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): March 16, 2006

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

On March 16, 2006, Mercury Interactive Corporation (the “Company”) entered into an Employment Agreement (the “Employment Agreement”) with David Murphy, the Company’s chief financial officer.

Pursuant to the Employment Agreement, Mr. Murphy’s annual base salary, effective as of April 1, 2006, will be $400,000, and he will be eligible for an annual performance bonus with a target of 100% of his base salary. The Employment Agreement also provides that Mr. Murphy’s previously issued stock option grants for (i) 240,000 shares of the Company’s common stock (issued in December 2002), (ii) 25,000 shares of the Company’s common stock (issued in December 2004), (iii) 25,000 shares of the Company’s common stock (issued in February 2005) and (iv) 100,000 shares of the Company’s common stock (issued in November 2005), will remain exercisable until the later of the fifteenth day of the third month following the date at which the option would otherwise have expired under the terms of the option at its original grant date, or the December 31^st that follows the termination of Mr. Murphy’s employment for any reason (subject to earlier termination under the terms of the Company’s Amended and Restated 1999 Stock Option Plan or the expiration date or maximum term defined in the applicable award agreement evidencing the option). In addition, the Employment Agreement provides that the Board or its Compensation Committee will, as part of the Company’s annual refresh grants to executives during 2006, approve the grant of an option to Mr. Murphy to purchase 100,000 shares of the Company’s common stock, which option will have an exercise price equal to the fair market value of the common stock on the date of grant, will vest at 1/48 per month over four years and will remain exercisable for a period of twelve months following the termination of Mr. Murphy’s employment for any reason (subject to earlier termination under the terms of the Company’s Amended and Restated 1999 Stock Option Plan and the expiration date and maximum term defined in the applicable award agreement evidencing the option). Mr. Murphy will also participate in other employee benefit programs and receive any perquisites available to other executives of the Company.

If Mr. Murphy’s employment is terminated by the Company without “cause” or by Mr. Murphy for “good reason” (as those terms are defined in the Employment Agreement), Mr. Murphy will receive (i) a severance payment equal to one year (or two years, if termination of his employment occurs after November 1, 2009) of base salary and target bonus in effect as of the date of termination, (ii) continued coverage under the Company’s health, life, dental and other insurance programs for up to the one- or two-year (as applicable) severance pay period, and (iii) accelerated vesting of his outstanding options (and any other equity compensation awards then outstanding) that would have vested, absent the end of employment, during the one- or two-year (as applicable) severance pay period following termination.

In addition, effective March 16, 2006, Mr. Murphy entered into a revised Change of Control Agreement with the Company that provides upon the involuntary termination (including resigning for good reason) or termination of Mr. Murphy’s employment as a result of disability or death within 24 months following a change of control of the Company, Mr. Murphy will be entitled to (i) severance pay equal to 24 months of his base salary and target bonus in effect as of the date his employment ceases, (ii) continued coverage under the Company’s health, life, dental and other insurance programs for the 24-month severance pay period, and (iii) accelerated vesting of all stock options and other forms of equity and long-term compensation held by Mr. Murphy at the time of termination. In addition, all outstanding vested stock options granted prior to January 1, 2006 will remain exercisable until the later of the fifteenth day of the third month following the date at which the option would otherwise have expired under the terms of the option at its original grant date, or the December 31^st that follows the termination of Mr. Murphy’s employment, and all outstanding vested options granted on or after January 1, 2006 will remain exercisable for a period of twelve months following the termination of Mr. Murphy’s employment (in each case, subject to earlier termination under the terms of the Company’s Amended and Restated 1999 Stock Option Plan (or any other applicable option plan under which a particular option is granted) and the expiration date and maximum term defined in the applicable award agreement evidencing the option).

The foregoing descriptions of Mr. Murphy’s Employment Agreement and Change of Control Agreement do not purport to be complete and are qualified in their entirety by reference to such agreements (including any schedules and exhibits thereto), copies of which are filed as Exhibits 10.53 and 10.54 hereto and are incorporated by reference herein.

Item 9.01. Financial Statements and Exhibits.

The following exhibits are filed herewith:

10.53 Employment Agreement by and between the Company and David Murphy dated March 16, 2006

10.54 Change of Control Agreement by and between the Company and David Murphy dated March 16, 2006

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: March 16, 2006	MERCURY INTERACTIVE CORPORATION
	By:	/s/ Anthony Zingale
	Name:	Anthony Zingale
	Title:	Chief Executive Officer

EXHIBIT INDEX

Exhibit No.	Description
10.53	Employment Agreement by and between the Company and David Murphy dated March 16, 2006
10.54	Change of Control Agreement by and between the Company and David Murphy dated March 16, 2006

EX-10.53

Exhibit 10.53

EMPLOYMENT AGREEMENT

EMPLOYMENT AGREEMENT (“Agreement”) effective as of March 16, 2006 by and between Mercury Interactive Corporation (the “Company”) and David Murphy (“Executive”).

WHEREAS, the Company considers it in the best interests of its stockholders to employ Executive as its Senior Vice President and Chief Financial Officer (“CFO”);

WHEREAS, Executive is willing to accept employment with the Company on the terms hereinafter set forth in this Agreement;

WHEREAS, simultaneously with the execution of this Agreement, Executive and the Company are entering into a Change of Control Agreement (the “Change of Control Agreement”);

NOW THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements of the parties set forth in this Agreement, and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows:

ARTICLE 1

Position; Term Of Agreement

Section 1.01. Position. (a) As of and following November 1, 2005, Executive has and shall continue to serve as CFO of the Company and shall report to the Chief Executive Officer. Executive shall have such duties and authority, consistent with such position, as shall be determined from time to time by the Company.

(b) During his employment with the Company, Executive will devote substantially all of his business time to the performance of his duties under this Agreement and will not engage in any other business, profession or occupation for compensation or otherwise which would conflict with the rendition of such services either directly or indirectly, without the prior written consent of the Board. Notwithstanding the foregoing, Executive shall be permitted to continue his service as a member of the board of directors of Streamserve, provided that such company does not compete with the Company. Executive may engage in civic and not-for-profit activities so long as such activities do not interfere with the performance of his duties hereunder.

ARTICLE 2

Compensation And Benefits

Section 2.01. Base Salary. Since November 1, 2005, the Company has paid Executive an initial annual base salary (the “Base Salary”) at the annual rate of $375,000.00, payable in accordance with the payroll practices of the Company from time to time. Effective as of April 1, 2006, Executive’s Base Salary shall increase to an annual rate of $400,000.00. Executive’s compensation package shall be subject to periodic review by the Company.

Section 2.02. Bonus. Executive shall be eligible to participate in an executive bonus plan in accordance with the terms and conditions of such plan. Executive’s target bonus (the “Target Bonus”) shall be 100% of Base Salary, subject to the Company’s performance and other terms and conditions of the bonus plan as determined by the Board in its sole discretion, including continued employment until the end of the applicable year.

Section 2.03. Stock Options. Executive has previously received options to purchase shares of the Company’s common stock (the “Common Stock”) as follows:

• Option to purchase 240,000 shares granted on 12/9/02

• Option to purchase 25,000 shares granted on 12/31/04

• Option to purchase 25,000 shares granted on 2/3/05

• Option to purchase 100,000 shares granted on 11/1/05

collectively, (the “Option”). The Option has a per share exercise price equal to the fair market value of the Common Stock on the date of grant, shall vest monthly in equal installments over a period of four years and shall remain exercisable until the later of (i) the 15^th day of the third month following the date at which the option would otherwise have expired, under the terms of the option at its original grant date or (ii) the December 31^st that follows Executive’s termination of employment for any reason (subject to earlier termination under Sections 7 and 11 of the 1999 Plan and the “Expiration Date” and maximum term as defined in the award agreement evidencing the Option). Except as provided for in this paragraph and in the Change of Control Agreement, the Option shall be subject to the terms and conditions of the Company’s Amended and Restated 1999 Stock Option Plan (the “1999 Plan”) and the stock option agreement evidencing the Option.

As part of the Company’s annual refresh grants to executives during 2006, the Board or its Compensation Committee shall approve the grant of a stock option to Executive to purchase 100,000 shares of the Company’s Common Stock (the “2006 Option”) after the end of the period during which Company insiders are prohibited from engaging in transactions with respect to Company Common Stock. The 2006 Option shall have a per share exercise price equal to the fair market value of the Common Stock on the date of grant, shall vest monthly in equal installments over a period of four years and shall remain exercisable for a period of twelve (12) months following Executive’s termination of employment for any reason (subject to earlier termination under Sections 7 and 11 of the 1999 Plan and the “Expiration Date” and maximum term as defined in the award agreement evidencing the 2006 Option). Except as provided for in this paragraph and in the Change of Control Agreement, the 2006 Option shall be subject to the terms and conditions of the Company’s 1999 Plan and the standard form of stock option agreement for the 1999 Plan.

Section 2.04. Executive Benefits. During the duration of Executive’s employment with the Company pursuant to the terms of this Agreement (the “Employment Term”), Executive shall be eligible for employee benefits (including fringe benefits, vacation and health, accident and disability insurance, and retirement plan participation) substantially similar to those benefits made available generally to similarly situated employees of the Company; provided, however, that Executive will earn 20 days of paid-time off per year (equivalent to four (4) weeks). This

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paid-time off will include both sick leave and vacation. In addition, Executive shall be entitled to all perquisites that are currently or may in the future be provided to any officer of the Company, including, but not limited to, bonus plans, life insurance, deferred compensation, club dues, car allowance or lease, car service, first-class airline travel, charter jet travel, financial planning, and tax and estate planning services, as applicable. Executive shall be entitled to fly first class (or, if not available, business class) on all Company-related travel.

Section 2.05. Revised Stock Option and Long-Term Incentive Plan. During the Employment Term, if the Company adopts a revised stock option plan and/or long-term incentive plan, Executive will be eligible to participate in such plan, according to the terms and conditions of such plan.

Section 2.06. Business And Travel Expenses. Reasonable travel, entertainment and other business expenses incurred by Executive in the performance of Executive’s duties hereunder shall be reimbursed by the Company in accordance with the Company’s policies as in effect from time to time.

ARTICLE 3

Severance Benefits

Section 3.01. Certain Events of Termination. (a) In the event that Executive’s employment is terminated by the Company without Cause (as defined below) or by Executive for Good Reason (as defined below) during the Employment Term, but not including termination by reason of death or disability, Executive shall be entitled to the following benefits:

(i) The Company shall pay Executive during the Severance Period (as defined below) an amount equal to Executive’s Base Salary and Target Bonus in effect as of the date of termination, payable in accordance with the Company’s standard payroll practices;

(ii) Executive shall be provided with continued coverage under the Company’s health, life, dental and other insurance programs for the Severance Period (which may be provided by the Company paying for Executive’s continued coverage under COBRA at the same cost to Executive as before his termination of employment or payment of an amount sufficient to purchase comparable benefits) until the earlier of (A) the end of the Severance Period or (B) the date Executive becomes eligible for group health coverage with another employer with similar standards of benefits excluding Execucare benefits;

(iii) Executive shall be credited immediately with vesting equal to the length of the Severance Period for each outstanding stock option and other equity compensation award (for example, any restricted stock grant, stock appreciation right, or phantom stock) held by Executive on the date of termination;

provided that (A) receipt of the foregoing shall be subject to (x) Executive signing and not revoking a release of claims in the form attached hereto and (y) Executive’s continued compliance with the covenants set forth in Section 4.01 hereof and in the Proprietary Agreement (as defined below) and (B) if Executive’s employment terminates during a Change of Control Period (as defined in the Change of Control Agreement), Executive’s benefits, if any, shall be determined under the terms of the Change of Control Agreement instead of under this Agreement.

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(b) “Cause” means the occurrence of any one or more of the following:

(i) any act of personal dishonesty taken by Executive in connection with Executive’s responsibilities as an employee and intended to result in substantial personal enrichment;

(ii) Executive being convicted of a felony; or

(iii) a willful act by Executive which constitutes gross misconduct and which is materially injurious to the Company.

(c) “Good Reason” means any of the following without Executive’s consent:

(i) Executive’s assignment to any duties or the significant reduction of Executive’s duties, either of which is inconsistent with Executive’s position or title with the Company and responsibilities in effect immediately prior to such assignment, or Executive’s removal from such position and responsibility, or a reduction in Executive’s title;

(ii) a greater than 10% reduction by the Company in Executive’s base compensation as in effect immediately prior to such reduction, unless substantially all executive officers of the Company agree to an equivalent reduction in base compensation;

(iii) relocation of Executive’s principal place of employment by more than 50 miles; or

(iv) any material breach by the Company of any material provision of this Agreement if such breach is not cured by the Company within 30 days after written notice to the Company by Executive of such breach.

(d) “Severance Period” shall mean 12 months after termination of employment except that if termination of employment occurs after the fourth anniversary of November 1, 2005, the Severance Period shall mean 24 months.

Section 3.02. Indemnification. Following termination of his employment, the Company shall provide Executive with indemnification rights pursuant to the terms of his indemnification agreement with the Company and directors’ and officers’ insurance, if any, consistent with the rights and coverage provided for the same periods of time to the Company’s then-current executive officers and members of the Board.

Section 3.03 At-Will Employment Status. Nothing contained in this Agreement shall interfere with the at-will employment status of Executive or with the Company’s or Executive’s right to terminate Executive’s employment with the Company at any time, with or without Cause, upon written notice to the other party, subject to Section 3.01 if applicable.

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ARTICLE 4

Covenants and Representations

Section 4.01. Proprietary Agreement. Executive agrees to execute, or has previously executed, the Company’s standard form of Proprietary Information and Arbitration Agreement (the “Proprietary Agreement”) and agrees to comply with the obligations thereunder during and after his employment with the Company as set forth therein, including but not limited to the non-solicitation and confidentiality covenants in Sections 2 and 8 thereof; provided that Executive agrees to comply with the non-solicitation covenant in Section 8 of the Proprietary Agreement for not less than the Severance Period.

Section 4.02. Enforceability. If any provision of this Agreement or the Proprietary Agreement is determined by a court of competent jurisdiction not to be enforceable in the manner set forth herein or therein, the Company and Executive agree that it is the intention of the parties that such provision should be enforceable to the maximum extent possible under applicable law and that such court shall reform such provision to make it enforceable in accordance with the intent of the parties.

Section 4.03. Executive Representation. Executive expressly represents and warrants to the Company that Executive is not a party to any contract or agreement and is not otherwise obligated in any way, and is not subject to any rules or regulations, whether governmentally imposed or otherwise, which will or may restrict in any way Executive’s ability to fully perform Executive’s duties and responsibilities under this Agreement.

ARTICLE 5

Successors And Assignments

Section 5.01. Assignments. Except for an assignment in the event of a change in control, this Agreement shall not be assignable by the Company without the written consent of Executive. This Agreement shall not be assignable by Executive.

Section 5.02. Successors; Binding Agreement. This Agreement shall inure to the benefit of and be binding upon personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees, and legatees.

ARTICLE 6

Miscellaneous

Section 6.01. Attorneys’ Fees. The Company shall reimburse Executive for reasonable attorney fees in an amount not to exceed $10,000 incurred in negotiating and finalizing this Agreement.

Section 6.02. Notices. Any notice required to be delivered hereunder shall be in writing and shall be addressed:

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(i) if to the Company, to:

Mercury Interactive Corporation

379 N. Whisman Road

Mountain View, California 94043

Attention: General Counsel

(ii) if to Executive, to Executive’s last known address as reflected on the books and records of the Company;

or, in each case, to such other address as such party may hereafter specify for the purpose by written notice to the other party hereto. Any such notice shall be deemed received on the date of receipt by the recipient thereof if received prior to 5:00 p.m. in the place of receipt and such day is a business day in the place of receipt. Otherwise, any such notice shall be deemed not to have been received until the next succeeding business day in the place of receipt.

Section 6.03. Dispute Resolution. (a) In consideration of Executive’s employment with the Company, the Company’s promise to arbitrate all employment-related disputes and Executive’s receipt of the compensation, pay raises and any and all other benefits paid to Executive by the Company, at present and in the future, Executive agrees that any and all controversies, claims or disputes with anyone, including any employee, manager, officer, shareholder or benefit plan or administrator of the Company, arising from or relating to or resulting from Executive’s employment with the Company, including any breach of this Agreement, shall be subject to and resolved by binding arbitration. Binding arbitration pursuant to this Agreement shall be pursuant to California law, including California Code of Civil Procedure Section 1280 through 1294.2, including Section 1283.05. Executive understands that this agreement to arbitrate also applies to any disputes that the Company may have with Executive. In agreeing to arbitrate any and all claims, EXECUTIVE AGREES TO WAIVE ANY RIGHT TO TRIAL BY JURY, INCLUDING ANY STATUTORY CLAIMS UNDER STATE AND FEDERAL LAW, INCLUDING BUT NOT LIMITED TO, CLAIMS UNDER TITLE VII OF THE CIVIL RIGHTS ACT OF 1964, THE AMERICANS WITH DISABILITIES ACT OF 1990, THE AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967, THE OLDER WORKERS BENEFIT PROTECTION ACT, THE CALIFORNIA FAIR EMPLOYMENT AND HOUSING ACT, THE CALIFORNIA LABOR CODE, CLAIMS OF SEXUAL OR OTHER UNLAWFUL HARASSMENT, DISCRIMINATION OR WRONGFUL TERMINATION, ANY STATUTORY CLAIMS, AND ANY CLAIMS FOR BREACH OF CONTRACT, TORT, OR ANY OTHER BASES IN STATE, FEDERAL OR LOCAL LAWS.

(b) Executive agrees that any arbitration will be administered by the American Arbitration Association (“AAA”) and that a neutral arbitrator will be selected in a manner consistent with its National Rules for the Resolution of Employment Disputes (the “Rules”). Executive agrees that the arbitration shall take place in Santa Clara County, California and that the arbitrator shall conduct and administer any arbitration in a manner consistent with the Rules, and with California law, including the power to conduct adequate discovery, decide any motions brought by any parties, and to award any remedies, including attorneys’ fees and costs, available under applicable law. Executive agrees that the arbitrator shall issue a binding written award that sets forth the essential findings and conclusions on which the award is based. Executive

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understands that the Company shall pay for all fees charged by the arbitrator and by the AAA, regardless of the party initiating the arbitration. The Company will reimburse Executive in any arbitration up to a maximum of $2,000 for travel expenses incurred for travel to the Santa Clara County area in connection with the arbitration hearing if Executive resides more than 300 miles from the location selected in Santa Clara County for the arbitration.

(c) Arbitration shall be the sole, exclusive and final remedy for any dispute between the Company and Executive. Accordingly, neither the Company nor Executive will be permitted to pursue court action regarding claims that are subject to arbitration. However, nothing in this Agreement will prohibit either party from seeking provisional relief, and Executive agrees that any party may petition the court for injunctive relief where either party alleges a violation of any of the covenants set forth herein. Executive further agrees that no bond or other security shall be required in obtaining such equitable relief and Executive hereby consents to the issuance of such injunction and to the ordering of specific performance. In the event either party seeks injunctive relief, the prevailing party shall be entitled to recover reasonable costs and attorneys’ fees.

