Shares of video game retailer Gamestop Corp (NYSE: GME) are getting shot down over 10% in premarket trading despite the company's record first quarter earnings.

So let's take a look at the numbers. Earnings per share came in at 37 cents for the quarter, two cents above the 35 cents that analysts had been expecting to see. At 37 cents per share, the company showed a pretty remarkable 151.4% earnings growth from the same period last year.

Revenue figures were also very respectable for the company, with a reported $1.813 billion (a 41.8% year over year increase), and well above the $1.72 billion estimate. Same-store sales got a boost of 27.1%, and if you take a look at new videogame software growth, that figure is an amazing 72%.

Hasbro (NYSE: HAS) and Mattel (NYSE: MAT), which own the right to Scrabble, are none too pleased with Scrabulous, a knockoff of the game that has gained tremendous popularity as an application on Facebook.

The game-makers have sent cease and desist notices to four parties involved with the production and distribution of Scrabulous, but it isn't immediately clear who those parties are.

In a statement, Hasbro said that it hoped to reach an amicable solution, but that, "If we cannot come to one quickly, we will be forced to close down the site and its associated distribution points."

The obvious solution is to make the game a fully-licensed version of Scrabble, and give Hasbro and Mattel a cut of the ad revenue it generates. Such a move would also probably boost sales of the board game at retail stores as people realize that Scrabble is actually pretty fun.

According (subscription required) to the Wall Street Journal, "While there are authorized Scrabble games online, Scrabulous has gained popularity because it's free, easy to play with friends and easy to access on Facebook. Scrabulous listed more than 600,000 daily active users on Facebook as of Wednesday and is one of the 10 most used applications on the site. People can also play at Scrabulous.com."

Microsoft (NASDAQ: MSFT) says it sold 4.3 million Xbox 360s in the last quarter of 2007. The popularity of the company's Halo 3 game helped.

According to Reuters, "'Holiday 2007 was a blockbuster season for the gaming industry,' Microsoft said, adding that the Xbox 360 has kept its lead over rivals in terms of total dollars spent on hardware and software." The company did say that its online game download service had problems toward the end of the year and offered a free game to 8 million users.

The news means that Microsoft's device division will probably be profitable for the fourth quarter. It lost money for years. But it also raises the issue of why the world's largest software company is in the business at all. The division brought in $1.9 billion last quarter, but had an operating profit of only $134 million.

The problems that the company has had with its game download service and past issues with the Xbox hardware only give Redmond a bad name. That does not exactly help the image of its core software business.

Douglas A. McIntyre is an editor at 247wallst.com.

The Wall Street Journal reports (subscription required) that Live Gamer Inc. is working with massive multiplayer online game makers to create a platform to allow players to trade virtual gear online -- for real money,.

According to the Journal, "Within fantasy games like "World of Warcraft" and Sony's "Everquest II," players can achieve status and advancement for their in-game characters by acquiring powerful weapons, armor and game currency. But many people prefer to purchase those virtual assets with real money instead of putting in the long hours of game playing required to earn them."

Industry estimates peg the amount of money consumers spend on virtual gear in online games at $2 billion per year.

Live Gamer is hoping to help legitimize a niche that has been rife with fraud for years -- gamers buying stuff and then not receiving it. Game companies receive complaints about these rip-offs but are powerless to do much because they had nothing to do with the transaction.

I predict great success for Live Gamer. But don't we already have a market for people to trade cool-sounding stuff that doesn't really exist?

Maybe virtual weapons should be sold on the Pink Sheets -- They're a lot more real than a lot of what people trade there now. For a few examples, check out this excellent piece from the Rocky Mountain News.

The head of Activision (NASDAQ: ATVI) sees the prices of the major game consoles dropping to under $200. Otherwise the game maker does not think the products will ever have mass market appeal. The cheapest Sony (NYSE: SNE) PS3 is $400, and a Microsoft (NASDAQ: MSFT) Xbox 360 is not available below $280.

Activision CEO Bobby Kotick told Reuters that "the (Nintendo) Wii at its price point is now setting a standard and an expectation, and people say, well, the Wii is less complex technically. I don't think that really matters as much to the consumer." He does not see wide adoption for other platforms unless they are priced at $199.

Of course, the man may be right, but that does not mean that game console prices are coming down much. Microsoft and Sony have to ask themselves whether they would rather sell 10 million units at $400, or 18 million at $199. The math is complex because of manufacturing costs and income from video games.

Working to the advantage of lower retail pricing is the fact that component costs for the game consoles probably drop as production picks up. And with some games, like Halo 3, the platform maker gets money from the sale of the video game, so more platforms have an extra financial benefit.

Will the market see a $199 PS3 soon? Probably not. Sony can't go to its shareholders with that big a loss per unit.

