I'm getting an error message using live trace in illustrator CS5

Would Illustrator behave if you use the B&W setting?
Do you have Photoshop handy to re-save the picture and then maybe try some other format like jpg (although AI should accept bmp)?

it works in b&w

My guess is that there is something wrong with the .bmp file.
Does it have any paths in it, clipping paths or similar?
Do you have a chance of making a new .bmp or .jpg fie, the same size and copy/paste the content of your file into it. Be sure that the colorspace is rgb or cmyk, not lab or indexed.

I've tried every file type excepted by AI CS5, its something in cs5

Here is a list from Adobe how to deal with errors of this kind http://kb2.adobe.com/cps/403/kb403151.html

Basically everyone says you should start with removing the preference (.plist) of Illustrator.

Secondly I would recommend trying to make a new account on the computer and try from there. If that succeeds the error has to do with the account, not Illustrator.

Thirdly I would be willing to give it a try on my mac if you send a sample file to sigurarm@islenska.is with such services as wetransfer.com (note that we have 8 timezones between us) That would give another comparison.

I have uninstalled Illustrator cs5 and reinstalled it on my win 7 computer. I am still unable to live trace in color.  For your information I was able to live trace the same bmp file successfully to color using cs3 on another computer in my house.