(d) This Agreement does not prohibit Executive from pursuing an administrative claim with a local, state or federal administrative body or agency, such as the Department of Fair Employment and Housing, the Equal Employment Opportunities Commission, or the Workers’ Compensation Board. This Agreement does, however, prohibit Executive from seeking or pursuing court action regarding any such claim.

Section 6.04. Unfunded Agreement. The obligations of the Company under this Agreement represent an unsecured, unfunded promise to pay benefits to Executive and/or Executive’s beneficiaries, and shall not entitle Executive or such beneficiaries to a preferential claim to any asset of the Company.

Section 6.05. Entire Agreement. This Agreement (together with the Proprietary Agreement and, if applicable, any option award agreement) represents the entire agreement between Executive and the Company and its affiliates with respect to the matters referred to herein, and supersedes all prior discussions, negotiations, agreements, and plans concerning such matters, other than the Change of Control Agreement; provided, however, that any amounts payable to Executive hereunder shall be reduced by any payments or notice period required by applicable law in connection with any termination of Executive’s employment.

Section 6.06. Tax Withholding. Notwithstanding anything in this Agreement to the contrary, the Company shall withhold from any amounts payable under this Agreement all federal, state, city, or other taxes as are legally required to be withheld.

Section 6.07. Waiver Of Rights. The waiver by either party of a breach of any provision of this Agreement shall not operate or be construed as a continuing waiver or as a consent to or waiver of any subsequent breach hereof.

Section 6.08. Amendment. This Agreement may not be modified, altered or changed except upon the express written consent of both parties.

Section 6.09. Severability. In the event any provision of this Agreement shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of this Agreement, and this Agreement shall be construed and enforced as if the illegal or invalid provision had not been included.

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Section 6.10. Indemnification Agreement. The Company shall enter into an indemnification agreement with Executive providing Executive with indemnification for his acts as a corporate officer as provided in the Company’s standard form of indemnification agreement that has been provided to Executive. The Company shall provide Executive with directors’ and officers’ insurance coverage as of the date of this Agreement in such amounts as provided to the chief executive officer.

Section 6.11 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California without reference to principles of conflict of laws.

Section 6.12. Section 409A. The parties agree to amend this Agreement to the extent necessary to avoid imposition of any additional tax or income recognition under Code Section 409A and any final Treasury Regulations and IRS guidance thereunder prior to the earlier of any actual payment to Executive that may or may not be in compliance with or exempt from Code Section 409A or December 31, 2006.

The Company will not take any action that would expose any payment or benefit to Executive to accelerated or additional tax under Section 409A of the Code, unless (i) the Company is obligated to take the action under an agreement, plan, or arrangement to which Executive is a party; (ii) Executive requests the action; or (iii) the Company advises Executive in writing that the action may result in the imposition of accelerated or additional tax under Section 409A of the Code and Executive subsequently requests in writing that the action be taken. The Company will hold Executive harmless for any action it may take in violation of this paragraph, including any attorney’s fees that Executive may incur in enforcing his rights hereto. Notwithstanding the foregoing, if the Company proposes to take any action or to make any amendment to this Letter to avoid any violation of Code Section 409A and Executive refuses to consent in writing to such action or amendment, then Executive shall be responsible for any additional tax or income recognition imposed on him, and any attorney’s fees Executive incurs, as a result of any violation of Code Section 409A. With respect to any such action or amendment the Company proposes, the Company shall, in good faith and after consultation with you, make reasonable efforts to have such proposed action or amendment minimize any adverse consequences to you.

Section 6.13. Counterparts. This Agreement may be signed in several counterparts, each of which shall be an original, with the same effect as if the signatures thereto and hereto were on the same instrument.

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IN WITNESS WHEREOF, the Company and Executive have executed this Agreement, to be effective as of the day and year first written above.

MERCURY INTERACTIVE CORPORATION
By:	/s/ Anthony Zingale
Name:	Anthony Zingale
Title:	President and Chief Executive Officer
EXECUTIVE:
/s/ David Murphy
David Murphy

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EXHIBIT A

RELEASE AGREEMENT

I understand that this Release Agreement (“Release”), together with the Employment Agreement dated March     , 2006 (the “Employment Agreement”), constitutes the complete, final and exclusive embodiment of the entire agreement between the Company and me with regard to the subject matter hereof. I am not relying on any promise or representation by the Company that is not expressly stated herein.

