My Hotmail account has switched over to a shiny, new Windows Live Mail Beta account. I had received an invitation for the beta about a week ago and got another e-mail for the switch over this week.
It looks like a really clean Hotmail account with Word merged into it, which is probably pretty close to the reality. Web based spell check now happens as you are typing! This new feature differentiates it significantly compared to Gmail and Yahoo! Mail as they require you to hit a spell check button manually before sending which can easily be forgotten and embarrassing for the sender. Yahoo! Mail has been hinting a new version for some time, so it may soon have this feature.
In terms of ads, there is presently only a large banner ad on the top of the page. At this time, when reading an e-mail in Windows Live Mail Beta there are no text ads on the side as with a Gmail account. It will be interesting to see if it stays that way.