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): July 3, 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 2.02. Results of Operation and Financial Condition.

On July 3, 2006, Mercury Interactive Corporation (the “Company”) (OTC: MERQ) issued a press release announcing that it has completed its previously announced restatement of the Company’s financial statements for the fiscal years 2004, 2003 and 2002 and that the restated financial statements have been filed with the Securities and Exchange Commission in an amended Form 10-K/A for the year ended December 31, 2004. In the press release, the Company also announced selected preliminary financial results for the year ended December 31, 2005. A copy of the press release, dated July 3, 2006, is furnished as Exhibit 99.1 to this Current Report and is incorporated herein in its entirety.

Item 9.01. Financial Statements and Exhibits.

The following exhibit is furnished herewith:

99.1 Press release dated July 3, 2006

This exhibit is furnished with this Current Report on Form 8-K and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section or Sections 11 and 12(a)(2) of the Securities Act of 1933, and is not incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date of this report and irrespective of any general incorporation language in such filing, except as shall be expressly set forth by specific reference in such filing.

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: July 3, 2006	MERCURY INTERACTIVE CORPORATION
	By:	/s/ Anthony Zingale
	Name:	Anthony Zingale
	Title:	Chief Executive Officer

EXHIBIT INDEX

Exhibit No.	Description
99.1	Press release dated July 3, 2006

This exhibit is furnished with this Current Report on Form 8-K and shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to the liabilities of that section or Sections 11 and 12(a)(2) of the Securities Act of 1933, and is not incorporated by reference into any filing of the Company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date of this report and irrespective of any general incorporation language in such filing, except as shall be expressly set forth by specific reference in such filing.

EX-99.1

Exhibit 99.1

Investor Relations Contact Michelle Ahlmann, 650.603.5464 Mercury   Public Relations Contact Dave Peterson, 650.603.5231 Mercury   Paul Sherer, 415.385.5970 Ogilvy Public Relations Worldwide

Mercury Files Restated Financial Statements

• Completes Major Milestone with the Filing of the Amended 2004 10-K/A

• Restatement Principally Non-Cash Adjustments From Past Stock Option Practices

• Provides Update on SEC Activities

Mountain View, CA, July 3, 2006 – Mercury Interactive Corporation (OTC: MERQ), the global leader in business technology optimization (BTO) software, today said that it has completed its previously announced restatement of the Company’s financial statements for the fiscal years 2004, 2003 and 2002. The restated financial statements have been filed with the Securities and Exchange Commission in an amended Form 10-K/A for the year ended December 31, 2004. The Company intends to file an amended Form 10-Q/A for the quarter ended March 31, 2005 with the SEC later this month.

“We have taken a rigorous and thorough approach to completing the restatement and recertification of our financial statements. I want to thank our customers, partners, shareholders and employees for their loyalty and support during this time period,” said Tony Zingale, president and chief executive officer at Mercury. “The Company remains in a strong financial position and we believe has a significant market opportunity going forward. I am particularly proud of Mercury’s continued ability to execute against our strategic business plan and our focus on customer success, technology innovation and expansion of our capabilities through our acquisitions.”

Update on SEC Filings

The Company intends to file its Forms 10-Q for the quarters ended June 30 and September 30, 2005 and its Form 10-K for the year ended December 31, 2005 in Q3 2006, and to become current in its SEC reporting in as timely a fashion as possible thereafter.

Mercury Files Restated Financial Statements Page 2

Overview of Restatement of Consolidated Financial Statements

As previously announced, a Special Committee comprised of disinterested members of the Audit Committee of the Board was formed in June 2005 to conduct an internal investigation relating to past stock option practices in response to an inquiry initiated by the SEC in November 2004. The Special Committee, its outside legal counsel and accounting experts reviewed thousands of individual option grants, modifications and exercises dating back to 1993, interviewed numerous individuals, and engaged in a forensic audit of the issues under investigation. In August 2005, the Special Committee concluded that the actual grant dates for certain past stock options differed from the originally stated grant dates for such awards. As a result, the Company determined that it should have recognized material amounts of stock-based compensation expense which were not accounted for in its previously issued financial statements and, accordingly, that the previously filed unaudited interim and audited consolidated financial statements for the fiscal years 2004, 2003 and 2002, as well as the unaudited interim financial statements for the first quarter of 2005, should no longer be relied upon because these financial statements contained misstatements and would need to be restated. On November 2, 2005, the Company announced that the Special Committee had made certain determinations as a result of its review, and that the Board of Directors had accepted the resignations of the then CEO, CFO and General Counsel.