In consideration of benefits I will receive under the Employment Agreement, I hereby release, acquit and forever discharge the Company, its parents and subsidiaries, and their officers, directors, agents, servants, employees, shareholders, attorneys’ successors, assigns and affiliates, of and from any and all claims, liabilities, demands, causes of action, costs, expenses, attorneys fees, damages, indemnities and obligations of every kind and nature, in law, equity, or otherwise, known and unknown, suspected and unsuspected, disclosed and undisclosed (other than any claim for indemnification I may have as a result of any third party action against me based on my employment with the Company under my indemnification agreement with the Company or based on any insurance obtained by the Company for my benefit or otherwise), arising out of or in any way related to agreements, events, acts or conduct at any time prior to and including the date I execute this Release, including, but not limited to: all such claims and demands directly or indirectly arising out of or in any way connected with my employment with the Company or the termination of that employment, including but not limited to, claims of intentional and negligent infliction of emotional distress, any and all tort claims for personal injury, claims or demands related to salary, bonuses, commissions, stock, stock options, or any other equity or ownership interests in the Company, vacation pay, fringe benefits, expense reimbursements, severance pay, or any other form of compensation; claims pursuant to any federal, state or local law or cause of action including, but not limited to, the federal Civil Rights Act of 1964, as amended; the federal Age Discrimination in Employment Act of 1967, as amended (“ADEA”); the federal Employee Retirement Income Security Act of 1974, as amended; the federal Americans with Disabilities Act of 1990; the California Fair Employment and Housing Act, as amended; the California Labor Code; tort law; contract law; wrongful discharge; discrimination; fraud; defamation; emotional distress; and breach of the implied covenant of good faith and fair dealing.

I acknowledge that I am knowingly and voluntarily waiving and releasing any rights I may have under the ADEA. I also acknowledge that the consideration given under the Agreement for the waiver and release in the preceding paragraph hereof is in addition to anything of value to which I was already entitled. I further acknowledge that I have been advised by this writing, as required by the ADEA, that: (A) my waiver and release do not apply to any rights or claims that may arise after the date I execute this Release; (B) I have the right to consult with an attorney prior to executing this Release; (C) I have twenty-one (21) days to consider this Release (although I may choose to voluntarily execute this Release earlier); (D) I have seven (7) days following my execution of this Release to revoke the Release; and (E) this Release shall not be effective until the date upon which the revocation period has expired, which shall be the eighth (8th) day after I execute this Release (provided that I have returned it to the Company by such date).

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I acknowledge that I have read and understand Section 1542 of the California Civil Code which reads as follows: “A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor.” I hereby expressly waive and relinquish all rights and benefits under that section and any law of any jurisdiction of similar effect with respect to my release of any claims I may have against the Company, its affiliates, and the entities and persons specified above.

DAVID MURPHY

Signature:

Date:

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EX-10.54

Exhibit 10.54

Mercury Interactive Corporation

379 N. Whisman Road

Mountain View, California 94043

March 16, 2006

Mr. David Murphy

Re:   Change of Control Agreement

Dear Mr. Murphy:

Mercury Interactive Corporation (the “Company”) has agreed to extend certain benefits to you in the event your employment with the Company is terminated within eighteen months of a “Change of Control” of the Company. This letter amends and restates an earlier agreement with you on this subject, and sets out the terms of our agreement henceforth (the “Letter”). Capitalized terms are defined on Exhibit A, attached.

1. Severance Benefits. If you or the Company terminate your employment at any time within the Change of Control Period, then you will be entitled to receive severance benefits as follows:

(a) Voluntary Resignation; Termination for Cause. If you terminate your employment by reason of voluntary resignation (other than by Involuntary Termination) or if you are terminated for Cause, then you will not be entitled to receive severance or other benefits. All outstanding vested stock options granted prior to January 1, 2006 shall remain exercisable until the later (i) the 15^th day of the third month following the date at which the option would otherwise have expired, under the terms of the option at its original grant date or (ii) the December 31^st of the year of the termination of your employment. All outstanding vested stock options granted on or after January 1, 2006 shall remain exercisable until the twelve (12) month anniversary of the date of your termination of employment; provided however, that all outstanding options shall be subject to earlier termination under Sections 7 and 11 of the Company’s Amended and Restated 1999 Stock Option Plan (the “1999 Plan”) (or comparable provisions of the option plan under which the option is granted) and the “Expiration Date” and maximum term as defined in the award agreement evidencing the options.

(b) Involuntary Termination. If your employment is terminated or you terminate your employment as a result of Involuntary Termination, you will be entitled to receive the following benefits:

(i) severance pay, equal to your base salary and target bonus as of the date your employment ceases, for the Severance Period and according to normal Company payroll practices and commencing with the month immediately after the month in which your employment so ceases;

(ii) coverage under the Company’s health, life, dental and other insurance programs for the Severance Period; and

(iii) accelerated vesting of all stock options, other forms of equity compensation (for example, any grants of stock appreciation rights, restricted stock or phantom stock) and other forms of long-term compensation held by you, including those granted after the date of this Letter. All outstanding vested stock options granted prior to January 1, 2006 will remain exercisable until the later of (i) the 15^th day of the third month following the date at which the option would otherwise have expired, under the terms of the option at its original grant date or (ii) the December 31^st of the year of the termination of your employment and all outstanding vested stock options granted on or after January 1, 2006 will remain exercisable until the twelve month anniversary of your date of termination; provided however, that all outstanding options shall be subject to earlier termination under Sections 7 and 11 of the 1999 Plan (or comparable provisions of the option plan under which the option is granted) and the “Expiration Date” and maximum term as defined in the award agreement evidencing the options.

