Vector tracing is a way to convert raster files into vector images. See "Raster versus Vector artwork" why many people prefer vector images for their arcade art. Tracing can be very time consuming and labour intensive but at the same time it can produce stunning results.
The art of tracing
Auto trace tools
"Labour intensive? Time consuming? Why can't a computer do this!", I hear you ask. Well, it's a very good question. First, there are tools that can trace images for you. These tools produce various results, ranging from crap to slightly usable. The main reason is this: context. Humans can make out what a shape is supposed to be even if it is abstract or fuzzy. A few white, blue and black blotches can look like an eye for humans because the context (a face) is there. A computer will still interpret those blotches, well, as blotches. The vectors it produces will be more or less accurate renditions of blotches and will remain so as the vectors are enlarged. A human artist can make these blotches into a vectorised image of an eye.
The best autotraced vectors are produced if the sourcematerial is either high contrast and low details, or of very high resolution with distinct areas of colours.
A short list of trace software:
See also Raster to vector Wikipedia article.