Chris: Any luck so far? We've been having similar troubles, with both Hotmail and LiveID accounts. I even walked through the whole shebang with a Microsoft Premeir support staffer, and demonstrated the problems. We've asked MS to a) insure everything works according to service description and b) provide end-user and site-owner documentation (end users = those w/ hotmail accounts and those with LiveID-associated e-mail accounts).
If you have an update, let us know. I hope it's an everything-works-now update! - tom braman, king county government sharepoint admin