(c) Disability; Death. If the Company terminates your employment as a result of your Disability (as defined below) or such employment is terminated by your death, then such termination shall be treated as if it were an Involuntary Termination (notwithstanding the language in clause (iii) of the definition of such term), and the severance and other benefits shall be provided, in accordance with subsection (b) above.

2. Successors. Any successor to the Company (whether direct or indirect and whether by purchase, lease, exclusive license, merger, consolidation, liquidation or otherwise) to all or substantially all of the Company’s business and/or assets shall assume the obligations under this Letter and agree expressly to perform the obligations under this Letter in the same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. To the extent the successor fails to expressly agree in writing at least five (5) days prior to the Change of Control to perform the obligations of the Company under this Letter, such failure shall entitle you to a payment equal to the severance benefits you would receive upon an Involuntary Termination, as provided in Section 1.b above, with such amount payable on the Change of Control. For all purposes under this Letter, the term “Company” shall include any successor to the Company’s business and/or assets which executes and delivers the assumption agreement described in this Section 2 or which becomes bound by the terms of this Letter by operation of law.

3. Law Governing; Arbitration. This Letter shall be governed by and construed in accordance with the laws of the State of California. Any dispute or controversy arising under or in connection with this Letter shall be settled exclusively in arbitration conducted in Sunnyvale, California, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator’s award in any court having jurisdiction. In any arbitration proceeding, the party determined to be the prevailing party shall be entitled to receive, in addition to any other award, its attorneys’ fees and expenses of the proceeding.

4. Employment and Income Taxes. All payments made pursuant to this Letter will be subject to withholding of employment taxes.

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5. Golden Parachute Excise Tax.

a. Notwithstanding anything in the foregoing to the contrary, if any of the payments to you (prior to any reduction described in this paragraph) provided for in this Agreement, together with any other payments which you have the right to receive from the Company or any corporation which is a member of an “affiliated group” as defined in Section 1504(a) of the Internal Revenue Code of 1986, as amended (“Code”), without regard to Section 1504(b) of the Code, of which the Company is a member (the “Payments”) would constitute a “parachute payment” (as defined in Section 280G(b)(2) of the Code) and if the Safe Harbor Amount is greater than the Taxed Amount, then the total amount of such Payments shall be reduced to the Safe Harbor Amount. The “Safe Harbor Amount” is the largest portion of the Payments that would result in no portion of the Payments being subject to the excise tax set forth at Section 4999 of the Code (“Excise Tax”). The “Taxed Amount” is the total amount of the Payments (prior to any reduction as described in this paragraph) notwithstanding that all or some portion of the Payments may be subject to the Excise Tax. Solely for the purpose of comparing which of the Safe Harbor Amount and the Taxed Amount is greater, the determination of each such amount, shall be made on an after-tax basis, taking into account all applicable federal, state and local employment taxes, income taxes, and the Excise Tax (all of which shall be computed at the highest applicable marginal rate). If a reduction of the Payments to the Safe Harbor Amount is necessary, then the reduction shall occur in the following order unless you elect in writing a different order (provided, however, that such election shall be subject to Company approval if made on or after the date on which the event that triggers the Payments occurs): reduction of cash payments; cancellation of accelerated vesting of stock awards; reduction of employee benefits. In the event that acceleration of vesting of a stock award is to be reduced, such acceleration of vesting shall be cancelled in the reverse order of the date of grant of your stock awards unless you elect in writing a different order for cancellation.

b. The accounting firm engaged by the Company for general audit purposes as of the day prior to the effective date of the Change of Control transaction shall perform the foregoing calculations. If the accounting firm so engaged by the Company is serving as accountant or auditor for the individual, entity or group effecting the Change of Control, or you and the Company agree that such accounting firm should not be engaged for purposes of making the determinations required hereunder, another nationally recognized accounting firm may be appointed to make the determinations required hereunder as mutually agreed to by the Company and you. The Company shall bear all expenses with respect to the determinations by such accounting firm required to be made hereunder.

c. The accounting firm engaged to make the determinations hereunder shall provide its calculations, together with detailed supporting documentation, to the Company and you within 15 calendar days after the date on which your right to a Payment is triggered (if requested at that time by the Company or you) or such other time as requested by the Company or you upon written notice that a payment related to a change of control of the Company has been or is to be made. If the accounting firm determines that no Excise Tax is payable with respect to a Payment, it shall furnish the Company and you with an opinion reasonably acceptable to you that no Excise Tax will be imposed with respect to such Payment.

6. Section 409A. The parties agree to amend this Agreement to the extent necessary to avoid imposition of any additional tax or income recognition under Code Section 409A and any final Treasury Regulations and IRS guidance thereunder prior to the earlier of any actual payment to you that may not be in compliance with or exempt from Code Section 409A or December 31, 2006.

