8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): February 3, 2005

Mercury Interactive Corporation

(Exact name of registrant as specified in its charter)

Delaware	0-22350	77-0224776
(State or other jurisdiction of incorporation)	(Commission File No.)	(IRS Employer Identification No.)

379 North Whisman Road, Mountain View, California 94043

(Address of Principal Executive Offices)

(Registrant’s Telephone Number, Including Area Code)

(650) 603-5200

(former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Solicitation material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 241.14a-12)

¨ Pre-commencement communications pursuant to rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 1.01 Entry into a Material Definitive Agreement

Change of Control Agreements. On February 3, 2005, Mercury Interactive Corporation (“Mercury” or the “Company”), entered into Change of Control Agreements with Yuval Scarlat, Mercury’s Sr. Vice President, Products and certain other executive officers. The Change of Control Agreements are in the form of the Amended and Restated Change of Control Agreements that Mercury currently has in place with its other executive officers and provide for specified severance benefits upon the involuntary termination (including resigning for good reason) or termination of the executive’s employment as a result of disability or death within 18 months following a change of control of Mercury, consisting of: (i) severance pay equal to 12-months of the executive’s base compensation and annual target bonus as of the date employment ceases, (ii) continued coverage under Mercury’s health, life, dental and other insurance programs for the 12-month severance pay period, and (iii) accelerated vesting of all stock options, shares of restricted stock and other forms of long-term compensation held by the executive at the time of termination. The foregoing description of the Change of Control Agreement does not purport to be complete and is qualified in its entirety by reference to such agreement, a copy of which was filed in the form of an Amended and Restated Change of Control Agreement as Exhibit 10.2 to the Form 8-K filed on December 21, 2004 and is incorporated by reference herein.

On February 3, 2005, the Compensation Committee (the “Committee”) of the Board of Directors of Mercury also approved the following actions:

2005 Long-Term Incentive Plan and Cash Award Participation Notices. The Committee approved the participation in its Long-Term Incentive Plan for 2005 of Amnon Landan, Mercury’s chief executive officer, Douglas Smith, Yuval Scarlat, and Zohar Gilad, and certain other executive officers and approved the criteria for potential cash awards under the Long-Term Incentive Plan that will be based on the Company’s 2005 performance. The amounts and payments of these cash awards will be based upon the Company’s earnings per share and bookings growth during the performance period from January 1, 2005 through December 31, 2005. If the specified performance goals for 2005 are met, the cash awards will be paid if the individual remains with the Company for two more years after the end of this performance period, meaning the awards will become vested and paid in the first quarter of 2008 (or earlier if an individual’s employment is terminated without cause before the award becomes vested). The maximum cash award for the executive officers named above is set forth in the table below. A copy of the form of Long-Term Incentive Plan Participation Notice is attached hereto as Exhibit 10.1. Specific information regarding earnings per share and bookings growth targets have been omitted from the Participation Notice as they involve confidential business information, the disclosure of which would have an adverse effect on the Company.

Options, Salary and Incentive Bonus Amounts. The Committee also approved the grant of stock options, the payment of 2004 cash bonuses, and the establishment of target bonuses for 2005 under the Company’s annual incentive plan (the “Annual Incentive Plan”) for each of Messrs. Landan, Smith, Scarlat, and Gilad and certain other executive officers. Each of the options will have an exercise price equal to the fair market value of Mercury’s common stock on the date of grant and a ten-year term, will vest at 25% one year from the vesting commencement date and at 1/48 per month over the next 36 months and will remain exercisable for a period of 7 months after termination of employment for any reason, except for Mr. Landan’s option, which will remain exercisable for a period of 12 months after termination of employment for any reason. Payment of the 2004 cash bonuses was primarily dependent on the achievement of five metrics, with various weightings for each, consisting of (1) growth in revenue, (2) increase in operating margin, (3) growth in new revenue, (4) change in cash flow from operations, and (5) growth in market capitalization.

In addition, the Committee approved an increase in base salary for Yuval Scarlat, the Senior Vice President, Products from $290,000 to $325,000, to become effective in April 2005.

