2002 Incentive Plan

 

 

AMENDMENT TO BMC SOFTWARE, INC.

1994 EMPLOYEE INCENTIVE PLAN

(AS AMENDED AND RESTATED EFFECTIVE AS OF AUGUST 25, 1997)

      WHEREAS, BMC SOFTWARE, INC. (the “Company”) has heretofore adopted the BMC SOFTWARE, INC. 1994 EMPLOYEE INCENTIVE PLAN (AS AMENDED AND RESTATED EFFECTIVE AS OF AUGUST 25, 1997), as amended (the “Plan”), for the benefit of certain employees of the Company and its subsidiaries; and

      WHEREAS, the Company desires to amend the Plan to extend the term of the Plan and to allow for the grant of Awards (as such term is defined in the Plan) to non-employee directors of the Company;

      NOW, THEREFORE, the Plan shall be amended as follows:

      1. The first three sentences of Paragraph I of the Plan shall be deleted and the following shall be substituted therefor:

 

 

 

      “The purpose of the BMC SOFTWARE, INC. 1994 EMPLOYEE INCENTIVE PLAN (the “Plan”) is to provide a means through which BMC SOFTWARE, INC., a Delaware corporation (the “Company”), and its subsidiaries may attract able persons to serve as Directors or to enter the employ of the Company or its subsidiaries and to provide a means whereby those individuals upon whom the responsibilities of the successful administration and management of the Company and its subsidiaries rest, and whose present and potential contributions to the Company and its subsidiaries are of importance, can acquire and maintain stock ownership, thereby strengthening their concern for the welfare of the Company and its subsidiaries. A further purpose of the Plan is to provide such individuals with additional incentive and reward opportunities designed to enhance the profitable growth of the Company and its subsidiaries. Accordingly, the Plan provides for granting Incentive Stock Options, options that do not constitute Incentive Stock Options, Restricted Stock Awards, or any combination of the foregoing, as is best suited to the circumstances of the particular employee or Director as provided herein.”

      2. Subparagraph II (g) of the Plan shall be deleted and the following shall be substituted therefor:

 

 

 

      “(g) “Director” means an individual who is a member of the Board.”

      3. Subparagraph II (j) of the Plan shall be deleted and the following shall be substituted therefor:

 

 

 

      “(j) “Holder” means an employee or a Director who has been granted an Award.”

      4. The third sentence of Paragraph III of the Plan shall be deleted and the following shall be substituted therefor:

 

 

 

      “No further awards may be granted under the Plan after August 23, 2015.”

      5. The term “employees” shall be replaced by the term “individuals” wherever it appears in Subparagraphs IV (b), V (a), and VII (d) of the Plan.

      6. The first two sentences of Paragraph VI of the Plan shall be deleted and the following shall be substituted therefor:

 

 

 

      “Awards may be granted only to persons who, at the time of grant, are employees or Directors.”

      7. The following sentence shall be added prior to the first sentence of Subparagraph VII (c) of the Plan:

 

 

 

      “An Incentive Stock Option may be granted only to an individual who is an employee at the time the Option is granted.”

      8. The phrase “an employee” in the first sentence of Subparagraph XI (a) of the Plan shall be replaced by the phrase “any individual.”

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      9. The following shall be added to Subparagraph XI (b) of the Plan:

 

 

 

      “In addition, for all purposes under the Plan, any reference to the employment of an employee or individual, or the termination thereof, shall be deemed to also include reference to the service of a Director on the Board, or the termination thereof, as applicable.”

      10. The final sentence of Subparagraph XI (d) of the Plan shall be deleted and the following shall be substituted therefor:

 

 

 

      “No employee, Director, beneficiary or other person shall have any claim against the Company or any subsidiary as a result of any such action.”

      11. The amendments to the Plan set forth herein shall be effective as of August 23, 2005, provided that this amendment instrument is approved by the stockholders of the Company at the 2005 annual meeting of the Company’s stockholders held on such date. If this amendment instrument is not so approved at such meeting, then the amendments to the Plan set forth herein shall be void ab initio.