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The Company will not take any action that would expose any payment or benefit to you to accelerated or additional tax under Section 409A of the Code, unless (i) the Company is obligated to take the action under an agreement, plan, or arrangement to which you are a party; (ii) you request the action; or (iii) the Company advises you in writing that the action may result in the imposition of accelerated or additional tax under Section 409A of the Code and you subsequently request in writing that the action be taken. The Company will hold you harmless for any action it may take in violation of this paragraph, including any attorney’s fees that you may incur in enforcing your rights hereto. Notwithstanding the foregoing, if the Company proposes to take any action or to make any amendment to this Letter to avoid any violation of Code Section 409A and you refuse to consent in writing to such action or amendment, then you shall be responsible for any additional tax or income recognition imposed on you, and any attorney’s fees you incur, as a result of any violation of Code Section 409A. With respect to any such action or amendment the Company proposes, the Company shall, in good faith and after consultation with you, make reasonable efforts to have such proposed action or amendment minimize any adverse consequences to you.

By your signature below, you indicate that you agree to the terms set out in this Letter.

Very truly yours,
MERCURY INTERACTIVE CORPORATION
By:	/s/ Anthony Zingale
Title:	President and Chief Executive Officer
ACKNOWLEDGED AND AGREED:
/s/ David Murphy
David Murphy
Date: March 16, 2006

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EXHIBIT A

Definition of Terms. The following terms referred to in this Letter shall have the following meanings:

“Cause” means (i) any act of personal dishonesty taken by you in connection with your responsibilities as an employee and intended to result in substantial personal enrichment; (ii) your being convicted of a felony; or (iii) a willful act by you which constitutes gross misconduct and which is materially injurious to the Company.

“Change of Control” means the occurrence of any of the following events:

(a) Any “person” (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended), is or becomes the “beneficial owner” (as defined in Section 13d-3 of said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company’s then outstanding voting securities;

(b) The composition of the Board of Directors changes during any period of 36 months such that individuals who at the beginning of the period were members of the Board of Directors (the “Continuing Directors”) cease for any reason to constitute at least a majority thereof; unless at least 66- ²/3% of the Continuing Directors has either (i) approved the election of the new Directors, (ii) if the election of the new Directors is voted on by shareholders, recommended that the shareholders vote for approval, or (iii) otherwise determined that such change in composition does not constitute a Change of Control, even if the Continuing Directors do not constitute a quorum of the whole Board (it being understood that this requirement shall not be capable of satisfaction unless there is at least one Continuing Director);

(c) The shareholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale, lease, exclusive license or disposition by the Company of all or substantially all of the Company’s assets;

(d) Any other provision of this subsection notwithstanding, the term Change of Control shall not include either of the following events undertaken at the election of the Company:

(i) Any transaction, the sole purpose of which is to change the state of the Company’s incorporation; or

(ii) A transaction, the result of which is to sell all or substantially all of the assets of the Company to another corporation (the “surviving corporation”) provided that the surviving corporation is owned directly or indirectly by the shareholders of the Company immediately following such transaction in substantially the same proportions as their ownership of the Company’s common stock immediately preceding such transaction.

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“Change of Control Period” means the period beginning with the date that a Change of Control has occurred (as determined by the Board of Directors of the Company) and ending twenty-four (24) months later.

“Disability” means that you suffer from a physical or mental disability to an extent that renders it impracticable for you to continue performing your duties hereunder. You shall be deemed to be so disabled if (i) a physician selected by the Company (and the Company will use its best efforts to coordinate such determination by the physician with the Company’s long term disability insurance carrier) advises the Company that your physical or mental condition will render you unable to perform your duties for a period exceeding three consecutive months, or (ii) due to a physical or mental condition, you have not substantially performed your duties hereunder for a period of three consecutive months.

“Involuntary Termination” means without your written consent (i) your assignment to any duties or the significant reduction of your duties or a significant change of your title, any of which is inconsistent with your position or title with the Company and responsibilities in effect immediately prior to such assignment. For purposes of clarification, if you are not the principal financial officer of the successor entity or its ultimate parent, if any, then you will have suffered a significant reduction of your duties which qualifies as an Involuntary Termination pursuant to this paragraph; (ii) reduction by the Company in your base compensation as in effect immediately prior to such reduction; (iii) any purported termination of you by the Company (other than a voluntary resignation initiated by you, except for a voluntary termination initiated by you for the reasons described in this paragraph) which is not effected for Disability or for Cause; (iv) relocation of your principal place of employment by more than 50 miles; (v) the failure of any successor entity to the Company to expressly assume in writing the terms of this agreement or your employment agreement; and (vi) any material breach by the Company of any material provision of your employment agreement with the Company which has not been cured within 30 days of written notice to the Company by you of such breach.

“Severance Period” means the 24-month period following your termination of employment.

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