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Holiday video game software sales weren't so bad after all, according to new sales data.

Despite an overall consumer spending drought, video game software sales rose 7% on the year in December and posted a 20.7% gain for the year, according to market research firm NPD.

The boost was offset by a 12% sales drop for video game hardware, as

Sony

(SNE) - Get Sony Corp. Report

,

Microsoft

(MSFT) - Get Microsoft Corporation Report

and

Nintendo

engaged in a price war. Factoring in the software and hardware performance, game industry sales slipped 2% in December.

Once touted as the sole growth prospect in a depressed technology sector, game stocks have been whacked by a stream of sales warnings from several companies and gloomy 2003 forecasts.

Investors liked the latest news on sales, and nudged the sector's shares higher. Market share leader

Electronic Arts

(ERTS)

gained $1.47, or 3.1%, to $49.42, up slightly over its 52-week low.

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THQ

(THQI)

surged 84 cents, or 7.5%, to $11.99.

Activision

(ATVI) - Get Activision Blizzard, Inc. Report

gained 43 cents, or 3.1%, to $14.52.

Take-Two Interactive

(TTWO) - Get Take-Two Interactive Software, Inc. Report

, however, lost 75 cents, or 3.5% to $20.95, as the company's December sales slipped 5%, according to the NPD report.

"We believe the December data actually demonstrated a solid growth month for the sector," said Lehman Brothers analyst Felicia Rae Kantor in a research note. "Given all the recent hand-wringing that this sector was dead, we believe these results, particularly in a tough retail environment, illustrate that the cycle is progressing on plan." Lehman Brothers has no investment banking relationship with any of the mentioned game companies.

Kantor conceded that software sales growth for the year of 20.7% fell beneath her firm's projections of 29.8%, clipped by overly optimistic estimates for game sales on Sony's PlayStation 2 and Nintendo's GameCube Advance.

Electronic Arts led the charge, with six of the top 20 games in the month, including the latest chapter of

Lord of the Rings

and

Madden NFL 2003

. In December, sales increased 18% from the same period last year. For the year, Electronic Arts sales grew 37%.

Despite publishing the top-selling hit

Grand Theft Auto: Vice City

in December, Take-Two saw its sales fall 5% for December, but logged a 135% full-year sales gain from 2001.

THQ also saw strong sales growth of about 25% in December and the full year.

Of the major publishers, Activision was hit the hardest, seeing a 23% sales drop in the month and a 6% gain on an annual basis.

"We continue to believe that the industry isn't as bad as the data suggest," said UBS Warburg analyst Michael Wallace. UBS has done investment banking for THQ and

Acclaim Entertainment

(AKLM)

.