Unfortunately the Hotmail account is basically a webmail account, even though it is accessed via the Outlook Connector. Outlook cannot apply rules to webmail accounts.

I'd suggest setting up the rules in Hotmail itself by logging in to the Hotmail webmail portal. Any rules you set up there will automatically be applied as they come in, without Outlook having to be connected.

Also, the "and on this machine only" always applies unless you are connected to an Exchange server. Unchecking that option sets a rule to be run server-side, and Outlook only supports managing server-side rules in Exchange.

-SW