      12. As amended hereby, the Plan is specifically ratified and reaffirmed.

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                                                                        EXHIBIT A
 
                               BMC SOFTWARE, INC.
                          1994 EMPLOYEE INCENTIVE PLAN
   
            AS AMENDED AND RESTATED EFFECTIVE AS OF AUGUST 25, 1997)
    
 
                                   I. PURPOSE
 
   
     The purpose of the BMC SOFTWARE, INC. 1994 EMPLOYEE INCENTIVE PLAN (the
"Plan") is to provide a means through which BMC SOFTWARE, INC., a Delaware
corporation (the "Company"), and its subsidiaries may attract able persons to
enter the employ of the Company and to provide a means whereby those employees
upon whom the responsibilities of the successful administration and management
of the Company rest, and whose present and potential contributions to the
welfare of the Company are of importance, can acquire and maintain stock
ownership, thereby strengthening their concern for the welfare of the Company
and their desire to remain in its employ. A further purpose of the Plan is to
provide such employees with additional incentive and reward opportunities
designed to enhance the profitable growth of the Company. Accordingly, the Plan
provides for granting Incentive Stock Options, options which do not constitute
Incentive Stock Options, Restricted Stock Awards, or any combination of the
foregoing, as is best suited to the circumstances of the particular employee as
provided herein. The Plan as set forth herein constitutes an amendment and
restatement of the Plan as previously adopted by the Company, and shall
supersede and replace in its entirety such previously adopted plan. This
amendment and restatement of the Plan shall be effective as of August 25, 1997,
provided this amendment and restatement of the Plan is approved by the
stockholders of the Company on such date at the Company's 1997 Annual Meeting of
Stockholders. If this amendment and restatement of the Plan is not so approved
by the stockholders, then this amendment and restatement will not be effective.
    
 
                                II. DEFINITIONS
 
     The following definitions shall be applicable throughout the Plan unless
specifically modified by any paragraph:
 
          (a) "Award" means, individually or collectively, any Option or
     Restricted Stock Award.
 
          (b) "Board" means the Board of Directors of the Company.
 
          (c) "Code" means the Internal Revenue Code of 1986, as amended.
     Reference in the Plan to any section of the Code shall be deemed to include
     any amendments or successor provisions to such section and any regulations
     under such section.
 
          (d) "Committee" means not less than two members of the Board who are
     selected by the Board as provided in Paragraph IV(a).
 
          (e) "Common Stock" means the common stock, par value $.01 per share,
     of the Company.
 
          (f) "Company" means BMC Software, Inc.
 
          (g) "Director" means an individual elected to the Board by the
     stockholders of the Company or by the Board under applicable corporate law
     who is serving on the Board on the date the Plan is adopted by the Board or
     is elected to the Board after such date.
 
          (h) An "employee" means any person (including a Director) in an
     employment relationship with the Company or any parent or subsidiary
     corporation (as defined in section 424 of the Code).
 
          (i) "Fair Market Value" means, as of any specified date, the mean of
     the high and low sales prices of the Common Stock (i) reported by the
     NASDAQ-National Market System on that date or (ii) if the Common Stock is
     listed on a national stock exchange, reported on the stock exchange
     composite tape on that date; or, in either case, if no prices are reported
     on that date, on the last preceding date on which such prices of the Common
     Stock are so reported. If the Common Stock is traded over the counter at
     the
 
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<PAGE>   19
 
     time a determination of its fair market value is required to be made
     hereunder, its fair market value shall be deemed to be equal to the average
     between the reported high and low or closing bid and asked prices of Common
     Stock on the most recent date on which Common Stock was publicly traded. In
     the event Common Stock is not publicly traded at the time a determination
     of its value is required to be made hereunder, the determination of its
     fair market value shall be made by the Board in such manner as it deems
     appropriate.
 
          (j) "Holder" means an employee who has been granted an Award.
 
          (k) "Incentive Stock Option" means an incentive stock option within
     the meaning of section 422 of the Code.
 
          (l) "1934 Act" means the Securities Exchange Act of 1934, as amended.
 