As a result of the Special Committee’s investigation and the Company’s internal review of its historical financial statements, the Company has recorded significant adjustments to its previously filed financial statements. The adjustments in the restated consolidated financial statements did not affect the Company’s previously reported cash and investment balances in prior periods.

The restated consolidated financial statements reflect a decrease in income before provision for taxes of approximately $566.7 million for the periods 1992 through December 31, 2004, consisting principally of non-cash adjustments to stock-based compensation expense resulting from the stock option grant and exercise practices described below. The majority of these expenses are reflected as a decrease to retained earnings (net of income tax effects) in the opening balance sheet for 2002 of approximately $362.3 million, reflecting adjustments from 1992 to 2001, and the remaining amounts are reported in the Company’s consolidated statements of operations in subsequent periods. The Company also has made a number of tax-related adjustments arising principally from the stock-based compensation adjustments.

Mercury Files Restated Financial Statements Page 3

The primary components of the accounting adjustments reflected in the restated consolidated financial statements are as follows:

	Year ended December 31, (in thousands)
	2004					2003					2002					1992 through 2001
Category(1)	Total increase/ (decrease) for period			% of total adjustments prior to income taxes		Total increase/ (decrease) for period			% of total adjustments prior to income taxes		Total increase/ (decrease) for period			% of total adjustments prior to income taxes		Total increase/ (decrease) for period			% of total adjustments prior to income taxes
Stock option grant date changes	$	(17,789	)	42	%	$	(79,518	)	72	%	$	(47,636	)	132	%	$	(113,400	)	30	%
Stock options exercisable with promissory notes		582		-1	%		(9,425	)	9	%		12,653		-35	%		(255,640	)	67	%
Stock options involved in consulting, transitions or advisory roles		(7,196	)	17	%		(3,039	)	3	%		(2,337	)	6	%		(6,889	)	2	%
Other matters related to stock options		(15,311	)	36	%		(13,617	)	12	%		(164	)	1	%		(376	)	0	%
Total stock option related accounting adjustments		(39,714	)	94	%		(105,599	)	96	%		(37,484	)	104	%		(376,305	)	99	%
Other miscellaneous accounting adjustments		(2,757	)	6	%		(4,281	)	4	%		1,374		-4	%		(1,923	)	1	%
Total adjustment to income (loss) before provision for income taxes		(42,471	)	100	%		(109,880	)	100	%		(36,110	)	100	%		(378,228	)	100	%
Income tax impact of restatement adjustments		11,647					5,781					7,966					15,921
Total adjustments to net income		(30,824	)				(104,099	)				(28,144	)				(362,307	)

(1) For explanatory purposes, we have classified the stock option and other adjustments that were affected by the restatement into the aforementioned categories as presented above. The classified amounts involve certain subjective judgments by management to the extent particular stock option related accounting errors may fall within more than one category to avoid double counting the adjustment amounts between categories (e.g., a stock option that is subject to date changes, combined with expenses resulting from the exercise of promissory notes, and/or combined with expenses resulting from consulting, transition or advisory roles). As such, the table above should be considered a reasonable representation of the magnitude of expenses in each category.

The cumulative effect of the restatement adjustments on the Company’s restated consolidated balance sheet at December 31, 2004 resulted in an increase in the accumulated deficit offset by a corresponding increase in additional paid-in capital and unearned stock-based compensation which results in a net decrease in total stockholders’ equity of $17.1 million. The adjustments reduced retained earnings as of December 31, 2001 from $155.7 million to an accumulated deficit of $206.6 million, and reduced retained earnings as of December 31, 2004 from $347.1 million to an accumulated deficit of $178.3 million.

Mercury Files Restated Financial Statements Page 4

The restated consolidated financial statements reflect the following increases (decreases) in previously reported GAAP net income, and previously reported GAAP diluted earnings per common share:

	2004			2003			2002
Net Income (in millions)	$	(30.8	)	$	(104.1	)	$	(28.1	)
Diluted Earnings Per Share	$	(0.30	)	$	(1.13	)	$	(0.32	)

Overview of Financial Recertification-Related Process

After the November 2005 determinations by the Special Committee, the Board of Directors requested that the Special Committee work in conjunction with the Company to conduct a supplemental review of the principal financial reporting control areas of the Company and the key individuals functioning in these areas during the relevant time periods. This recertification work was conducted in order to determine whether the work previously carried out by the Company in connection with the preparation of its restated financial statements could be relied upon with respect to matters other than the stock option related matters that were the subject of the Special Committee’s initial efforts.