Douglas A. McIntyre is an editor at 247wallst.com.

This post is part of our Hottest Products of 2007 feature. Also check out our other Hottest Products of 2007 posts and let us know which product you think is the greatest thing since sliced bread.

For gamers, the experience is everything, and their heroes are not the wonks designing Microsoft (NASDAQ: MSFT)'s Xbox or Nintendo's Wii, but the creators of the worlds that hold them in thrall. None has done it better than Bungie Studio's Halo 3, the first-person shooter game that is one of our Hottest Products of 2007.

The numbers demonstrate just how this game annihilated its competitors. 4.2 million units were in stores on the day the third iteration of this game was unveiled September 25. In the U.S. alone, Halo 3 grossed $170 million its first day, and $300 million in the first week. More than a million players competed live in its first day of release, via Xbox Live.

Microsoft Corp. (NASDAQ: MSFT) is known as a stifler of individual culture in many ways, and why would it not be? Most companies that are decades old, global, and are billion-dollar enterprises emerged from a shifty, risk-taking entrepreneurship to bureaucratic, slow-moving, corporate monstrosities with so many layers of management that they would make the world's largest sheet cake jealous. Unfortunately for Microsoft, that apparent corporate culture is not sitting well with Bungie Studios, the game studio that created the Halo game series and have made more gaming and entertainment money for Microsoft that all other efforts combined. Halo 3, the latest in the series, has made $300 million for the company -- and it's not even two weeks out of release yet.

Is Bungie really trying to split away from its large corporate parent? Bungie pulled away from its parent to develop Halo 3 and even blocked entrance into its studio by Microsoft employees as development ramped up. Is this a sign of a small company not wanting to be ruled by its corporate overlord. Yes, it is -- but the best product sometimes comes from non-interference from the top brass. It's when you let Harvard MBAs and other folks out of touch with the real world start mandating things that innate innovativeness becomes trampled upon.

This is precisely what Bungie developers probably recognized. But to go as far as stating they want out of the marriage with Microsoft? That's intriguing, to put it mildly. I agree with Dvorak here -- in contrast to Google, Inc. (NASDAQ: GOOG), which encourages innovation and non-meddling from its employee population -- and then lets those ideas become actual products -- Microsoft is acting like some anti-innovation dinosaur in this case from all appearances. The world could stand to let smaller divisions do what they do best without interference from the large, ill-equipped bureaucracy.

The New York Times' Career Coach takes a look at online gaming in the workplace. A recent survey indicates that 24% of employees admit to playing computer games in the workplace -- a statistic that may leave a lot of managers none too pleased.

Somewhat surprisingly, employers are mixed in their responses to online gaming. Some have chosen to block all gaming sites, while others have only blocked a few. Many have no clear policy, and some even believe it can be a valid way for workers to recharge their batteries, provided that it takes place in moderation.

Depending on what they're playing, I would argue that an occasional break for a computer game could be very productive -- certainly more so than office gossip around the water cooler. Remember, Warren Buffett has said that he spends roughly 10% of his productive hours playing bridge -- often online, sometimes with Bill Gates. Given that these are the two richest men we have, it's safe to say that their gaming hasn't hindered their productivity too much.

The latest generation of workers grew up on video games, and I suspect that gaming will only become more widespread, and more acceptable, within the office environment.

Apple (NASDAQ: AAPL) implied volatility up into expected new family of iPod launch on 9/5.

AAPL is recently up $3.03 to $129.85 in pre-open trading. Goldman Sachs says, "Buy AAPL shares as new iPods add to its product cycle story." AAPL overall option implied volatility of 45 is above its 26-week average of 41 according to Track Data, suggesting slightly larger price movement.

Nokia (NYSE: NOK) volatility at 36 as NOK introduces four devices; NOK near 6-year high.

NOK introduced four devices optimized for entertainment, music and games. NOK closed at $30.01. OPCO says, "reiterate Buy – announces attractive multimedia products." NOK over all option implied volatility of 36 is above its 26-week average of 33 according to Track Data, suggesting slightly larger price risk.

Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

This week games-maker Electronic Arts (NASDAQ:ERTS) announced a deal with Hasbro (NYSE:HAS) to create electronic versions of the toymaker's brands, including Scrabble and Monopoly. The deal runs through 2013, and covers all Hasbro properties, which include such popular names as the Bratz dolls, the Fantastic Four, Gastrointestinal Joe, The Simpsons, and Twister.

