Are violent video games -- such as those showing the virtual representation of human bodies exploding, limbs being torn off or blood-soaked monsters -- the equivalent of constitutionally protected free speech, or pornography?

That’s essentially the question in front of the U.S. Supreme Court, which heard oral arguments on Tuesday regarding the constitutionality of a California law banning the sale of violent video games to minors.

While being argued primarily as a First Amendment issue, the case before the Court -- Schwarzenegger v. EMA -- could have potentially massive financial implications for the $30 billion video-game industry.

California enacted a law in 2005 banning the sale of games that depict “killing, maiming, dismembering, or sexually assaulting an image of a human being” or games the community would consider inappropriate for children. Retailers found guilty of selling violent video games to minors would face a $1,000 fine for each occurrence.

If found constitutional, video games would be the first type of media content banned for sale to minors because of violent, but not sexual, content. (Contrary to popular belief, it is not illegal for a minor to see an R-rated movie.)

California argues the state has a right to protect children of scenes of graphic violence, citing health organizations such as the American Psychological Association and the American Pediatric Association, which has said can lead to increased tendencies toward violent behavior.

The industry argues that dozens of other studies filed by social scientists and other researchers have shown video games have little impact on children’s behavior, and that any impact would require years of exposure,

“[Parents] have ample opportunities to exercise parental supervision over what games are being played in the house,” Paul Smith, who represented the industry in oral arguments.

Justices on both sides of the Court’s ideological spectrum expressed skepticism on the State of California’s claim that video games should be classified as a separate type of media requiring additional regulation.

“Some of the Grimm's fairy tales are quite grim, to tell you the truth,” Justice Anthony Scalia said. “Are they okay? Are you going to ban them, too?”

“What's the difference?” said Judge Ruth Bader Ginsburg. “I mean, if you are supposing a category of violent materials dangerous to children, then how do you cut it off at video games? What about films? What about comic books? Grimm's fairy tales?  Why are video games special?”

Like Hollywood, the video game industry has its own ratings agency that sets ratings for video games upon release. Games rated “M” or “Mature” are the equivalent of an “R” rating by the MPAA, and like movie ratings have no legal authority. The industry argues the ESRB, parent knowledge of video game ratings and retailer compliance provides enough of a safety net to keep violent video games from children.

Violence is big business for the video game industry. Blizzard-Activision’s “Call of Duty: Modern Warfare 2,” a game rated “M” by the Electronic Software Ratings Board sold more than $550 million in sales in the first five days of release. Other top-selling titles such as Microsoft’s (NASDAQ:MSFT) “Halo” franchise and Take-Two Interactive’s (NASDAQ:TTWO) “Grand Theft Auto” games have also been rated “M.”

While Justices Ginsberg and Scalia had issues with California’s legal justification, other Justices expressed thoughts that because video games are an interactive form of entertainment, they should be given a different form of scrutiny than books, movies or TV.

“We have here a new medium that cannot possibly have been envisioned at the time when the First Amendment was ratified,” said Justice Samuel Alito. “Now, reading [violence] is one thing. Seeing it as graphically portrayed [is another thing] and doing it is still a third thing.”

The Supreme Court is expected to rule on the constitutionality of the law before its term ends in June 2011.