As a result of the initial Special Committee findings and this work, the Company determined, as part of the Item 9A Controls and Procedures disclosure in its amended 2004 Annual Report on Form 10-K/A, that the Company’s disclosure controls and procedures were not effective at a reasonable level of assurance as of December 31, 2004. In its Item 9A disclosure, the Company identified two material weaknesses in its internal control over financial reporting as of December 31, 2004. A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The Company’s independent registered public accounting firm, PricewaterhouseCoopers LLP, issued an opinion that management’s assessment that the Company did not maintain effective internal control over financial reporting as of December 31, 2004 is fairly stated, in all material respects. Notwithstanding these material weaknesses, management believes that because of the substantial work performed during the restatement process, the Company’s financial position, results of operations and cash flows, as reflected in the restated consolidated financial statements, are fairly stated in all material respects in accordance with GAAP for each of the periods presented.

Certain Directors Receive “Wells Notice” from SEC

On June 23, 2006, the SEC Staff, as part of the “Wells” process by which the SEC Staff affords individuals and companies the opportunity to present their views regarding potential action by the SEC, advised counsel for directors Igal Kohavi, Yair Shamir and Giora Yaron that the SEC Staff is considering recommending that the Commission file a civil enforcement proceeding against each of these directors

Mercury Files Restated Financial Statements Page 5

under applicable provisions of the federal securities laws. The directors have advised the SEC Staff that they intend to file a Wells submission arguing that they did not violate the federal securities laws, that they did not participate in or know of option backdating and that the charges under consideration are legally and factually without basis. Former officers of the Company are likely to receive or have received similar notices. In light of the Wells notice, the aforementioned directors have offered to withdraw from their respective positions on the applicable committees of the Company’s Board of Directors, and the Board has accepted that offer. As previously disclosed, the Company is cooperating in the continuing formal SEC investigation of the Company.

Update on 2005 Unaudited Financial Metrics

The Company also announced today full year 2005 revenue of approximately $843 million and a net full year increase in deferred revenue of approximately $50 million. The Company had 79 deals greater than $1 million for the full year 2005. The full year restated GAAP operating margin was approximately 13%, and the full year restated Non-GAAP operating margin was approximately 21%. The principal adjustments between the restated GAAP operating margin estimates and the restated Non-GAAP operating margin estimates are: the costs incurred in connection with the Special Committee investigation, our internal review of our historical financial statements, the preparation of the restated financial statements, the SEC investigation and inquiries from other government agencies, the related class action and derivative litigation and amendments to the terms of our notes as a result of our failure to timely file our Exchange Act reports with the SEC and the trustee for the notes, and amortization and write-off of intangible assets. The Company’s cash and investment balance was $1.4 billion at December 31, 2005.

Conference Call

Mercury will host a conference call to discuss the restatement and financial results at 5:00 a.m. Pacific Time on Wednesday, July 5, 2006. A live Webcast of the conference call, together with supplemental financial information, can be accessed through the Company’s Investor Relations Web site at http://www.mercury.com/ir. In addition, an archive of the Webcast can be accessed through the same link. An audio replay of the call will be available until midnight on July 11, 2006. The audio replay can be accessed by calling 888-203-1112 or 719-457-0820, conference call code: 4047904.

About Mercury

Mercury Interactive Corporation (OTC: MERQ), the global leader in business technology optimization (BTO) software, is committed to helping customers optimize the business value of information technology. Founded in 1989, Mercury conducts business worldwide and is one of the largest enterprise software companies today. Mercury provides software and services for IT Governance, Application Delivery and Application Management. Customers worldwide rely on Mercury offerings to govern the priorities, processes and people of IT and test and manage the quality and performance of business-critical applications. Mercury BTO offerings are complemented by technologies and services from global business partners. For more information, please visit www.mercury.com.

Forward Looking Statements

This release contains “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 that reflect Mercury’s judgment and involve risks and uncertainties as of the date of this release.

