Ok, so I got my image ready in Photoshop and saved it as a .psd, and placed it in Illustrator. See how the image below has a border around it? That’s important. You need to have closed path shapes of course when you vectorize an image, and Illustrator interprets full bleed images as open shapes, so making a ‘border’ from the background layer in Photoshop is an important step. Then I used Object > Live Trace > Make and Convert to Live Paint:

After you do this, make sure you release the paint group. (Object > Live Paint > Release).

The next problem: losing details. Or so it seemed. The trunk of the tree ended up on top of the shadow marks, and I couldn’t find those for a while. So I sent the trunk to the back of the group and turned it into another color so I could see the smaller paths on top:

What you’re seeing here is the next step. I selected all the small shapes on top of the trunk, then the trunk, and used Pathfinder to cut out the smaller path shapes from the trunk shape. You could just make them the same color as the background if you wanted to, but I wanted the most design process flexibility, so I made them as a cut-out.

Here’s one of the concept revisions I used this image for: