I'll assume you're talking about George's "step 2"...Originally Posted by Chuck Burke
Most programs call it "posterize". Closest thing I could find in PhotoPaint was under Image|Color Mode|Paletted..., select "Optimized" palette, set "Dithering" to "none", and start dialing down the "Colors" spinner. Once you get close you can edit the resulting palette and/or use the Image|Adjust|Replace Colors dialog to adjust or further reduce the number of colors.
One other thing that can drive you crazy is if you resize a bitmap and save it with "Anti-aliasing" checked (same true for exporting bitmaps from CorelDraw). It leaves "fringes" of intermediate colors at color boundaries. Example: that picture George posted looks like it only has 8 or so colors, but it actually has more than 20, most of which never appear as more than a couple isolated pixels at a time. Not fatal, but it makes the CorelTrace settings rather twitchy: if you end up with way more objects in the trace than you expected, that's probably what happened.