Across the country over three November days, thousands of hard-core gamers waited for hours to be among the first to buy Sony's PlayStation 3 and Nintendo's Wii.

Lined up in the cold and darkness, they were on hand to officially kick off the next-generation video console wars, with long queues for the PS3 in New York and San Francisco, and for the Wii in New York and Los Angeles. And across the country, for both.

After some recent stumbles, Nintendo, with its innovative motion-sensitive Wii controller, has a chance to regain a reputation as a serious player in the console space. For Sony, the PS3 is in some ways a Trojan horse for the high-definition Blu-ray format. Sony has many critics to silence, especially those who worry that the company's losing too much money on the cost of manufacturing each unit.

Microsoft took a back seat to Sony and Nintendo, at least in terms of launch PR, but did produce some noteworthy Xbox news. Perhaps the most interesting was its XNA Studio Express initiative, which lets nearly anyone create games and distribute them on the Xbox and on Windows PCs.

The software giant also announced that its Xbox Live service would begin offering movies and TV shows for download.

For the industry, the conclusion of several years of console hype is likely one reason for the Entertainment Software Association's August decision to end its annual E3 convention in L.A., as a mammoth affair, and turn instead to a smaller, invite-only event. Despite proclamations that E3 would no longer let "booth babes" prowl the E3 show floor, the fact that E3 2006 was heavy with the scantily clad women raises questions about what role they will play in the event's future.

Sex was a big issue in the video game industry in 2006, as proven by the first-ever Sex in Video Games conference in June in San Francisco. Hundreds came to discuss how to make and market adult-only games without running afoul of regulators.

That's important, especially because many people are still upset over last year's "Hot Coffee" scandal, in which the hit game Grand Theft Auto: San Andreas had built-in sexual content available via a simple modification, despite being rated for ages 17 and up. After months of controversy, the game's publisher, Take Two, settled with the U.S. Federal Trade Commission, agreeing to never hide such content again.

This was also a year in which online games and virtual worlds made substantial inroads. Second Life, which took three years to grow to a million registered accounts, took just eight weeks to make its second million. Its publisher, Linden Lab, also dealt with growing questions about its scalability, especially in light of the quick growth.

At the same time, Second Life became a destination for large organizations including IBM, Dell, Major League Baseball and others looking for new ways to reach potential customers. Helping to meet the Second Life needs of those companies is a new breed of contractor, like The Electric Sheep, which has more than 30 employees doing little else but build projects in the virtual world.

World of Warcraft also made news. First, it hit 6 million, and then 7 million, paid subscribers. It also released the beta of a major expansion, The Burning Crusade. But it also had troubles, including a stretch in April when its servers were crashing, making it difficult for players to get into the game.

WoW also made news when it decided to ban a gay- and lesbian-oriented guild on the theory that its members faced sexual harassment from the general WoW population.

--Daniel Terdiman

2006 Highlights

Online game warns gay-lesbian guild

World of Warcraft publisher tells guild that it risks being banned if it doesn't cease its recruiting activities.

PlayStation 3 component prices: Why so high?

No one knows exactly how much it'll cost to put a PS3 together, but Sony might take a hit on each box sold.

'Second Life' dreams of Electric Sheep

A tiny start-up is helping big companies make their mark on the virtual world.

Despite controversy, 'booth babes' still prowl E3

After "Hot Coffee" scandal, gaming trade show said days of scantily clad models were through. Ahem.

'Second Life': Don't worry, we can scale

Critics say the virtual world is running on a computer network that could have problems growing with demand.

'Grand Theft Auto' makers settle with FTC

Government says agreement forces video game's publishers to follow labeling rules strictly or face steep fines.

Sex, schmoozing and video games

The first-ever conference about the future of the adult-oriented video games industry kicks off in San Francisco

Why E3's shifting to a smaller playing field

Like other tech confabs, the gaming industry's biggest conference seeks intimacy in 2007.

Play your own Xbox game

Microsoft plans free tools for enthusiasts to make their own games, but at first only other hard-core gamers will be able to share the creations.

Xbox Live cues up TV, movie downloads

New feature appears to be Microsoft's latest attempt to colonize the living room.

Game on: PS3, Wii finally hitting stores

No longer does Microsoft's Xbox 360 have the next-generation video game console market to itself. But who will come out on top?

For Sony, the PS3 is about more than gaming

The Japanese electronics giant has had a rough year, but the new console could be a key to turning things around.

Next-gen console war off and running

With the release of Nintendo's Wii hot on the PS3's heels, the game market now has all three big-name competitors.

IRS taxation of online game virtual assets inevitable

A series of tax law experts weigh in on whether the transfer of virtual goods in online games is taxable.