lol.
it doesn't steal your password, it relies on you to enter it. if you're dumb enough to enter it , it probably logs in with your msn ID to the chat servers and spams your contacts.. since msn ids = hotmail/msn addresses, there's lots of reasons for them to grab it. they could be spamming, they could be harvesting contact emails to spam, or they could be looking for all kinds of infoz.

There's a similar one doing the rounds on Facebook at the moment. It's hosted on imagehost as an swf which redirects to a fake Facebook looking URL. Here's the link.

http://img232.imageshack.us/img232/909/fbdr4.swf

I quite admired this one, as it's super viral. Once they get your details, by being an idiot and entering login details, it logs into your account and posts a message to all your friends saying, "I just found this blog with some really horrible pictures about you. You gotta check this out." then it shows the above link.

The rest is self explanatory.

why not report that to imageshack? heh.