I though Windows Live Mail was a complete replacement for OE or Vista's Windows Mail. According to the website
http://get.live.com/wlmail/features#ID0EGFAC you can read mail while offline which would indicate it is held locally. It also says you can compose mail while offline for delivery later, which would indicate the address book is local as well.
I have an amusing story about using M/S mail email clients. One of my web hosts has advised me that if I use a M$ mail client and my local broadband provider that all my outbound mail is considered spam and is bit bucketed. If I use a alternate client such as thunderbird or a different broadband provider, then they will not trash my mail.