Microsoft ended discussions to buy Yahoo over the summer, and while the company maintains there are no plans to restart those talks, purchasing the ailing Yahoo may be the only way Microsoft's advertising business can survive.

According to analysts at Cowen and Company, Microsoft is looking at very few choices -- buy either Yahoo or its search business, or else get out of advertising by 2010.

"None of Microsoft's online initiatives have gained traction and we do not believe the company's current strategy will result in a change in the status quo," said analysts Kevin Kopelman and Jim Friedland in a research note. The analysts predict the slowing economy will force the software giant to either buy Yahoo or quit advertising to focus on profitable projects.

Microsoft's online service business grew 15 percent in the third quarter, but according to Kopelman and Friedland, it is operating at a loss of $480 million on revenue of $770 million.