Features Update: Nathan Buggia, Lead Program Manager at Live Search, contacted me to let me know they've fixed the problem. Here's what happened, in their own words.
Live Search is offering a new way for AdWords customers to get click-throughs — their own natural SERPs. They appear to be indexing AdWords ads from Google's own SERPs. Doing a search on Live for colorations paint (at the time of this writing) will give you AdWords ads in the third and fourth natural result. I can only assume this is unintentional and is simply a bug in their crawler. Regardless, it's a little embarrassing.
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