I would also like to adopt the online editing capability directly from the workspace by using the Edit icon.
This is my experience:
After clicking ok to the window verifying I wish to open the particualr document, the next window is a Save As window which states, "The converter failed to save the file."
I have found a multistep workaround so I'm able to edit an online version from within Word.
1. From Word, click the Office Button.
2. Click "Open From Office Live"
3. Choose your workspace.
4. Find and open your workspace document.
5. Begin editing the document
6. Save your changes (Changes are synced with the online document in the workspace)
So basically, the Office Button has the options needed to access the online version of any of your workspace documents. It gives you the functionality you are looking for, but is not as convient as clcking the Edit button on the workspace.
Test out the other icons on the worksapce as well. I found that Save and Version icons are useful if you want to download a file to work on when not online. When ready to upload changes, use the Version Icon drop down arrow to bring up options for uploading a new versiion.
Although I'm able to utilize the online collabortive features of the workspace, I'm still interested in resolving the issue I described above about the Edit icon not working properly.