Using the New Live Trace Feature in Illustrator CS2

Preparation
Open the photo in Photoshop and removing the background and any areas you so not want to trace there first
If you want less colors to make a smaller vector file, try using the Posterize filter (Image > Adjustments > Posterize) to lower the number of colors in the image


Live Trace
Use the place command to place the photo into Illustrator, 
click the Live Trace button and open the tracing options and make any changes you wish. 
When you're done, click Expand.


You can also use the Object > Live Trace Menu. This one was traced with the Color 16 option. Click the Expand button to expand the trace to paths.


http://graphicssoft.about.com/od/illustrator/ss/sflivetrace.htm