Mercury Files Restated Financial Statements Page 6

These forward looking statements include those related to the filing of the restated report on Form 10-Q/A for the first quarter of 2005 and the filing of delinquent reports on Forms 10-Q and 10-K, and the estimates of fiscal 2005 revenue, increase in deferred revenue, number of transactions greater than $1 million and restated GAAP and Non-GAAP operating margins, and the Company’s cash and investment balance at December 31, 2005. Actual events or results may differ materially from the results predicted or from any other forward-looking statements made by, or on behalf of, Mercury and should not be considered as an indication of future events or results. Potential risks and uncertainties include, among other things: 1) the timing of completion of the Company’s filing of its Form 10-Q/A for the first quarter of fiscal 2005, its Forms 10-Q for the second and third quarters of fiscal year 2005 and the first quarter of fiscal year 2006, and its Form 10-K for fiscal year 2005, and any other required SEC reports, 2) the impact of the expensing of stock options and stock purchases under Mercury’s employee stock purchase program pursuant to Financial Accounting Standards Board’s Statement 123(R), 3) the impact of the resignations of Amnon Landan, Douglas Smith and Susan Skaer, 4) the nature and scope of the ongoing government investigation, 5) the effect of the Wells notices received by certain directors, 6) the timing of relisting of the Company’s securities on a national securities exchange, including the risk that relisting will not occur, 7) the effect of the SEC investigation and any litigation or other legal proceedings arising out of the matters covered by the Special Committee investigation, 8) costs incurred by Mercury in connection with the Special Committee investigation and the SEC investigation, 9) financial results for fiscal 2005, and the adjustments resulting from the quarter-end and year-end close process and audit by Mercury’s independent auditors of the financial results for fiscal 2005, and 10) the additional risks and important factors described in Mercury’s SEC reports, including the Quarterly Report on Form 10-Q/A for the fiscal quarter ended March 31, 2005, which is available at the SEC’s website at http://www.sec.gov. All of the information in this press release is made as of July 3, 2006, and Mercury undertakes no duty to update this information.

###

Mercury, Mercury Interactive and the Mercury logo are trademarks of Mercury Interactive Corporation and may be registered in certain jurisdictions. Other product and company names are used herein for identification purposes only, and may be trademarks of their respective companies.

MERCURY INTERACTIVE CORPORATION

379 N. Whisman Road

Mountain View, CA 94043

Tel: (650) 603-5200 Fax: (650) 603-5300

www.mercury.com

Mercury Files Restated Financial Statements Page 7

The following tables present the effect of the restatement adjustments by financial statement line item for the Consolidated Balance Sheets, Statements of Operations and Statements of Cash Flows:

Consolidated Balance Sheets as of December 31, 2004 and 2003 (in thousands):

