Going from PSD file to Illustrator image trace: Background not transparent

Okay guys so a friend has drawn me a "man" in Psd and I want to convert it in AI because I don't want it to look very pixely (great scientific term). The man is on a transparent layer as below:
I was then able to bring it into illustrator fine. I used the image trace function and got some great results. The image looks more as I intended.(below). The only problem is the transparent layer goes and is replaced by a white layer. This "man" needs to be placed on top of other elements and so the bg needs to be transparent. I've scoured the forums but couldn't find a conversion topic specific to the image trace function. Is there a way to do this without the bg turning white? Am I importing the file wrong into illustrator? Is it the settings of the image trace function? I'm very new to illustrator so would very much appreciate all the help I can get.
Cheers,
Cam.               

look at your trace settings and (in CS5 at least) tick Ignore white.

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