          (m) "Option" means an Award granted under Paragraph VII of the Plan
     and includes both Incentive Stock Options to purchase Common Stock and
     Options which do not constitute Incentive Stock Options to purchase Common
     Stock.
 
          (n) "Option Agreement" means a written agreement between the Company
     and a Holder with respect to an Option.
 
   
          (o) "Plan" means the BMC Software, Inc. 1994 Employee Incentive Plan
     as set forth herein and, as amended from time to time.
    
 
          (p) "Restricted Stock Agreement" means a written agreement between the
     Company and a Holder with respect to a Restricted Stock Award.
 
          (q) "Restricted Stock Award" means an Award granted under Paragraph
     VIII of the Plan.
 
          (r) "Rule 16b-3" means SEC Rule 16b-3 promulgated under the 1934 Act,
     as such may be amended from time to time, and any successor rule,
     regulation or statute fulfilling the same or a similar function.
 
          (s) "Stock Appreciation Right" shall have the meaning assigned to such
     term in Paragraph VII(d) of the Plan.
 
                  III. EFFECTIVE DATE AND DURATION OF THE PLAN
 
   
     The Plan originally became effective on July 11, 1994. This amendment and
restatement of the Plan shall be effective as provided in Section I. No further
Awards may be granted under the Plan after August 25, 2007. The Plan shall
remain in effect until all Awards granted under the Plan have been satisfied or
expired.
    
 
                               IV. ADMINISTRATION
 
   
     (a) Composition of Committee. The Plan shall be administered by a committee
which shall be (i) appointed by the Board, (ii) solely of "nonemployee
directors," within the meaning of Rule 16b-3, and (iii) constituted solely by
two or more "outside directors," within the meaning of section 162(m) of the
Code and applicable interpretive authority thereunder.
    
 
     (b) Powers. Subject to the express provisions of the Plan, the Committee
shall have authority, in its discretion, to determine which employees shall
receive an Award, the time or times when such Award shall be made, whether an
Incentive Stock Option or nonqualified Option shall be granted, and the number
of shares to be subject to each Option or Restricted Stock Award. In making such
determinations the Committee shall take into account the nature of the services
rendered by the respective employees, their present and potential contribution
to the Company's success and such other factors as the Committee in its
discretion shall deem relevant.
 
     (c) Additional Powers. The Committee shall have such additional powers as
are delegated to it by the other provisions of the Plan. Subject to the express
provisions of the Plan, this shall include the power to
 
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<PAGE>   20
 
construe the Plan and the respective agreements executed hereunder, to prescribe
rules and regulations relating to the Plan, and to determine the terms,
restrictions and provisions of the agreement relating to each Award, including
such terms, restrictions and provisions as shall be requisite in the judgment of
the Committee to cause designated Options to qualify as Incentive Stock Options,
and to make all other determinations necessary or advisable for administering
the Plan. The Committee may correct any defect or supply any omission or
reconcile any inconsistency in the Plan or in any agreement relating to an Award
in the manner and to the extent it shall deem expedient to carry it into effect.
The determinations of the Committee on the matters referred to in this Paragraph
IV shall be conclusive.
 
                V. GRANT OF OPTIONS AND RESTRICTED STOCK AWARDS;
                           SHARES SUBJECT TO THE PLAN
 
   
     (a) Stock Grant and Award Limits. The Committee may from time to time grant
Awards to one or more employees determined by it to be eligible for
participation in the Plan in accordance with the provisions of Paragraph VI.
Subject to adjustment in the same manner as provided in Paragraph IX with
respect to shares of Common Stock subject to Options then outstanding, the
aggregate number of shares of Common Stock that may be issued under the Plan
shall not exceed 22,000,000 shares. Shares shall be deemed to have been issued
under the Plan only (i) to the extent actually issued and delivered pursuant to
an Award, or (ii) to the extent an Award is settled in cash. To the extent that
an Award lapses or the rights of the Holder terminate, any shares of Common
Stock subject to such Award shall again be available for the grant of an Award .
Notwithstanding any provision in the Plan to the contrary, the maximum number of
shares of Common Stock that may be subject to Awards granted to any one
individual during the term of the Plan as provided in Paragraph III hereof may
not exceed 2,000,000 (subject to adjustment in the same manner as provided in
Paragraph IX hereof with respect to shares of Common Stock subject to Options
then outstanding). The limitation set forth in the preceding sentence shall be
applied in a manner which will permit compensation generated under the Plan to
constitute "performance-based" compensation for purposes of section 162(m) of
the Code, including, without limitation, counting against such maximum number of
shares, to the extent required under section 162(m) of the Code and applicable
interpretive authority thereunder, any shares subject to Options or Stock
Appreciation Rights that are cancelled or repriced.
    