The following table sets forth, for each of the officers named above, the bonus awarded for 2004, the target bonus for 2005 under the Annual Incentive Plan, and the maximum potential award under the LTIP described above for the 2005 performance period:

Name	Title	2004 Bonus Payment		Target Bonus for 2005 Annual Incentive Plan		2005 LTIP Maximum Cash Award
Amnon Landan	Chairman and CEO	$	800,000	$	750,000	$	1,600,000
Doug Smith	EVP and CFO	$	350,000	$	375,000	$	800,000
Yuval Scarlat	Sr. VP, Products	$	145,000	$	225,000	$	500,000
Zohar Gilad	VP, Strategy	$	100,000	$	112,000	$	250,000

The foregoing descriptions of the Long-Term Incentive Plan, Participation Notice and option agreements do not purport to be complete and are qualified in their entirety by reference to such agreements and participation notices (including any schedules and exhibits thereto), copies of which are filed as Exhibit 10.1 to the Company’s Form 8-K filed on December 21, 2004, and Exhibits 10.1, 10.2 and 10.3 hereto, respectively, and are incorporated by reference herein.

Item 9.01 Financial Statements and Exhibits

(c) Exhibits.

10.1    Form of Long-Term Incentive Plan Participation Notice

10.2    Form of Amnon Landan Notice of Grant and Option Agreement

10.3    Form of Notice of Grant and Option Agreement for certain NEOs and executive officers

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: February 9, 2005	MERCURY INTERACTIVE CORPORATION
	By:	/s/ Susan J. Skaer
	Name:	Susan J. Skaer
		Vice President, General Counsel and Secretary

EX-10.1

EXHIBIT 10.1

Form of Participation Notice

Mercury Interactive Corporation

Long-Term Incentive Plan

Name:
Title:
Performance Period:	January 1 through December 31,

Capitalized terms used in this Participation Notice (“Notice”) but not otherwise defined shall have the respective meanings ascribed to them in the Long-Term Incentive Plan (the “Plan”) attached hereto as Exhibit A and incorporated herein by this reference.

Criteria/Amount of Award:

• Non-GAAP Earnings per share (“EPS”) and Bookings Growth of the Company (together, the “Criteria”), with the targets based on the Company’s Business Plan for the Performance Period approved by the Company’s Board of Directors.

• Target cash Award amount for this Performance Period:                          (representing 100% in the matrix below), with a maximum potential cash Award of [    ]% of the target.

• In addition, you are eligible for a grant of (or have been granted) an option to purchase              shares under the terms of the Equity Plan. The terms of the option will be governed by the Equity Plan and the applicable option agreement.

Performance Goals:

• The amount of a cash Award is based on the Company’s achievement (as determined by the Committee in its sole discretion) of the Performance Goals as set forth in the matrix below:

Performance Matrix

Award Percentage

EPS

Bookings Growth

• Examples:

• If the Company achieves the minimum Performance Goal for each of the Criteria, then the Participant shall be granted a cash Award equal to     % of the total cash Award amount.

• If the Company does not achieve the minimum Performance Goal for each of the Criteria, then the Participant shall not be granted a cash Award.

Vesting and Payment of Cash Awards:

• The vesting of cash Awards shall occur over a two year period after the end of the Performance Period. Payment of cash Awards will be made in the first quarter following full vesting of a cash Award (or Q1         ), subject to earlier payment in the limited circumstances set forth in Section 4(d) of the Plan.

I hereby acknowledge and agree that my Mercury Interactive Corporation Long-Term Incentive Plan is comprised of this Participation Notice listing my Performance Goals and the Criteria on which they are based together with the Plan attached hereto as Exhibit A and incorporated herein by this reference (collectively, this “Notice/Plan”). I further acknowledge and agree that this Notice/Plan is effective during the Performance Period, unless modified in writing. Each new/modified Notice/Plan supersedes and cancels all previous Notice/Plans and any other oral or written commitment with respect to the subject matter of this Notice/Plan.

