Updated from 6:04 p.m. EDT

Take-Two Interactive ( TTWO) is ceasing production of the latest version of its popular Grand Theft Auto game following public outcry about a software hack that allows players to see racy sex scenes.

The video-game software publisher is setting up a reserve fund to cover the value of copies of the game still in its inventory. As a result, Take-Two is slashing its outlook for its fiscal third quarter and its full fiscal year.

Investors frowned on the news, sending the company's stock down nearly 7% in after-hours trading.

The move is in response to and follows the completion of an investigation by the Entertainment Software Rating Board, a regulatory body set up by the gaming industry. New York Sen. Hillary Rodham Clinton and other public officials have called for separate inquiries.

The ESRB has advised retailers to stop selling GTA until the "corrective actions" have been taken.

According to the ESRB, Take-Two agreed as part of the settlement to either re-label for retailers the current version of GTA with an Adults Only rating or to exchange all unsold copies the retailers are holding for copies of the updated game

Take-Two "is pleased that the ESRB investigation is now settled," the company said in a statement.

The Grand Theft Auto series has long been controversial for its depictions of street gang violence. Sans modification, the games have included scenes that imply sex between some of the characters. But a third-party program called "hot coffee" that is available over the Internet allows players to see their character actually engage in sex.

Some analysts have charged that the "hot coffee" modification simply allowed access to scenes that were already built into the game. Take-Two spokesman Jim Ankner acknowledged that the scenes were on the game discs, but said they were examples of "unused and unfinished" content that is often found on game discs when they ship. Game players could not view the scenes without the hot coffee program, the installation of which constitutes a violation of the end-user agreement, Ankner said.

"In the future, we will be more diligent to be sure that content like that is removed," he said.

As part of the move, the ESRB is changing its rating on all versions of Grand Theft Auto: San Andreas from "Mature" to the more restrictive "Adults Only." Take-Two plans to issue a patch for the PC version of San Andreas that will block the "hot coffee" program. Ankner said the patch will be available in "a couple weeks." However, the ESRB has said the hot coffee version was also found on the PlayStation and Xbox versions.

The ESRB advises that "Mature" games are for people 17 and older and recommends that "Adults Only" be played just by adults. However the ratings are merely guidelines and retailers can choose whether or not to enforce them; according to the ESRB, most major U.S. retailers do.

Meanwhile, Take-Two plans to issue a new version of San Andreas in its fiscal fourth quarter that will also block the hot coffee modification. That version will carry the original "Mature" rating on the game and will likely be released in September or October, Ankner said.

Take-Two now expects to lose 40 cents to 45 cents a share in its current quarter on sales ranging from $160 million to $170 million. For the full year, the company expects to earn $1.05 to $1.12 a share on sales of $1.26 billion to $1.31 billion.

Previously, the company had predicted that it would lose 5 cents to 10 cents a share on sales ranging from $205 million to $215 million in the current quarter.

The reserve fund is an effort to protect the company against potential returns from retailers, Ankner said. Ankner declined to say how the controversy over the hot coffee scenes was affecting sales of San Andreas. But he did say that "there has been a lot of interest in the game" both before and after the hullabaloo arose.

San Andreas was the best-selling video game last year and the Grand Theft Auto series has been one of the best selling game franchises of all time.

In recent trading in the after-hours markets, Take-Two's stock was off $1.81, or 6.7%, to $25.26. The company's shares closed regular trading up 12 cents, or 0.5%, to $27.07.

Despite the public outcry, Ankner said the ESRB investigation was the only one of which he is aware concerning the hot coffee modification.