 
     (b) Stock Offered. The stock to be offered pursuant to the grant of an
Award may be authorized but unissued Common Stock or Common Stock previously
issued and outstanding and reacquired by the Company.
 
                                VI. ELIGIBILITY
 
     Awards may be granted only to persons who, at the time of grant, are
employees. Awards may not be granted to any Director who is not an employee. An
Award may be granted on more than one occasion to the same person, and, subject
to the limitations set forth in the Plan, such Award may include an Incentive
Stock Option, an Option which is not an Incentive Stock Option, a Restricted
Stock Award, or any combination thereof.
 
                               VII. STOCK OPTIONS
 
     (a) Option Period. The term of each Option shall be as specified by the
Committee at the date of grant.
 
     (b) Limitations on Exercise of Option. An Option shall be exercisable in
whole or in such installments and at such times as determined by the Committee.
 
     (c) Special Limitations on Incentive Stock Options. To the extent that the
aggregate Fair Market Value (determined at the time the respective Incentive
Stock Option is granted) of Common Stock with respect to which Incentive Stock
Options granted after 1986 are exercisable for the first time by an individual
during any calendar year under all incentive stock option plans of the Company
and its parent and subsidiary corporations exceeds $100,000, such Incentive
Stock Options shall be treated as options which do not constitute Incentive
 
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Stock Options. The Committee shall determine, in accordance with applicable
provisions of the Code, Treasury Regulations and other administrative
pronouncements, which of a Holder's Incentive Stock Options will not constitute
Incentive Stock Options because of such limitation and shall notify the Holder
of such determination as soon as practicable after such determination. No
Incentive Stock Option shall be granted to an individual if, at the time the
Option is granted, such individual owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company or of its
parent or subsidiary corporation, within the meaning of section 422(b)(6) of the
Code, unless (i) at the time such Option is granted the option price is at least
110% of the Fair Market Value of the Common Stock subject to the Option and (ii)
such Option by its terms is not exercisable after the expiration of five years
from the date of grant. An Incentive Stock Option shall not be transferable
otherwise than by will or the laws of descent and distribution, and shall be
exercisable during the Holders lifetime only by such Holder or the Holder's
guardian or legal representative.
    
 
   
     (d) Option Agreement. Each Option shall be evidenced by an Option Agreement
in such form and containing such provisions not inconsistent with the provisions
of the Plan as the Committee from time to time shall approve, including, without
limitation, provisions to qualify an Incentive Stock Option under section 422 of
the Code. Each Option Agreement shall specify the effect of termination of
employment on the exercisability of the Option. An Option Agreement may provide
for the payment of the option price, in whole or in part, by the delivery of a
number of shares of Common Stock (plus cash if necessary) having a Fair Market
Value equal to such option price. Moreover, an Option Agreement may provide for
a "cashless exercise" of the Option by establishing procedures whereby the
Holder, by a properly-executed written notice, directs (I) an immediate market
sale or margin loan respecting all or a part of the shares of Common Stock to
which he is entitled upon exercise pursuant to an extension of credit by the
Company to the Holder of the option price, (ii) the delivery of the shares of
Common Stock from the Company directly to a brokerage firm, and (iii) the
delivery of the option price from sale or margin loan proceeds from the
brokerage firm directly to the Company. Further, an Option Agreement may provide
for the surrender of the right to purchase shares under the Option in return for
a payment in cash or shares of Common Stock or a combination of cash and shares
of Common Stock equal in value to the excess of the Fair Market Value of the
shares with respect to which the right to purchase is surrendered over the
option price therefor ("Stock Appreciation Rights"), on such terms and
conditions as the Committee in its sole discretion may prescribe; provided, that
with respect to Stock Appreciation Rights granted to employees who are subject
to Section 16 of the 1934 Act, except as provided in Subparagraph IX(c) hereof,
the Committee shall retain final authority (i) to determine whether a Holder
shall be permitted, or (ii) to approve an election by a Holder, to receive cash
in full or partial settlement of Stock Appreciation Rights. In the case of any
such Stock Appreciation Right that is granted in connection with an Incentive
Stock Option, such right shall be exercisable only when the Fair Market Value of
the Common Stock exceeds the price specified therefor in the Option or the
portion thereof to be surrendered. The terms and conditions of the respective
Option Agreements need not be identical.
    
