I am unable to use live trace to trace an image in black and white while still retaining the alpha. I have tried pasting and placing the image and no luck. "The ignore white" checkbox doesn't get me any further.. no mater what i do, livetrace merges the white hilites with the alpha.. As an example, i show a donut, and how AI fails to acknowledge the alpha. Can someone explain how to trace this donut properly?
I just read your post again. Another part of your issue is that you're losing the inner and outer shape. correct?
You could redraw those elements after the trace.
Or, adjust the trace setting, so you don't lose the object's structure.
Or, darken or saturate the image in PS, prior to tracing in AI.