VectorMagic is a free online tool from the Standford University AI lab for converting bitmap images to vector formats. The image below shows an example of what you might use this tool for.
I just heard about the software and tried it out with a fairly complex image, a sample of Japanese calligraphy, and it did a beautiful job converting the image from bitmap to EPS (Encapsulated PostScript).
The software supports JPEG, GIF, PNG, BMP, and TIFF input. It supports EPS, SVG, and PNG output.
(In case you’re not familiar with graphic formats, a bitmap image is a matrix of dots. The format records what color each dot is. That works fine when an image is displayed at its original resolution. But if you make the image bigger, you just get bigger dots and things look grainy. A vector format stores the formulas for the curves that make up the image, not the dots, and computes the dots when it’s time to display the image. If you make an image larger, it computes new dots according to the formulas. Software for making bitmaps smaller is common. Software that does a good job of making bitmaps larger is rare.)
Update: VectorMagic has moved to a new domain. I’ve corrected the link above.