While EA hasn't released information about their plans to make use of these properties, the possibilities are endless –

• Monopoly Extreme -- Why should players be allowed to stroll uninhibited down Boardwalk and Atlantic Avenue, when the game could be much more interesting in a Grand-theft- Auto-type world? Imagine shooting your way out of Marvin Gardens, highjacking a Reading Railroad train, and trolling Baltic Ave. for a hooker.
• Chutes and Ladders -- In the video world, falling into a chute would cost the player much more than a few squares – perhaps even a visit the Hell! Ladders, on the other hand, could lead to greater rewards, such as a front row seat at a Barry Manilow show in Las Vegas. Or do I have those backwards?
• Bratz – the Hilton version. Dress up your Bratz from an endless variety of skanky outfits (underwear tonight- yes, or no?), take her partying in the hottest Hollywood clubs, indulge her in the very best drink and toot, and check her in to the most exclusive rehab clinics. Accumulate points every time she manages to smack a paparazzi with her purse.
• Scrbl – txt vrsn. Txtrs cmpt 2 c who cn use t fwst ltrs 2 spl wrds.
• Easy-Bake Iron Chef – No more light bulbs and tasteless cakes. In the virtual world, mini-chefs can compete with gamers around the world to create monster desserts, exotic entrees or even cook up batches of meth.

Now, that's entertainment.

Last week I blogged on Britain banning Rockstar's Manhunt 2, owned by Take-Two Interactive (NASDAQ: TTWO) for the game's "unremitting bleakness and callousness of tone." I said that banning games stifles creative freedom and has the ability to destroy an industry -- from game makers to retailers, and, most importantly, consumers.

Well that's exactly what has happened folks.

Following bans in Britain and Ireland, as well as an "Adults Only" rating in the United States, GamesIndustry.biz has told us that Take-Two temporarily shelved Manhunt 2.

Manhunt 2 was scheduled for release on July 10 on the Sony Corp. (NYSE: SNE) PlayStation 2, PSP, and Nintendo's (OTC: NTDOY) Wii consoles. However, both Sony and Nintendo carry an Adults Only policy, which leaves little room for compromise. Even if the game were to ship with the AO rating, many retailers -- including Wal-Mart Stores (NYSE: WMT) -- will not put Manhunt 2 on the shelves.

Take-Two could still appeal the rating of a more toned-down version that fits the "Mature" rating for players 17 and older. However, the AP's Matt Slagle reports that the decision to suspend distribution of Manhunt 2 could actually boost demand, according to industry analysts. Colin Sebastian, an analyst at Lazard Capital Markets, tells Slagle that he doesn't believe the game will hurt Take-Two's bottom line in the long term, and he considers the recent controversy over the game to be great exposure. "It's free publicity," Sebastian said. "Consumer backlash is a risk, but at the end of the day if it's rated 'M' the retailers will take it."

Investor's didn't seem phased on the news. Shares of Take-Two Interactive were up for the week and closed +1.02% on Friday, to $20.82.

Shares of Build-A-Beat Workshop (NYSE: BBW) have been fairly lackluster performers since the company's IPO in 2004, but a new concept store called Ridemakerz could change all that, as Build-A-Bear owns 25% of the new venture.

Build-A-Bear has about 300 locations globally, offering children and their parents an opportunity to customize their own teddy bears. Ridemakerz, whose first location just opened last week, will offer fathers and sons a chance to build their own toy cars. According to the New York Times, "Customers select a chassis type (street or monster); body styles (stock or custom, a Ridemakerz brand hot rod, a Ford Mustang GT, or Dodge Ram pickup, to name a few options); paint schemes; sound effects (for example, sirens or race sounds) and style of locomotion (free wheel or radio control) ... After the 10- to 12-inch cars are assembled, there are ample customizing and accessorizing options: tire treads, grille guards, side pipes, snowboard racks and decals. Mr. Andreini estimates that a fully tricked-out vehicle will run about $75, including $25 for radio control. For the budget-minded, there's a stock tuner car for $12."

If this does catch on, and it seems likely that it will, the growth could be explosive. Build-A-Bear grew from one store to more than 300 in ten years and, with the support of Build-A-Bear already there, Ridemakerz could much more quickly.

With the huge popularity of NASCAR and cars in general, Ridemakerz could be the catalyst for shares of BBW to rapidly gain in value. The shares are trading right around their price from a year ago, indicating that much of the upside of Ridemakerz is not yet priced in.

To learn more about Ridemakerz, see the company's website.

MOST NOTEWORTHY: Several stocks in the video game sector were today's noteworthy initiations:

• UBS initiated shares of Activision, Inc (NASDAQ: ATVI), THQ Inc (NASDAQ: THQI) and GameStop Corp (NYSE: GME) with Buy ratings. Electronic Arts Inc (NASDAQ: ERTS) and Take-Two Interactive Software, Inc (NASDAQ: TTWO) were initiated with Neutral ratings...

