Updated from 5:01 p.m. EST

The transition to a new generation of video-game technology is proving tough for industry leader

Electronic Arts

(ERTS)

.

The video-game software publisher on Thursday reported that earnings slumped in the holiday quarter, coming in below analysts' already lowered expectations.

Meanwhile, the company predicted more rocky times ahead, giving a current-quarter forecast significantly below the Street's estimates.

The disappointing outlook marks the sixth straight time the company has offered a worse-than-expected forecast in its quarterly report.

Despite the bad news, investors seemed willing to cut the company some slack. In recent after-hours exchanges, EA's shares were up $1.02, or about 2%, to $54.60.

In its fiscal third quarter, which ended Dec. 31, EA earned $259 million, or 83 cents, a share. That was down from the year-earlier period, when the company posted a profit of $375 million, or $1.18 a share.

Sales fell 11% year over year to $1.27 billion.

Excluding certain amortization and restructuring charges, EA would have earned $268 million, or 86 cents a share, in the just-completed period.

On this basis, analysts polled by Thomson First Call were expecting the company to earn 90 cents a share on $1.26 billion in sales.

But the Street's estimates were down significantly from where they were in mid-December, when the company

warned that its results would be "well below" its earlier target of $1.15 to $1.25 a share in earnings on sales ranging from $1.48 billion to $1.58 billion.

Looking forward, EA expects to lose 15 cents to 23 cents a share in the current quarter on sales ranging from $550 million to $600 million.

Excluding costs related to its planned acquisition of mobile-phone game publisher

Jamdat

(JMDT)

, restructuring charges and a tax on foreign earnings, the company expects to earn 6 cents to 14 cents a share.

Excluding those expenses, Wall Street had previously predicted that the company would earn 14 cents a share on sales of $625 million in the current period. On a GAAP basis, the company earned $8 million, or 2 cents a share, on sales of $553 million in the fiscal fourth quarter last year.

In an interview with

TheStreet.com

, CFO Warren Jenson attributed the company's troubles to the ongoing console transition.

Microsoft

(MSFT) - Get Report

launched its Xbox 360 console last fall, and

Sony

(SNE) - Get Report

and

Nintendo

are expected to debut their competing boxes later this year.

In the past, similar transitions to new game equipment have led to short-term declines in software sales and rising costs.

EA expects several positive developments this year, including the expansion of the installed base of next-generation console owners, growth in its handheld and mobile games business and new revenue opportunities from downloadable content for games for the new consoles, Jenson said.

But in the short term, the company continues to see soft sales and plans to continue to make investments to take advantage of those emerging markets, he said.

"We recognize that we're in a transition," he said. "This year has to be the year that we get ready for those trends."

The effects of the transition were readily apparent in EA's holiday quarter, as demand for games for older consoles fell off a cliff. EA's sales of games for Sony's PlayStation 2 fell 25% from a year earlier to $495 million. Sales of games for Microsoft's Xbox fell 35% to $152 million and those for Nintendo's GameCube 37% to $69 million.

EA did see an upsurge in games for new systems. Sales of games for Nintendo's DS jumped 125% to $36 million. And EA sold $76 million worth of Xbox 360 titles, $120 million worth of games for Sony's PSP handheld device, up from no sales of either a year ago, since both of were introduced in the U.S. within the last year. But those gains were nowhere near enough to make up for the loss of current-generation sales.

And the company's balance sheet echoes Jenson's warning about continued soft sales in the current quarter. At the end of the holiday quarter, EA's inventory was up 23% from the same period a year earlier to $76 million. Meanwhile, days sales outstanding as a function of holiday-quarter sales had jumped from less than 19 days a year ago to more than 40 days at the end of December.

While sales are falling, costs are rising. With declining demand for current-generation games, the company upped its reserves for price protection and returns in the holiday quarter, leading to a sharp drop in gross margins, Jenson said. Margins fell from 64.8% of sales a year earlier to 60.5% of sales in the just-completed period.

EA upped its marketing spending to $147 million, or 11.6% of sales, in the just completed quarter from $133 million, or 9.3% of sales a year earlier.

The investments the company is making in next-generation and other consoles showed up in its line for research and development spending, which rose 11% to $206 million. Research and development came in at 16% of sales from just 13% a year earlier.