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Mercury Interactive




setting a negative tone, major software issues moved lower Wednesday.

In recent trading, Mercury was off $5, or 13.6%, to $31.90 after warning late Tuesday that it won't meet its third-quarter revenue forecast. The company also said that a once informal investigation by the

Securities and Exchange Commission

into its past use of option grants is now formal. Volume was heavy.

Mercury said it expects to post revenue of $198 million to $203 million in the quarter, down from prior expectations of $205 million to $215 million.

"The disappointing third-quarter results are due primarily to the delayed timing of several large transactions as well as our continued transition in Europe," said Amnon Landan, chairman and CEO.

Downgraded by Morgan Stanley, was off as much as 5%, but recovered and in recent trading shares had shed 46 cents, or nearly 2%, to $23.34. Analyst Ross MacMillan dropped his rating to equal weight, saying he thinks expectations for new subscribers may be too high.

"While we would expect the company to beat our

third-quarter net new subscriber forecast of 35,000, we think the stock is already pricing in a much higher number," he wrote in a note to clients. Morgan Stanley is seeking investment banking business with

Meanwhile, Prudential downgraded



on valuation concerns. The stock has risen about one-third in the past two months.

The Goldman Sachs Software Index dropped 2.19 points to 164.29, a loss of 1.3%, with 40 of its 44 companies constituents companies showing losses. Other notables heading lower were

Take-Two Interactive


, which was off 4.1%;



, which lost 3.8%, and

Internet Security


, which lost 3.6%.