I have two Windows Live accounts: a very old one (Hotmail from 1995) which I use for Live Messenger, and a new one which I use for everything else.
It seems the ability to Switch SMS to Live Messenger conversations is only available to the first Live account registered. I can't see to get my Windows Live Messenger contacts (second account) in the chat at all.
Might have to revert to using the old account then... Which means another hard reset on this phone.