 
     (e) Option Price and Payment. The price at which a share of Common Stock
may be purchased upon exercise of an Option shall be determined by the Committee
but, subject to adjustment as provided in Paragraph IX, shall not be less than
the Fair Market Value of a share of Common Stock on the date such Option is
granted. The option or portion thereof may be exercised by delivery of an
irrevocable notice of exercise to the Company. The purchase price of the Option
or portion thereof shall be paid in full in the manner prescribed by the
Committee. Separate stock certificates shall be issued by the Company for those
shares acquired pursuant to the exercise of an Incentive Stock Option and for
those shares acquired pursuant to the exercise of any Option which does not
constitute an Incentive Stock Option.
 
     (f) Shareholder Rights and Privileges. The Holder shall be entitled to all
the privileges and rights of a shareholder only with respect to such shares of
Common Stock as have been purchased under the Option and for which certificates
of stock have been registered in the Holder's name.
 
     (g) Options and Rights in Substitution for Stock Options Granted by Other
Corporations. Options and Stock Appreciation Rights may be granted under the
Plan from time to time in substitution for stock options held by individuals
employed by corporations who become employees as a result of a merger or
consolidation of the employing corporation with the Company or any subsidiary,
or the acquisition by the Company or a
 
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<PAGE>   22
 
subsidiary of the assets of the employing corporation, or the acquisition by the
Company or a subsidiary of stock of the employing corporation with the result
that such employing corporation becomes a subsidiary.
 
                         VIII. RESTRICTED STOCK AWARDS
 
   
     (a) Restrictions To Be Established by the Committee. Shares of Common Stock
that are the subject of a Restricted Stock Award shall be subject to
restrictions on disposition by the Holder and an obligation of the Holder to
forfeit and surrender the shares to the Company under certain circumstances (the
"Forfeiture Restrictions"). The Forfeiture Restrictions shall be determined by
the Committee in its sole discretion, and the Committee may provide that the
Forfeiture Restrictions shall lapse upon (i) the attainment of one or more
performance targets established by the Committee that are based on (1) the price
of a share of Common Stock, (2) the Company's earnings per share, (3) the
Company's market share, (4) the market share of a business unit of the Company
designated by the Committee, (5) the Company's sales, (6) the sales of a
business unit of the Company designated by the Committee, or (7) the return on
stockholders' equity achieved by the Company, (ii) the Holder's continued
employment with the Company for a specified period of time, (iii) the occurrence
of any event or the satisfaction of any other condition specified by the
Committee in its sole discretion or (iv) a combination of any of the foregoing.
Each Restricted Stock Award may have different Forfeiture Restrictions, in the
discretion of the Committee. The Forfeiture Restrictions applicable to a
particular Restricted Stock Award shall not be changed except as permitted by
Paragraph VIII(b) or Paragraph IX.
    
