well with ArcGIS? (Or, is that not allowed?)

You won't be limited by what works with ArcGIS as a font editor. It is a separate process to create the font itself. Use any font editing application that you find comfortable. What you do have to consider is the exported or generated font format. Make sure the font application can generated Windows TrueType or OpenType fonts.

We use several font editors, not all at once of course, but as needed. Some can handle simple edits quickly. Others handle complex fonts other than just Western English. One of the more complex editors is FontLab by Pyrus Ltd., but we don't endorse one commercial item more than another, and we find that we can use freeware or shareware items quite readily, too.

I found the Creating a marker from a TrueType font instructions. Are they the same for Open Type fonts?

Open Type Fonts are the second generation (version 2) of True Type. So, yes, the instructions would be the same.

Font-based symbols
pro: they are vector so they scale without getting pixelly.
con: they are single color, so if your symbol needs more than one color you have to make a different character for each color

emfs are a good alternative if you can make the "picture" vector rather than raster. One way I've done that is take a large size picture into Illustrator and vectorize it there (using "live trace" or manualy tracing it if it's simple enough), color the parts and then export to emf(probably plenty of other software can do the same). Depending on your skill levels and the complexity of the symbol you could draw it in ArcMap on a blank layout and export as emf from there. If you already have access to a vector version of the symbol, even better.

We demoed what David suggested here about using ArcMap to make the symbol for a wind turbine symbol -- there is also a download that includes the graphic we started from, the .mxd, and the resulting symbol applied to some example data:
http://mappingcenter.esri.com/index.cfm?fa=ask.answers&q=1516