	December 31, 2004									December 31, 2003
	As previously reported			Adjustments			As restated			As previously reported			Adjustments			As restated
ASSETS
Current assets:
Cash and cash equivalents	$	182,868		$	—		$	182,868		$	127,971		$	—		$	127,971
Short-term investments		447,453			—			447,453			589,389			—			589,389
Trade accounts receivable, net		224,011			(601	)		223,410			142,908			—			142,908
Deferred tax assets, net		10,140			(6,695	)		3,445			442			—			442
Prepaid expenses and other assets		85,077			(12,078	)		72,999			64,043			(2,618	)		61,425
Total current assets		949,549			(19,374	)		930,175			924,753			(2,618	)		922,135
Long-term Investments		508,120			—			508,120			516,348			—			516,348
Property and equipment, net		78,415			(182	)		78,233			73,203			—			73,203
Investments in non-consolidated companies		13,031			—			13,031			13,928			—			13,928
Debt issuance costs, net		11,258			—			11,258			14,965			—			14,965
Goodwill		395,439			890			396,329			347,616			(2,128	)		345,488
Intangible assets, net		38,452			—			38,452			45,126			—			45,126
Restricted cash		6,000			—			6,000			6,000			—			6,000
Interest rate swap		4,832			—			4,832			11,557			—			11,557
Long-term deferred tax assets, net		—			3,503			3,503			—			17,514			17,514
Other assets		14,854			8,694			23,548			17,456			—			17,456
Total assets	$	2,019,950		$	(6,469	)	$	2,013,481		$	1,970,952		$	12,768		$	1,983,720
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	20,008		$	—		$	20,008		$	17,584		$	—		$	17,584
Accrued liabilities		128,997			14,818			143,815			96,637			6,986			103,623
Income taxes		65,578			(464	)		65,114			63,771			(9,320	)		54,451
Deferred tax liabilities, net		—			2			2			—			17,514			17,514
Short-term deferred revenue		312,115			(539	)		311,576			212,716			508			213,224
Total current liabilities		526,698			13,817			540,515			390,708			15,688			406,396
Convertible notes		804,483			—			804,483			811,159			—			811,159
Long-term deferred revenue		102,205			—			102,205			67,909			—			67,909
Long-term deferred tax liabilities, net		3,192			(3,192	)		—			266			(266	)		—
Other long-term payables		2,386			—			2,386			541			—			541
Total liabilities		1,438,964			10,625			1,449,589			1,270,583			15,422			1,286,005
Commitments and contingencies (Notes 9, 10 and 19)
Stockholders’ equity:
Preferred stock		—			—			—			—			—			—
Common stock		170			—			170			181			—			181
Additional paid-in capital		599,976			518,777			1,118,753			468,150			532,020			1,000,170
Treasury stock		(348,249	)		—			(348,249	)		(16,082	)		—			(16,082	)
Notes receivable from issuance of common stock		(4,173	)		(1,283	)		(5,456	)		(6,580	)		(1,349	)		(7,929	)
Unearned stock-based compensation		(608	)		(9,214	)		(9,822	)		(1,533	)		(38,775	)		(40,308	)
Accumulated other comprehensive loss		(13,182	)		—			(13,182	)		(6,219	)		—			(6,219	)
Retained earnings / (Accumulated deficit)		347,052			(525,374	)		(178,322	)		262,452			(494,550	)		(232,098	)
Total stockholders’ equity		580,986			(17,094	)		563,892			700,369			(2,654	)		697,715
Total liabilities and stockholders’ equity	$	2,019,950		$	(6,469	)	$	2,013,481		$	1,970,952		$	12,768		$	1,983,720

Mercury Files Restated Financial Statements Page 8

Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002 (in thousands, except per share amounts):

	Year Ended December 31,
	2004									2003									2002
	As previously reported			Adjustments			As restated			As previously reported			Adjustments			As restated			As previously reported			Adjustments			As restated
Revenues:
License fees	$	261,306		$	76		$	261,382		$	201,047		$	(208	)	$	200,839		$	192,212		$	2		$	192,214
Subscription fees		152,064			135			152,199			98,858			(34	)		98,824			53,024			(54	)		52,970
Maintenance fees		196,141			74			196,215			159,030			(7	)		159,023			122,343			(81	)		122,262
Professional service fees		76,036			239			76,275			47,538			(19	)		47,519			32,543			(36	)		32,507
Total Revenues		685,547			524			686,071			506,473			(268	)		506,205			400,122			(169	)		399,953
Costs and expenses:
Cost of license and subscription (including stock-based compensation) (1)		40,344			1,455			41,799			29,056			5,376			34,432			24,804			2,523			27,327
Cost of maintenance (including stock-based compensation) (1)		15,583			2,315			17,898			11,880			5,851			17,731			11,662			2,935			14,597
Cost of professional services (including stock-based compensation) (1)		62,834			903			63,737			36,942			3,379			40,321			24,334			1,176			25,510
Cost of revenue—amortization of intangible assets (1)		10,019			—			10,019			5,189			—			5,189			1,833			—			1,833
Marketing and selling (including stock-based compensation) (1)		314,900			20,967			335,867			244,374			59,491			303,865			194,418			22,128			216,546
Research and development (including stock-based compensation) (1)		73,724			8,398			82,122			55,904			17,192			73,096			42,699			8,498			51,197
General and administrative (including stock-based compensation) (1)		56,008			7,794			63,802			40,034			15,870			55,904			32,474			(1,560	)		30,914
Acquisition-related expenses		900			—			900			11,968			—			11,968			—			—			—
Restructuring, integration, and other related expenses		3,088			—			3,088			3,389			—			3,389			(537	)		—			(537	)
Amortization of intangible assets		5,544			—			5,544			2,281			—			2,281			542			—			542
Excess facilities expense		8,943			—			8,943			16,882			—			16,882			—			—			—
Total costs and expenses		591,887			41,832			633,719			457,899			107,159			565,058			332,229			35,700			367,929
Income (loss) from operations		93,660			(41,308	)		52,352			48,574			(107,427	)		(58,853	)		67,893			(35,869	)		32,024
Interest income		38,614			(404	)		38,210			36,077			(1,678	)		34,399			35,119			(178	)		34,941
Interest expense		(20,292	)		(4,335	)		(24,627	)		(19,551	)		(3,273	)		(22,824	)		(23,370	)		(1,624	)		(24,994	)
Other income (expense), net		(4,837	)		3,576			(1,261	)		(7,405	)		2,498			(4,907	)		2,747			1,561			4,308
Income (loss) before provision for income taxes		107,145			(42,471	)		64,674			57,695			(109,880	)		(52,185	)		82,389			(36,110	)		46,279
Provision for income taxes		22,545			(11,647	)		10,898			16,182			(5,781	)		10,401			17,185			(7,966	)		9,219
Net income (loss)	$	84,600		$	(30,824	)	$	53,776		$	41,513		$	(104,099	)	$	(62,586	)	$	65,204		$	(28,144	)	$	37,060
Net income (loss) per share-basic	$	0.95		$	(0.34	)	$	0.61		$	0.48		$	(1.20	)	$	(0.72	)	$	0.78		$	(0.33	)	$	0.45
Net income (loss) per share-diluted	$	0.83		$	(0.30	)	$	0.53		$	0.41		$	(1.13	)	$	(0.72	)	$	0.74		$	(0.32	)	$	0.42
Weighted average common shares- basic		89,060			(1,392	)		87,668			87,124			(515	)		86,609			83,938			(1,226	)		82,712
Weighted average common shares and equivalents-diluted		103,207			30			103,237			102,401			(15,792	)		86,609			87,640			(426	)		87,214
__________ (1)    Stock-based compensation:
Cost of license and subscription	$	—		$	1,201		$	1,201		$	—		$	5,073		$	5,073		$	—		$	2,517		$	2,517
Cost of maintenance		—			1,725			1,725			—			5,433			5,433			—			2,926			2,926
Cost of professional services		108			690			798			53			3,127			3,180			—			1,174			1,174
Marketing and selling		437			15,868			16,305			5,609			54,816			60,425			643			22,093			22,736
Research and development		255			7,944			8,199			296			16,108			16,404			453			9,453			9,906
General and administrative		21			6,211			6,232			34			15,114			15,148			67			(917	)		(850	)

Mercury Files Restated Financial Statements Page 9

Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 (in thousands, except per share amounts):

	Year ended December 31,
	2004									2003									2002
	As previously reported			Adjustments			As restated			As previously reported			Adjustments			As restated			As previously reported			Adjustments			As restated
Cash flows from operating activities:
Net income (loss)	$	84,600		$	(30,824	)	$	53,776		$	41,513		$	(104,099	)	$	(62,586	)	$	65,204		$	(28,144	)	$	37,060
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		21,697			(6	)		21,691			17,869			—			17,869			14,704			—			14,704
Sales reserve		1,873			—			1,873			1,193			—			1,193			3,342			—			3,342
Unrealized (gain) loss on interest rate swap		51			—			51			8			—			8			(406	)		—			(406	)
Amortization of intangible assets		15,563			—			15,563			7,470			—			7,470			2,375			—			2,375
Stock-based compensation		821			33,639			34,460			5,992			99,671			105,663			1,163			37,246			38,409
Gain on early retirement of debt		—			—			—			—			—			—			(11,610	)		—			(11,610	)
Loss on investments in non-consolidated companies		1,138			—			1,138			3,959			—			3,959			5,296			—			5,296
Loss on disposals of assets		454			188			642			—			—			—			—			—			—
Gain on sale of available-for-sale securities		(336	)		—			(336	)		—			—			—			—			—			—
Unrealized gain on warrant		(502	)		—			(502	)		(435	)		—			(435	)		—			—			—
Write-off of in-process research and development		900			—			900			11,968			—			11,968			—			—			—
Excess facilities expense		8,943			—			8,943			16,882			—			16,882			—			—			—
Tax benefit from employee stock options		17,964			(17,625	)		339			6,367			(6,367	)		—			—			—			—
Deferred income taxes		(7,214	)		710			(6,504	)		13,517			(11,589	)		1,928			(6,595	)		6,595			—
Changes in assets and liabilities, net of effect of acquisitions:
Trade accounts receivable		(76,787	)		601			(76,186	)		(40,878	)		—			(40,878	)		(28,288	)		590			(27,698	)
Prepaid expenses and other assets		(14,350	)		733			(13,617	)		(20,808	)		2,499			(18,309	)		(27,498	)		22,884			(4,614	)
Accounts payable		1,152			—			1,152			3,167			—			3,167			(451	)		—			(451	)
Accrued liabilities		23,142			7,833			30,975			12,927			7,091			20,018			11,443			(1,531	)		9,912
Income taxes		5,216			5,429			10,645			(12,681	)		12,882			201			38,492			(37,667	)		825
Deferred revenue		126,627			(1,048	)		125,579			111,944			268			112,212			65,002			(421	)		64,581
Other long-term payables		1,845			—			1,845			541			—			541			—			—			—
Net cash provided by (used in) operating activities		212,797			(370	)		212,427			180,515			356			180,871			132,173			(448	)		131,725

