Microsoft (MSFT) reported better than expected results  for its fiscal third-quarter on Thursday, sending the stock up as much as 4 percent in after-hours trading. But despite the good news about Mister Softee’s new Windows Vista and Microsoft Office, one division at the company remains a notable laggard: MSN.

Microsoft’s ”online services business”, which includes its MSN Internet unit, posted revenues of $623 million in the quarter, growth of just 10 percent. By way of comparison, online search leader Google (GOOG) generated sales, exlcuding revenue shared with affiliates, of $2.53 billion in its most recent quarter, up 66 percent from a year ago.  

What’s more, Microsoft’s online services division lost $200 million during the quarter, bringing operating losses at the unit to $494 million for the first three quarters of this fiscal year.  

If this performance continues at MSN, expect more speculation to surface about whether or not Microsoft, which I’ve dubbed the Dr Pepper of search because of its inability to move out of third place, should look to buy Yahoo! (YHOO), which disappointed Wall Street with its first-quarter numbers and second-quarter guidance last week.

Microsoft clearly needs to do something to jumpstart its struggling Internet business. In many regards, MSN resembles Time Warner’s (TWX) AOL. (Time Warner also owns CNNMoney.com.) AOL and MSN are both in a tough spot right now. They are trying to morph into online businesses that depend more on advertising and less on subscription revenue.

So far, AOL is making a game effort to change its stripes. But despite a 49 percent increase in online advertising during the fourth quarter of last year, AOL still reported a decline in overall revenue as well as adjusted operating income before depreciation and amortization.

MSN probably needs to make a splashy acquisition to boost its online presence. And to the company’s credit, it has tried. The company was said to be interested in purchasing online ad placement service DoubleClick but was outbid by Google, which agreed to buy DoubleClick for $3.1 billion. So that makes comments by Microsoft’s general counsel about the Google-DoubleClick deal sound suspiciously like sour grapes to me.

Instead of whining about Google becoming a new Net monopoly - now that’s ironic, Alanis Morissette - Microsoft probably should act soon to buy a DoubleClick competitor before its too late. ValueClick (VCLK), aQuantive (AQNT) and 24/7 Real Media (TFSM) are still available, although speculation that advertising agency WPP Group (WPPGY) might make a play for 24/7 has lifted 24/7’s stock price up 24 percent during the past two days.

But Microsoft, which is generating a ton of dough from Windows and Office, can afford to pony up in order to boost its Web presence. With $28 billiion in cash at the end of March, there’s no excuse for Microsoft letting any company, even Google, outbid it for the next big Web deal. If Microsoft doesn’t make a significant move soon, it risks falling even further behind Google in the online search and advertising business.