How do I do this?

Might be a CS2 limitation. If you're interested here is a few files, the PNG i re-saved that now opens in illustrator (CS3).
A illustrator file with the png untouched and the same image live traced in 16 colours with the white background removed and two EPS files which most graphics applications will open containing the live traced image.

http://rapidshare.com/files/202984215/Nurse_Blood.rar.html

Downloaded, will mess tomorrow
 
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