Knockavullig: Hotmail contacts appear as "Corporate Contacts" on my phone. From within my stock Contacts app, if I hit Menu button -> "New Contact" the phone makes me choose whether to create the contact under my Hotmail account, Google Account, etc. I have no problem creating or editing Hotmail contacts.
If you've created a Hotmail account on your phone as detailed in my original post, as a Corporate Account, not as a POP mail account, then you should be able to create and edit contacts. I suspect that you may not have created a Hotmail acccount as a "Corporate Account".
From the home screen, if you press the settings button, then go to Settings-> Accounts & Sync, and you tap on your Hotmail account, at the top it should list it as a "Corporate" account. If it's a "Corporate" account it will have a square symbol in front of it (but the square has a break in the middle of each side). Is it a "Corporate Account"?