Shoutbox

You are viewing your contacts with their first and last name, right? Then try editing those contacts from inside Windows Live Hotmail's Contacts page, if you have a Hotmail e-mail account associated with your Widnows Live ID. After changing it, signin again on Messenger. See if the changes are retrieved from the server. If not, then go to Messenger Options>Security, and tick the option" This is a shared computer, don't store my address book, display picture and personal message here" then sign-out. Now change the names of your contacts from Hotmail again, then sign-in Messenger (it will take longer for this time because all contacts' information will be retrieved from the server) and now check the contact list if the changes have been applied. (Now you can again untick the option I mentioned above)

Do you receive contact updates from your contacts? It may have something to do with this problem. Try cancelling it for a while if that is the case.

Also you can try assigning a nickname for contacts, without editing their first and last names. Even if you view your contacts with their first and last names, if a nickname is avaliable for a contact, then WLM will show the nickname in contact list, also you can use Plus! tags to format the name as well.

By the way, everything works as intended here so I don't think this is a general bug with WLM.