OTHER INITIATIONS:

• Aeropostale, Inc (NASDAQ: ARO) was initiated at CIBC with a Sector Outperform rating.

• NYSE Euronext (NYSE: NYX) was started with a Sell rating and $75 target at Banc of America.

• Wachovia initiated VeriFone Holdings, Inc (NYSE: PAY) with an Outperform rating.

• CastlePoint Holdings (NASDAQ: CPHL) was started at both Keefe Bruyette and Friedman Billings with an Outperform rating.

Analyst summaries provided by TheFlyOnTheWall.com (subscription required).

Too focused on elections and their effect on the market this November 7th? Not Jim Cramer, who's already looking ahead with what he calls a "holiday play" that is good regardless of wins the polls. Cramer thinks that it's going to be an Activision, Inc. (NASDAQ:ATVI) Christmas. The video game company is #2 behind ERTS. The company's blowout numbers didn't affect the stock because they had already guided up. Think video games are too juvenile in which to invest? Then, says Cramer, think of them as long interactive movies.

This will be a big season for video game consoles, with Sony PS3 coming out November 17 and Nintendo's Wii out on November 19. And, don't leave out the Xbox 360 from Microsoft Corporation (NASDAQ:MSFT). He has recommended GameStop Corp. (NYSE:GME) much lower, but says ATVI is the play. Tomorrow ATVI releases "Call of Duty 3," and Cramer though this will be a huge driver and it is available for Xbox 360 and PS3. The "Guitar Hero" sequel just hit store shelves today, and the "Tony Hawk" game is also quite popular.

Never the buy-and-hold type, Cramer noted that buying ATVI is "risky investing" and you should remember to sell it going into the holidays. Cramer said even though he likes management, the company has a history of "lumpy quarters." He reminded investors to use limit orders and only buy later tomorrow.

He says this is a TRIPLE NO COAL IN YOUR STOCKING BUY.

Microsoft Corporation (NASDAQ: MSFT) today struck back at its nemesis Google Inc. (NASDAQ: GOOG), announcing a new advertising offering that will let companies connect to people through their PCs, Xboxes, mobile phones and personal digitial assistants.

Microsoft Digital Advertising Solutions, which the largest software maker will discuss today at the Advertising Week conference in New York, underscores how eager the company is to gets its share of the dollars that are flowing online from traditional media. Earlier this year Microsoft unveiled some well-received improvements to its MSN search engine. It also signed an advertising deal with the red-hot social networking site Facebook. The Wall Street Journal reported last week that Microsoft tried to buy Facebook though now the startup is in talks with Yahoo! (NASDAQ: YHOO).

"Microsoft's advertising business is growing quickly and becoming more sophisticated," says Joanne Bradford, Microsoft's corporate vice president of sales and marketing, in a press release. "It is our responsibility to clearly articulate to advertisers how they can apply our broad set of assets and relationships to reach consumers across the many digital touch points of their day."

Microsoft is putting all of its digital advertising eggs, including MSN and Windows Live, in one basket to ``better package its multiplying offerings'' to media buyers, according to the trade publication Media Week. Nonetheless, this is a fine line for the Redmond, Wash. company to walk.

I suspect that people aren't going to be thrilled to see advertisements in places where they aren't used to them. Plus, Microsoft will have to be careful that it doesn't put too many banners in one spot because advertisers don't want to annoy consumers either or have their messages get lost amidst clutter. Companies will have to get creative and design spots for new platforms instead of just repurposing television commercials.

Wall Street is plenty worried about Microsoft's online ad push. Chief Executive Steve Ballmer vowed last June to ``catch Google'' in terms of search relevancy in the next months, according to reports in Cnet and other media outlets. That's a mighty cocky attitude for the company that badly trails both Google and Yahoo! by a wide margin. His statement seemed to be just Bravado at the time.

Ballmer struck again in May. This time, he vowed to put $1.6 billion in MSN and its other online businesses. Investors paid attention and sent Microsoft's shares plummeting to their lowest level in five years, according to Bloomberg News. Analysts derided Ballmer for putting good money after bad and wondered whether he would ever catch Google. They also freetted about Google's efforts to steal Microsoft's core business through free offerings like spreadsheets and email. This coupled with the delays of the new Windows Vista system and worries about the economy made Microsoft the tech stock that Wall Street loved to hate. Between January and May, seven analysts downgraded the stock.

But a funny thing has happened lately. Microsoft is rebounding. The shares, which traded at $23.44 after Ballmer announced the big investment on May 4, recently traded at $26.79. A huge stock buyback and a boost in the dividend no doubt helped.

Don't take this as a sign that investors are thrilled witih Microsoft's online push. Sometimes even unpopular stocks get too cheap to ignore.