While I've chatted with other users who were able to initiate chat with me, I'm completely unable to initiate chats with other users, whether from the "search" or "monitor" tab. I click on the smiley to highlight the line and click on chat, but no dice.

I love 3.5.8, it's soooo much better for downloads and sharing, but I would like to be able to chat.

That's not unusual. The window will open if a connection can be established, but hosts are often busy. You might try dragging the LW window out of the way in case the chat window (if any) is hidden behind another window. Too, you can help make connections easier by opening the OSX firewall (System Preferences->Sharing->Firewall->New->Guntella/Limewire (6346).