“Participant”	Mercury Interactive Corporation
Signature:	By:
Date:	Name:
	Its:

EX-10.2

EXHIBIT 10.2

MERCURY INTERACTIVE CORPORATION

AMENDED AND RESTATED 1999 STOCK OPTION PLAN

NOTICE OF STOCK OPTION GRANT

[optionee]

[address]

You have been granted an Option under the Amended and Restated 1999 Stock Option Plan (the “Plan”). The terms of your Option are governed by the Plan, the Stock Option Agreement attached hereto (including Exhibit A to the Stock Option Agreement) and this Notice of Stock Option Grant. (The Stock Option Agreement, including Exhibit A and this Notice of Stock Option Grant together will be referred to as the “Option Agreement.”). Unless otherwise stated herein, all capitalized terms in the Stock Option Agreement shall have the same meaning as defined in the Plan and in the Stock Option Agreement. Your Option is an option to purchase shares of Common Stock of Mercury Interactive Corporation (“Company”) as follows:

Date of Grant	[date]
Vesting Commencement Date	[date]
Exercise Price Per Share	$ [exercise price]
Total Number of Optioned Shares Granted	[shares]
Total Exercise Price of Shares Granted	$ [total price]
Grant Number
Type of Option	¨ Incentive Stock Option
	x Nonqualified Stock Option
Term/Expiration Date	10 years/

Exercise Schedule:

This Option may be exercised in whole or in part, in accordance with the Vesting Schedule set out below.

Vesting Schedule

25% of the Total Number of Optioned Shares vest on the 1^st anniversary of the Vesting Commencement Date and thereafter, 1/48^th of the Total Number of Optioned Shares vest monthly on the monthly anniversary of the Vesting Commencement Date until fully vested. In the event of fractional Shares, the monthly number of Shares shall be adjusted accordingly to the nearest whole Share.

Termination Period:

Option may be exercised for twelve (12) months after termination of active employment or consulting relationship except as set out in Sections 5, 6 and 7 of the Stock Option Agreement (but in no event later than the Expiration Date).

Form of Exercise:

Exercise of this Option shall be on a properly executed Exercise Notice in the form provided by the Company, along with (i) cash, (ii) check or (iii) if by broker sale, delivery of such documentation as the Plan Administrator and the broker shall require to effect delivery of the sale or loan proceeds required to pay the exercise price and any tax withholding resulting from such exercise, unless provided otherwise in Exhibit A to the Stock Option Agreement.

OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THIS OPTION IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY’S AMENDED AND RESTATED 1999 STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH HIS/HER RIGHT OR THE COMPANY’S RIGHT TO TERMINATE HIS EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.

Optionee acknowledges receipt of a copy of the Plan and certain information related to it and represents that he or she is familiar with the terms and provisions of the Plan and this Option Agreement. Optionee accepts this Option Agreement subject to all such terms and provisions. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Option Agreement.

By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the AMENDED AND RESTATED 1999 STOCK OPTION PLAN and the Option Agreement, each of which are attached and made a part of this document.

OPTIONEE:	MERCURY INTERACTIVE CORPORATION,
	a Delaware corporation
/s/	By:	/s/
Signature
	Title:
Print Name
Dated:	Dated:

I am unmarried or reside in a separate property state             .

Spousal consent attached             .

I am married and have previously filed a spousal consent with the Company             .

EXHIBIT A TO NOTICE OF GRANT

STOCK OPTION AGREEMENT

FOR THE MERCURY INTERACTIVE CORPORATION

AMENDED AND RESTATED 1999 STOCK OPTION PLAN

1. Grant of Option. Mercury Interactive Corporation, a Delaware corporation (“the Company”), has granted to the Optionee named in the Notice of Grant (the “Optionee”), an option (the “Option”) to purchase a total number of shares of Common Stock (the “Shares”) set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “Exercise Price”), and in all respects subject to the terms, definitions and provisions of the Amended and Restated 1999 Stock Option Plan (the “Plan”) adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings herein.

If designated an Incentive Stock Option, this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code.

2. Exercise of Option. This Option shall be exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows:

(a) Right to Exercise.

(i) Subject to subsections 2 (a) (ii), (iii) and (iv ) below, this Option shall be exercisable cumulatively, as set forth in the Notice of Grant; provided, however, that the vesting schedule shall temporarily cease during any period of time that the Optionee’s employment is subject to an approved leave of absence in excess of thirty (30) days and recommences thereafter. This Option may be exercised in whole or in part at any time as to the Shares which have not yet vested under the vesting schedule; provided, however, that the Optionee shall execute as a condition to such exercise of this Option, the Restricted Stock Purchase Agreement attached hereto as Exhibit A.

(ii) This Option may not be exercised for a fraction of a share.

