Illustrator and Photoshop have been quietly growing tighter, and you may have discovered that it’s possible to export a very editable PSD file from Illustrator (preserving nested layers, masks, editable text along a path, etc.). But what about going the other way–turning a layered PSD into a layered Illustrator composition? It’s easy to do, though not at first glance.
Background: The compositing model (i.e. the layer blending modes & options) used by Illustrator, InDesign, and Acrobat is different than the one used by Photoshop. Therefore some blending options in Photoshop (for example, complex "Blend If" settings) can’t be replicated in Illustrator. As a result, when you place a PSD file into Illustrator, the blending is isolated. That is, the PSD is treated as things a little world unto itself, and the blending modes within it don’t interact with anything else in the Illustrator document. Objects like drop shadows (set to Multiply mode) only multiply against other things inside the PSD.
But here’s the trick: if you place the PSD and embed it in your Illustrator file (by unchecking the Link option in the import dialog), you can tell Illustrator to convert each layer into a separate Illustrator object. In that case the blending options should come through largely intact. Even things like text & vector layers (including text on a path & text in a shape) will be converted to the native Illustrator versions.
This is quite powerful but, ah, shall we say, non-obvious. I don’t have a perfect solution in mind for making this capability more discoverable, but we’ll give it some thought.