GoodRevrnd, where did you hear about raytracing? Most of raytracing's applications are in 3D animation/visualization, to create effects such as reflections, refractions, shadows, and (more recently) lighting effects.
There are two ways that raytracing works. There is the method that heliomphalodon described, where each ray is traced backwards from a pixel to the viewer, and then there is forward raytracing, where the ray is traced from an object outwards.
Each method has it's advantages and disadvantages, but it can be broken down like this:
Backwards raytracing (used in renderers such as finalRender, Brazil, Mental Ray, and VRay) is faster, because it only calculates the rays that are seen by the viewer. However, the rays must be calculated for each frame, since every frame displays a different set of pixels to the viewer.
Forwards raytracing (used in renderers such as Lightscape and Viz 4) is slower initially, but after all of the rays in a scene are calculated, then the image is rendered about as fast as a picture without raytracing. So forward raytracing has an initial performance hit (and it's one hell of a hit), but is then less computationally intensive afterwards.
In the end, backwards raytracing is the method best suited to real time applications, since most games contain fairly dynamic environments, which would cause either method of raytracing to recalculate certain parts of the scene.