(iii) In the event of Optionee’s death, disability or other termination of employment, the exercisability of the Option is governed by Sections 5, 6 and 7 below, subject to the limitations contained in subsection 2(a)(iv).

(iv) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in Section 9 below.

(b) Method of Exercise. This Option shall be exercisable by written notice which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements with respect to such Shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon the receipt by the Company of such written notice accompanied by the Exercise Price.

No share will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock

exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares.

3. Method of Payment.

(a) Forms of Consideration Authorized. Payment of the Exercise Price shall consist of: (i) cash; (ii) check; (iii) by means of a Cashless Exercise, as defined in this Section 3(b); or (iv) by any combination of the foregoing.

(b) A “Cashless Exercise” means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to decline to approve or terminate any such program or procedure.

4. Restrictions on Exercise. This Option may not be exercised until such time as the Plan has been approved by the stockholders of the company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations (“Regulation G”) as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation.

5. Termination of Status as an Employee. In the event of termination of Optionee’s Continuous Status as an Employee, the Optionee may, but only within twelve (12) months after the date of such termination (but in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), exercise this Option to the extent exercisable at the date of such termination. To the extent this Option was not exercisable at the date of such termination, or if the Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

6. Disability of Optionee. Notwithstanding the provisions of Section 5 above, in the event of termination of Optionee’s Continuous Status as an Employee as a result of Optionee’s total and permanent disability (as defined in Section 22 (e) (3) of the Code), the Optionee may, but only within twelve (12) months from the date of termination of employment (but in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), exercise this Option to the extent exercisable at the date of such termination. To the extent that the Option was not exercisable at the date of termination, or if the Optionee does not exercise such Option within the time specified herein, the Option shall terminate.

7. Death of Optionee. In the event of the death of Optionee:

(a) during the term of this Option and while an Employee of the Company and having been in continuous status as an Employee since the date of grant of the Option, the Option may be exercised in full even as to shares which otherwise would not have been vested, at any time within twelve (12) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), by Optionee’s estate or by a person who acquired the right to exercise; or

(b) within thirty days after the termination of Optionee’s Continuous Status as an Employee, the Option may be exercised, at any time within twelve (12) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), by Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise what had accrued at the date of termination.

8. Non-Transferability of Option; Successors and Assigns. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

9. Term of Option. This Option may not be exercised more than ten (10) years (five years if Optionee owns, immediately before this Option is granted, stock representing more than 10 percent of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary) from the date of grant of this Option, and may be exercised during such term only in accordance with the Plan and the terms of this Option.

10. Taxation Upon Exercise of Option. Optionee understands that, upon exercising a Nonstatutory Stock Option, he or she will recognize income for tax purposes in an amount equal to the excess of the then fair market value of the Shares over the Exercise Price, and that if the Optionee is an employee, the Company will be required to withhold federal and state taxes from Optionee’s compensation, or collect withholding taxes from Optionee at the time of exercise. Optionee understands that if the Option qualifies as an ISO, upon the exercise of the Option, the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise. Optionee acknowledges that he or she has been given the opportunity to consult and is relying solely on tax and legal counsel of his or her own choosing with regard to the exercise of his or her Option.

11. Notice of Disqualifying Disposition of ISO Shares. If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to ISO on or before the later of (1) the date two years after the Date of Grant, or (2) the date one year after the date of exercise, Optionee hereby agrees to notify the Company in writing within 30 days after the date of any such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee from the early disposition by payment in cash or out of the current earnings paid to the Optionee. Optionee understands that if he disposes of such shares at any time after the expiration of such two-year and one-year holding periods, any gain on such sale will be taxed as long-term capital gain.

12. Designation of Beneficiary .. The Employee shall have the right to appoint any individual or legal entity in writing, on Exhibit B to the Notice of Grant, as his or her beneficiary to receive any Option (to the extent not previously exercised or forfeited) under this Agreement upon the Employee’s death. Such designation under this Agreement may be revoked by the Employee at any time and a new beneficiary may be appointed by the Employee by execution

and submission to the Stock Administration Department of the Company of a revised Exhibit B to this Agreement. In order to be effective, a designation of beneficiary must be completed by the Employee on Exhibit B and received by the Stock Administration Department of the Company, prior to the date of the Employee’s death. In the absence of such designation, the Employee’s beneficiary shall be the person designated under the Employee’s will or as defined by the applicable state laws of the decedent’s distribution.

OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES SUBJECT TO THIS OPTION IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY’S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH HIS OR HER RIGHT OR THE COMPANY’S RIGHT TO TERMINATE HIS OR HER EMPLOYMENT AT ANY TIME, WITH OR WITHOUT CAUSE.

EX-10.3

EXHIBIT 10.3

MERCURY INTERACTIVE CORPORATION

AMENDED AND RESTATED 1999 STOCK OPTION PLAN

NOTICE OF STOCK OPTION GRANT

[optionee]

[address]

You have been granted an Option under the Amended and Restated 1999 Stock Option Plan (the “Plan”). The terms of your Option are governed by the Plan, the Stock Option Agreement attached hereto (including Exhibit A to the Stock Option Agreement) and this Notice of Stock Option Grant. (The Stock Option Agreement, including Exhibit A and this Notice of Stock Option Grant together will be referred to as the “Option Agreement.”). Unless otherwise stated herein, all capitalized terms in the Stock Option Agreement shall have the same meaning as defined in the Plan and in the Stock Option Agreement. Your Option is an option to purchase shares of Common Stock of Mercury Interactive Corporation (“Company”) as follows:

Date of Grant	[date]
Vesting Commencement Date	[date]
Exercise Price Per Share	$ [exercise price]
Total Number of Optioned Shares Granted	[shares]
Total Exercise Price of Shares Granted	$ [total price]
Grant Number
Type of Option	¨ Incentive Stock Option
	x Nonqualified Stock Option
Term/Expiration Date	10 years/

Exercise Schedule:

This Option may be exercised in whole or in part, in accordance with the Vesting Schedule set out below.

Vesting Schedule

25% of the Total Number of Optioned Shares vest on the 1^st anniversary of the Vesting Commencement Date and thereafter, 1/48^th of the Total Number of Optioned Shares vest monthly on the monthly anniversary of the Vesting Commencement Date until fully vested. In the event of fractional Shares, the monthly number of Shares shall be adjusted accordingly to the nearest whole Share.

Termination Period:

Option may be exercised for seven (7) months after termination of active employment or consulting relationship except as set out in Sections 5, 6 and 7 of the Stock Option Agreement (but in no event later than the Expiration Date).

Form of Exercise:

Exercise of this Option shall be on a properly executed Exercise Notice in the form provided by the Company, along with (i) cash, (ii) check or (iii) if by broker sale, delivery of such documentation as the Plan Administrator and the broker shall require to effect delivery of the sale or loan proceeds required to pay the exercise price and any tax withholding resulting from such exercise, unless provided otherwise in Exhibit A to the Stock Option Agreement.

OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THIS OPTION IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY’S AMENDED AND RESTATED 1999 STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH HIS/HER RIGHT OR THE COMPANY’S RIGHT TO TERMINATE HIS EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.

Optionee acknowledges receipt of a copy of the Plan and certain information related to it and represents that he or she is familiar with the terms and provisions of the Plan and this Option Agreement. Optionee accepts this Option Agreement subject to all such terms and provisions. Optionee has reviewed the Plan and this Option Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Option Agreement and fully understands all provisions of the Option Agreement.

By your signature and the signature of the Company’s representative below, you and the Company agree that this Option is granted under and governed by the terms and conditions of the AMENDED AND RESTATED 1999 STOCK OPTION PLAN and the Option Agreement, each of which are attached and made a part of this document.

OPTIONEE:	MERCURY INTERACTIVE CORPORATION,
	a Delaware corporation
/s/	By:	/s/
Signature
	Title:
Print Name
Dated:	Dated:

I am unmarried or reside in a separate property state             .

Spousal consent attached             .

I am married and have previously filed a spousal consent with the Company             .

