You need to select that link and click the button with the chain in the Hotmail editor to create a live hyperlink. You can hover each toolbar button to see what it does.

Thanks for the helpful work-around...Is this the only way to get a hyperlink in an email (same hotmail or yahoo) when using firefox? When I use IE, I can just copy (ctrl-c) and paste (ctrl-v) in hyperlinks without having to use the chain button.

I find this much easier than using the chain button and was hoping there was some sort of setting I could adjust with firefox so that my paste ins appeared as hyperlinks.