Make your B/W image background layer into a standard layer (double click, then click OK), make the area outside your selection area (Control Shift I) transparent and save the image as a PSD. Place the PSD into Illustrator 10 and the background will be transparent without any further work.
Bob
This also has an added benefit where you can colourize the image to any swatch colour.
John
-Mark
In PhotoShop, you first Image, Mode and make your image into a shades of gray, then Image, Mode and Bitmap to make it one bit monocolor. Now save as a TIFF.
Bob