EXHIBIT A TO NOTICE OF GRANT

STOCK OPTION AGREEMENT

FOR THE MERCURY INTERACTIVE CORPORATION

AMENDED AND RESTATED 1999 STOCK OPTION PLAN

1. Grant of Option. Mercury Interactive Corporation, a Delaware corporation (“the Company”), has granted to the Optionee named in the Notice of Grant (the “Optionee”), an option (the “Option”) to purchase a total number of shares of Common Stock (the “Shares”) set forth in the Notice of Grant, at the exercise price per share set forth in the Notice of Grant (the “Exercise Price”), and in all respects subject to the terms, definitions and provisions of the Amended and Restated 1999 Stock Option Plan (the “Plan”) adopted by the Company, which is incorporated herein by reference. Unless otherwise defined herein, the terms defined in the Plan shall have the same defined meanings herein.

If designated an Incentive Stock Option, this Option is intended to qualify as an Incentive Stock Option as defined in Section 422 of the Code.

2. Exercise of Option. This Option shall be exercisable during its term in accordance with the provisions of Section 9 of the Plan as follows:

(a) Right to Exercise.

(i) Subject to subsections 2 (a) (ii), (iii) and (iv ) below, this Option shall be exercisable cumulatively, as set forth in the Notice of Grant; provided, however, that the vesting schedule shall temporarily cease during any period of time that the Optionee’s employment is subject to an approved leave of absence in excess of thirty (30) days and recommences thereafter. This Option may be exercised in whole or in part at any time as to the Shares which have not yet vested under the vesting schedule; provided, however, that the Optionee shall execute as a condition to such exercise of this Option, the Restricted Stock Purchase Agreement attached hereto as Exhibit A.

(ii) This Option may not be exercised for a fraction of a share.

(iii) In the event of Optionee’s death, disability or other termination of employment, the exercisability of the Option is governed by Sections 5, 6 and 7 below, subject to the limitations contained in subsection 2(a)(iv).

(iv) In no event may this Option be exercised after the date of expiration of the term of this Option as set forth in Section 9 below.

(b) Method of Exercise. This Option shall be exercisable by written notice which shall state the election to exercise the Option, the number of Shares in respect of which the Option is being exercised, and such other representations and agreements with respect to such Shares of Common Stock as may be required by the Company pursuant to the provisions of the Plan. Such written notice shall be signed by the Optionee and shall be delivered in person or by certified mail to the Secretary of the Company. The written notice shall be accompanied by payment of the Exercise Price. This Option shall be deemed to be exercised upon the receipt by the Company of such written notice accompanied by the Exercise Price.

No share will be issued pursuant to the exercise of an Option unless such issuance and such exercise shall comply with all relevant provisions of law and the requirements of any stock

exchange upon which the Shares may then be listed. Assuming such compliance, for income tax purposes the Shares shall be considered transferred to the Optionee on the date on which the Option is exercised with respect to such Shares.

3. Method of Payment.

(a) Forms of Consideration Authorized. Payment of the Exercise Price shall consist of: (i) cash; (ii) check; (iii) by means of a Cashless Exercise, as defined in this Section 3(b); or (iv) by any combination of the foregoing.

(b) A “Cashless Exercise” means the assignment in a form acceptable to the Company of the proceeds of a sale or loan with respect to some or all of the shares of Stock acquired upon the exercise of the Option pursuant to a program or procedure approved by the Company (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to decline to approve or terminate any such program or procedure.

4. Restrictions on Exercise. This Option may not be exercised until such time as the Plan has been approved by the stockholders of the company, or if the issuance of such Shares upon such exercise or the method of payment of consideration for such shares would constitute a violation of any applicable federal or state securities or other law or regulation, including any rule under Part 207 of Title 12 of the Code of Federal Regulations (“Regulation G”) as promulgated by the Federal Reserve Board. As a condition to the exercise of this Option, the Company may require Optionee to make any representation and warranty to the Company as may be required by any applicable law or regulation.

5. Termination of Status as an Employee. In the event of termination of Optionee’s Continuous Status as an Employee, the Optionee may, but only within seven (7) months after the date of such termination (but in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), exercise this Option to the extent exercisable at the date of such termination. To the extent this Option was not exercisable at the date of such termination, or if the Optionee does not exercise this Option within the time specified herein, the Option shall terminate.

6. Disability of Optionee. Notwithstanding the provisions of Section 5 above, in the event of termination of Optionee’s Continuous Status as an Employee as a result of Optionee’s total and permanent disability (as defined in Section 22 (e) (3) of the Code), the Optionee may, but only within seven (7) months from the date of termination of employment (but in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), exercise this Option to the extent exercisable at the date of such termination. To the extent that the Option was not exercisable at the date of termination, or if the Optionee does not exercise such Option within the time specified herein, the Option shall terminate.