	Year ended December 31,
	2004								2003									2002
	As previously reported			Adjustments		As restated			As previously reported			Adjustments			As restated			As previously reported			Adjustments		As restated
Cash flows from investing activities:
Maturities of investments		544,135			—		544,135			453,142			—			453,142			382,261			—		382,261
Purchases of held-to-maturity investments		(481,887	)		—		(481,887	)		(809,395	)		—			(809,395	)		(303,427	)		—		(303,427	)
Increase in restricted cash		—			—		—			—			—			—			(6,000	)		—		(6,000	)
Proceeds from sale of available-for-sale investments		1,124,255			—		1,124,255			1,498,549			—			1,498,549			637,635			—		637,635
Purchases of available-for-sale investments		(1,034,438	)		—		(1,034,438	)		(1,687,095	)		—			(1,687,095	)		(871,973	)		—		(871,973	)
Proceeds from return on investment in non-consolidated company		1,525			—		1,525			—			—			—			—			—		—
Purchases of investments in non-consolidated companies		(2,625	)		—		(2,625	)		(1,500	)		—			(1,500	)		(2,244	)		—		(2,244	)
Cash paid in conjunction with the acquisition of Performant, net		—			—		—			(22,028	)		—			(22,028	)		—			—		—
Cash paid in conjunction with the acquisition of Kintana, net		(163	)		—		(163	)		(136,653	)		—			(136,653	)		—			—		—
Cash paid in conjunction with a technology purchase from Allerez		—			—		—			(1,270	)		—			(1,270	)		—			—		—
Cash paid in conjunction with a domain name purchase		—			—		—			(650	)		—			(650	)		—			—		—
Cash paid in conjunction with the acquisition of Appilog, net		(49,543	)		—		(49,543	)		—			—			—			—			—		—
Net proceeds from sale of assets and vacant facilities		2,684			—		2,684			—			—			—			—			—		—
Acquisition of property and equipment, net		(32,684	)		—		(32,684	)		(17,093	)		—			(17,093	)		(8,164	)		—		(8,164	)
Net cash provided by (used in) investing activities		71,259			—		71,259			(723,993	)		—			(723,993	)		(171,912	)		—		(171,912	)
Cash flows from financing activities:
Proceeds from issuances of convertible notes, net		—			—		—			488,056			—			488,056			—			—		—
Proceeds from issuances of common stock under stock option and employee stock purchase plans		103,981			—		103,981			74,779			—			74,779			23,038			—		23,038
Purchase of treasury stock		(332,186	)		—		(332,186	)		—			—			—			—			—		—
Retirement of convertible subordinated notes		—			—					—			—			—			(64,640	)		—		(64,640	)
Collection of notes receivable from issuances of common stock, net		1,689			370		2,059			4,186			(356	)		3,830			878			448		1,326
Net cash provided by (used in) financing activities		(226,516	)		370		(226,146	)		567,021			(356	)		566,665			(40,724	)		448		(40,276	)
Effect of exchange rate changes on cash		(2,643	)		—		(2,643	)		(194	)		—			(194	)		1,287			—		1,287
Net increase (decrease) in cash and cash equivalents		54,897			—		54,897			23,349			—			23,349			(79,176	)		—		(79,176	)
Cash and cash equivalents at beginning of year		127,971			—		127,971			104,622			—			104,622			183,798			—		183,798
Cash and cash equivalents at end of year	$	182,868		$	—	$	182,868		$	127,971		$	—		$	127,971		$	104,622		$	—	$	104,622