An unexpected run on toys has left retailers who gambled on tight inventories this holiday season scrambling to restock their shelves.

Fearing there would be little holiday shopping in the wake of the Sept. 11 attacks and after flat sales last year, many retailers cancelled or lightened up on toy orders. As it turns out, Americans have been on a toy-buying mini-binge, as money ordinarily spent on travel gets diverted. Demand for Harry Potter and

Monsters, Inc.

items, as well as for new video consoles and games, is high, leaving suppliers scrambling.

While video game makers like

Electronic Arts

(ERTS)

and

Activision

(ATVI) - Get Report

should be able to respond quickly, traditional toymakers like

Hasbro

(HAS) - Get Report

and

Mattel

(MAT) - Get Report

probably can't. As a result, video game sales could rise as much as 10% to 20% this season, while traditional toy sales are expected to be flat.

"Video units are created more quickly, whereas many of your traditional toys are outsourced from the Far East. That means there's more lag time," says Arvind Bhatia, video game analyst at Southwest Securities. The debut of two new game consoles -- Microsoft's Xbox and Nintendo's GameCube -- has video game demand through the roof. "It should be a very good year for video games compared to last year, which was lousy because it was a transition year. This Christmas you have two new platforms," he said.

I Am the Very Model

In the traditional toy business, Harry Potter and

Monsters, Inc.

seem to be driving demand. While there's no Tickle Me Elmo or Furby this year, several popular Harry Potter toys, like Hogwarts Castle and the Harry Potter Levitating Challenge, have flown off shelves. A fuzzy replica of the hairy blue monster in

Monsters, Inc.

called Glowing Bedtime Sully is also in high demand, as is a Nutcracker version of Barbie, G.I. Joe action figures and a Fisher-Price rescue hero named Billy Blaze the fireman, among other toys.

"If the stores had stocked up on key items, toy sales could have risen 4% to 5%," says Jim Silver, publisher of a trade magazine called

The Toy Book

and co-publisher of

Toy Wishes

, a consumer magazine that publishes a yearly top dozen toys list. "Now there's no way of getting those sales back. The feeling is it's going to be a somewhat flat season, or up just 1% compared to last year," he says.

At the end of the year, a couple of percentage points matter a lot. Last year, some $23 billion in traditional toys and $6.4 billion in video games were bought for kids in the U.S., according to the Toy Industry Association. Typically, close to 53% of the year's sales fall in the fourth quarter.

Historically, recession has been kinder to the toy business than to other retailers because adults are more reluctant to cut back on spending for their children than for themselves. In fact, toys are on the top of more shopping lists this year than last. Some 35% of families say toys are their biggest holiday shopping priority this year compared with 32% last year, according to a survey by the American Research Group, a consumer and market research group.

It doesn't hurt that discount shops like

Wal-Mart

(WMT) - Get Report

,

Kmart

(KM)

and

Target

(TGT) - Get Report

, which have become the most popular shopping destinations in recent months, are top toy sellers.

Toys R Us

(TOY)

has fallen to second place among toy retailers behind Wal-Mart in recent years.

Anabolic

Most stores have been paring inventories all year, and weren't prepared to bulk up after Sept. 11.

"Retailers didn't expect favorable shifts in consumer patterns post-Sept. 11," says Scott Barry, Hasbro and Mattel analyst at Credit Suisse First Boston. "There has been more than the traditional share of wallet set aside for toys as families make less travel-related and more family-related expenditures," he said.

Hasbro owns the license for toys based on

Monsters, Inc.

, while Mattel licenses most Harry Potter-related merchandise. Barry says these stocks are difficult investments in the near term, because they are so product-driven. Over the long term he prefers Mattel over Hasbro, which he says is "relatively full" from a valuation perspective. "You have to look at the long-term cash generating potential, and Mattel will be a tremendous cash-producing franchise." If the stock dips on weak holiday sales, it could be a good buying opportunity, he says. Mattel has fallen to $18.01 from $18.81 since Thanksgiving, while Hasbro has dropped to $16.86 from $18.

Microsoft

(MSFT) - Get Report

entered the game console market for the first time this year, launching its Xbox on Nov. 15. So far the company says it has shipped 1.1 million Xbox consoles to stores and expects to come close to its year-end target of 1.5 million. Nintendo, which introduced its GameCube console just three days after Microsoft, says it sold 600,000 units in 15 days. And Sony is still selling its PlayStation II, released last year, at a rapid clip. The company remains in first place in terms of console sales, says Bhatia, though market share figures aren't yet available.

All of that is good news for video game makers. Electronic Arts,

Take-Two Interactive

(TTWO) - Get Report

, Activision and

THQ

(THQI)

could have their best season in years. Activision recently raised its guidance for the remainder of the current year and for fiscal 2003.

Rein, Dear

The stocks spiked shortly after Black Friday, the day after Thanksgiving and one of the biggest shopping days of the year. They have since fallen back, but remain well above pre-Thanksgiving levels. Electronic Arts has jumped to $64.96 from $54; Take-Two has climbed to $15.15 from $14.43; Activision has gained $4.97 to $27.72; and THQ is up $4.96 to $56.96.

With consumers reining in their spending, overall holiday sales through early December are slower this year than last. Same-store sales through Dec. 2 are up 2.1%, compared with 3.2% last year through Dec. 4, according to TeleCheck Services, a check acceptance company and subsidiary of First Data Corp.

The pace could still pick up, says Telecheck's senior retail adviser Ira Silver. Totaling 32 days, this year's holiday shopping season is the longest since 1990. In a tough economic environment, consumers might also make more last-minute purchases hoping to get bargains and sales.