7. Death of Optionee. In the event of the death of Optionee:

(a) during the term of this Option and while an Employee of the Company and having been in continuous status as an Employee since the date of grant of the Option, the Option may be exercised in full even as to shares which otherwise would not have been vested, at any time within seven (7) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), by Optionee’s estate or by a person who acquired the right to exercise; or

(b) within thirty days after the termination of Optionee’s Continuous Status as an Employee, the Option may be exercised, at any time within seven (7) months following the date of death (but in no event later than the date of expiration of the term of this Option as set forth in Section 9 below), by Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise what had accrued at the date of termination.

8. Non-Transferability of Option; Successors and Assigns. This Option may not be transferred in any manner otherwise than by will or by the laws of descent or distribution and may be exercised during the lifetime of Optionee only by him. The terms of this Option shall be binding upon the executors, administrators, heirs, successors and assigns of the Optionee.

9. Term of Option. This Option may not be exercised more than ten (10) years (five years if Optionee owns, immediately before this Option is granted, stock representing more than 10 percent of the total combined voting power of all classes of stock of the Company or of any Parent or Subsidiary) from the date of grant of this Option, and may be exercised during such term only in accordance with the Plan and the terms of this Option.

10. Taxation Upon Exercise of Option. Optionee understands that, upon exercising a Nonstatutory Stock Option, he or she will recognize income for tax purposes in an amount equal to the excess of the then fair market value of the Shares over the Exercise Price, and that if the Optionee is an employee, the Company will be required to withhold federal and state taxes from Optionee’s compensation, or collect withholding taxes from Optionee at the time of exercise. Optionee understands that if the Option qualifies as an ISO, upon the exercise of the Option, the excess, if any, of the fair market value of the Shares on the date of exercise over the Exercise Price will be treated as an adjustment to the alternative minimum tax for federal tax purposes and may subject the Optionee to the alternative minimum tax in the year of exercise. Optionee acknowledges that he or she has been given the opportunity to consult and is relying solely on tax and legal counsel of his or her own choosing with regard to the exercise of his or her Option.

11. Notice of Disqualifying Disposition of ISO Shares. If the Option granted to Optionee herein is an ISO, and if Optionee sells or otherwise disposes of any of the Shares acquired pursuant to ISO on or before the later of (1) the date two years after the Date of Grant, or (2) the date one year after the date of exercise, Optionee hereby agrees to notify the Company in writing within 30 days after the date of any such disposition. Optionee agrees that Optionee may be subject to income tax withholding by the Company on the compensation income recognized by the Optionee from the early disposition by payment in cash or out of the current earnings paid to the Optionee. Optionee understands that if he disposes of such shares at any time after the expiration of such two-year and one-year holding periods, any gain on such sale will be taxed as long-term capital gain.

12. Designation of Beneficiary. The Employee shall have the right to appoint any individual or legal entity in writing, on Exhibit B to the Notice of Grant, as his or her beneficiary to receive any Option (to the extent not previously exercised or forfeited) under this Agreement upon the Employee’s death. Such designation under this Agreement may be revoked by the Employee at any time and a new beneficiary may be appointed by the Employee by execution

and submission to the Stock Administration Department of the Company of a revised Exhibit B to this Agreement. In order to be effective, a designation of beneficiary must be completed by the Employee on Exhibit B and received by the Stock Administration Department of the Company, prior to the date of the Employee’s death. In the absence of such designation, the Employee’s beneficiary shall be the person designated under the Employee’s will or as defined by the applicable state laws of the decedent’s distribution.

OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES SUBJECT TO THIS OPTION IS EARNED ONLY BY CONTINUING EMPLOYMENT AT THE WILL OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY’S STOCK OPTION PLAN WHICH IS INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH RESPECT TO CONTINUATION OF EMPLOYMENT BY THE COMPANY, NOR SHALL IT INTERFERE IN ANY WAY WITH HIS OR HER RIGHT OR THE COMPANY’S RIGHT TO TERMINATE HIS OR HER EMPLOYMENT AT ANY TIME, WITH OR WITHOUT CAUSE.