Updated from 1:43 p.m. EDT

Take-Two Interactive

(TTWO) - Get Report

pulled a nasty two-step Tuesday: first it posted a far worse-than-expected loss for the second quarter, then it warned investors to expect more of the same in the third quarter.

On the heels of the announcement, Take-Two's stock took a tumble. Shares closed in regular trading Tuesday at $28.65, down $1.62, or 5.35%. The low of the day was $27.40.

More than 12.2 million shares changed hands during the regular session, vs. the 30-day average daily volume of 1.2 million.

Citing a sales drop off at the end of its fiscal quarter due in part to the absence of its key title,

Grand Theft Auto

, the video-game software maker posted a loss of $14.58 million, or 33 cents a share. In the second quarter last year, the company earned $14.62 million, or 35 cents a share.

Sales fell 20.5% from the year-ago period to $153.37 million.

Those results fell short of Wall Street's estimates. Analysts had expected the company to lose 15 cents a share on $170.4 million in sales, according to Thomson First Call.

The company also didn't meet its own revised guidance. In April, Take-Two

warned that it wouldn't meet analysts' then-current forecasts. The company guided to a loss of 15 cents a share on about $170 million in sales, instead of the 33 cents a share in the quarter on nearly $220 million in sales that analysts expected at the time.

Unfortunately for investors, the company expects its poor performance to continue into the third quarter. Noting that the release dates for some of its titles had shifted from the third quarter to the fourth quarter or next year, the company warned that its results for the current quarter would again come in below analysts' estimates and its previous guidance.

Take-Two now expects to lose 28 cents to 33 cents a share in the third quarter on sales ranging from $130 million to $140 million. Wall Street had expected the company to earn 14 cents a share in the quarter on $189.85 million in sales.

As recently as April, when Take-Two lowered its second-quarter forecast, the company affirmed its outlook for the third quarter of earnings of 12 cents to 17 cents a share on revenue of $180 million to $200 million.

For the full year, the company now expects to earn $1.60 to $1.65 a share on sales of $1.125 billion to $1.145 billion. Analysts had previously forecast earnings of $1.98 a share on $1.16 billion in sales.

"Our revised guidance takes into account the lessons we've learned," Karl Winters, the company's CFO, said on a conference call Tuesday morning.

The warning marked the fourth time in the last six months the company has lowered its previous earnings guidance. In recent months, Take-Two has replaced both its

chairman and its CEO,

restated its earnings for 1999 through parts of 2003 and stated that the

Securities and Exchange Commission

was considering a civil action against it.

Despite all the turmoil, many analysts and investors remain bullish on the stock. Many expect

Grand Theft Auto: San Andreas

to be the best-selling game this year. Meanwhile, the company has successfully developed other franchises, such as its

Max Payne

series and its new

Red Dead Revolver

title, noted P.J. McNealy, who covers the company for American Technology Research.

"Certainly it's not helpful when they can't forecast their catalog sales well," McNealy said. "It's never good to miss a quarter and lower guidance. But fundamentally, they didn't cancel any games.

"The new franchises sold, and

Grand Theft Auto

is on track," he added. (American Technology Research doesn't do investment banking and McNealy does not own Take-Two.)

Indeed,

Grand Theft Auto

is the key to Take-Two, noted Michael Pachter, who covers the company for Wedbush Morgan. Investors seem willing to forgive the companies foibles as long as that title remains a part of its lineup.

"This is the 'Barbie' story," Pachter said. "When you think of Mattel, you think of Barbie. When you think of Take-Two, you think of

Grand Theft Auto

. "It's a one-hit wonder that's a hell of a hit." (Wedbush Morgan does not have investment banking business with Take-Two, and Pachter does not own the company's stock.)

The company's revenues and earnings slipped in the second quarter due to a drop in performance of its top titles, Winters said. In the same period last year, the company's top five game titles accounted for 44% of Take-Two's revenue, he said. In the just-completed quarter, those titles accounted for just 33% of the lowered amount of sales.

Part of the problem was that the company won't release

Grand Theft Auto: San Andreas

, the latest version of its super-popular game, until October. Unlike some of the company's other games, the ship date on

San Andreas

has not slipped.

But the company did not release a new

Grand Theft Auto

title last year, and sales of the franchise have tapered off pending the upcoming release. Last year, the company was still enjoying strong sales from the previous iteration of the franchise:

Grand Theft Auto: Vice City

.

In general, the company's older catalog titles didn't perform well in the quarter, Winters said. That meant that the company's distribution business -- where it distributes titles on behalf of other publishers -- comprised a greater proportion of its revenues than in past quarters. Because Take-Two doesn't own those titles, it sees fewer profits on their sale.

That factor helped trip up the company's gross margin in the quarter. Take-Two's gross margin -- the difference between what customers pay for its products and the company's direct costs of producing and acquiring them -- fell to just 22.3% of sales from 37.0% of sales in the second quarter last year.

Meanwhile, despite the company's drop in sales, its operating costs jumped 23% in the quarter to $58.46 million. Take-Two's research and development costs nearly doubled in the quarter, while its general and administrative expenses were up by nearly 50%.

The company has put in place a cost-reduction plan, Winters said. As part of that plan, the company is revising its compensation of employees and managers, providing more incentive compensation to encourage them to meet sales and operations targets, company officials said on the call. Take-Two expects its bottom line to benefit from the cost savings in the second half of this year, Winters said.