Mercury Interactive ( MERQE) said Chief Executive Amnon Landan and Chief Financial Officer Douglas Smith resigned after a special committee at the company found that they benefited from a program to favorably price option grants.

General Counsel Susan Skaer also resigned, the business software company said.

The special committee was formed in June to conduct an internal investigation of Mercury's past stock option grants after the Securities and Exchange Commission started an inquiry. The committee found that, beginning in 1995, there were 49 instances in which the stated date of a stock option grant was different from the date on which the option appears to have actually been granted.

In almost every case, the price on the actual date was higher than the price on the stated grant date. The misdating occurred on grants for all levels of employees, Mercury said Wednesday.

To fill the vacated executive posts, Mercury named Anthony Zingale CEO. Zingale joined Mercury in December as president and chief operating officer. David Murphy, who started in 2003 as senior vice president, corporate development, was appointed CFO. Giora Yaron, a member of the Mercury board since 1996, was elected chairman.

Shareholders were scrambling for the exits after the announcement, and Mercury's stock was plummeting $10.16, or 29%, to $24.84 in premarket trading.

Mercury said Landan, Smith and Skaer were each aware of the option-pricing practice and to varying degrees took part in it and benefited personally.

"While each of these officers asserts that he or she did not focus on the fact that the practices and their related accounting were improper, the special committee has concluded that each of them knew or should have known that the practices were contrary to the options plan and proper accounting," the company said, adding that "missing or overlooking a practice as basic and important as the proper granting of options is not acceptable."

Additionally, a $1 million loan to Landan in 1999, which has since been repaid, doesn't appear to have been approved in advance by the board. Mercury said the loan was referenced in some of the company's public filings but wasn't clearly disclosed.

The company said the favorable pricing plan seems to have ended around April 2002.

"During the relevant period, Mercury's internal controls and accounting controls with respect to option grants and exercises were inadequate," the company said.

Mercury also said it expects revenue to be $205 million to $210 million for the third quarter ended Sept. 30, but it added that the fourth quarter will be "challenging," preventing it from providing guidance right now. Analysts expect a top line of about $203 million for the third quarter.

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