The division's revenue grew 15% to $770m (£497m), generated from its Live search and MSN display ad networks, with search growth exceeding display.
The figures surpassed Microsoft's own expectations, which were banking on projections of $718m (£464m).
Due to forecasts of a difficult ad environment, the company has cuts its year-end projections. Microsoft now expects the division's growth to be 10% in 2009, compared to the 18% it predicated last quarter.
Microsoft also announced that it would cut back on hiring in 2009, and look to spend less on travel expenses and data centres.
Overall Microsoft remained buoyant thanks to the stability of its Window's client, server and office businesses, but chief financial officer Chris Liddell warned the "challenging economic environment" will cut growth predictions for 2009.
Overall revenues climbed 9% to $15bn (£9.7bn) while profits rose just 1.9% to $4.3bn (£2.8bn).
Liddell said: "What we've done is essentially gone right across the company, every division, and looked for areas where we would like to spend less."
The company will trim expenses next year, looking to shave $500m (£323m) in total, cutting back in a number of areas including marketing.
The company's recent ad spend was the inspiration for a new Apple TV spot, which ridiculed the firm for spending $300m (£194m) on its 'I am a PC' ads.