I have this problem as well on my Vista machine. I tried uninstalling the Office Live add-in and reinstalling, but all I get when going to "open from office live" is my documents folder on my computer, even though I have signed in to Office Live. The add-in is enabled.
So I don't know what the problem is. It has been a bug for years. It works fine on two other computers I use...
I wish this could be fixed.
Richard