 
     (b) Other Terms and Conditions. Common Stock awarded pursuant to a
Restricted Stock Award shall be represented by a stock certificate registered in
the name of the Holder of such Restricted Stock Award. The Holder shall have the
right to receive dividends with respect to Common Stock subject to a Restricted
Stock Award, to vote Common Stock subject thereto and to enjoy all other
shareholder rights, except that (i) the Holder shall not be entitled to delivery
of the stock certificate until the Forfeiture Restrictions have expired, (ii)
the Company shall retain custody of the stock until the Forfeiture Restrictions
have expired (iii) the Holder may not sell, transfer, pledge, exchange,
hypothecate or otherwise dispose of the stock until the Forfeiture Restrictions
have expired, and (iv) a breach of the terms and conditions established by the
Committee pursuant to the Restricted Stock Agreement, shall cause a forfeiture
of the Restricted Stock Award. At the time of such Award, the Committee may, in
its sole discretion, prescribe additional terms, conditions or restrictions
relating to Restricted Stock Awards, including, but not limited to, rules
pertaining to the termination of employment (by retirement, disability, death or
otherwise) of a Holder prior to expiration of the Forfeiture Restrictions. Such
additional terms, conditions or restrictions shall be set forth in a Restricted
Stock Agreement made in conjunction with the Award.
 
     (c) Payment for Restricted Stock. The Committee shall determine the amount
and form of any payment for Common Stock received pursuant to a Restricted Stock
Award, provided that in the absence of such a determination, a Holder shall not
be required to make any payment for Common Stock received pursuant to a
Restricted Stock Award, except to the extent otherwise required by law.
 
     (d) Agreements. At the time any Award is made under this Paragraph VIII,
the Company and the Holder shall enter into a Restricted Stock Agreement setting
forth each of the matters contemplated hereby and such other matters as the
Committee may determine to be appropriate. The terms and provisions of the
respective Restricted Stock Agreements need not be identical.
 
                     IX. RECAPITALIZATION OR REORGANIZATION
 
     (a) The existence of the Plan and the Awards granted hereunder shall not
affect in any way the right or power of the Board or the shareholders of the
Company to make or authorize any adjustment, recapitalization, reorganization or
other change in the Company's capital structure or its business, any merger or
consolidation of the Company, any issue of debt or equity securities ahead of or
affecting Common Stock or the rights thereof, the dissolution or liquidation of
the Company or any sale, lease, exchange or other disposition of all or any part
of its assets or business or any other corporate act or proceeding.
 
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<PAGE>   23
 
   
     (b) The shares with respect to which Options may be granted are shares of
Common Stock as presently constituted, but if, and whenever, prior to the
expiration of an Option theretofore granted, the Company shall effect a
subdivision or consolidation of shares of Common Stock or the payment of a stock
dividend on Common Stock without receipt of consideration by the Company, the
number of shares of Common Stock with respect to which such Option may
thereafter be exercised (i) in the event of an increase in the number of
outstanding shares shall be proportionately increased, and the purchase price
per share shall be proportionately reduced, and (ii) in the event of a reduction
in the number of outstanding shares shall be proportionately reduced, and the
purchase price per share shall be proportionately increased. Any fractional
share resulting from such adjustment shall be rounded up to the next whole
share.
    
 
   
     (c) If the Company recapitalizes, reclassifies its capital stock, or
otherwise changes its capital structure (a "recapitalization"), the number and
class of shares of Common Stock covered by an Option theretofore granted shall
be adjusted so that such Option shall thereafter cover the number and class of
shares of stock and securities to which the Holder would have been entitled
pursuant to the terms of the recapitalization if, immediately prior to the
recapitalization, the Holder had been the holder of record of the number of
shares of Common Stock then covered by such Option. If (i) the Company shall not
be the surviving entity in any merger or consolidation (or survives only as a
subsidiary of an entity, (ii) the Company sells, leases or exchanges or agrees
to sell, lease or exchange all or substantially all of its assets to any other
person or entity, (iii) the Company is to be dissolved and liquidated, (iv) any
person or entity, including a "group" as contemplated by Section 13(d)(3) of the
1934 Act, acquires or gains ownership or control (including, without limitation,
power to vote) of more than 50% of the outstanding shares of the Company's
voting stock (based upon voting power), or (v) as a result of or in connection
with a contested election of directors, the persons who were directors of the
Company before such election shall cease to constitute a majority of the Board
(each such event is referred to herein as a "Corporate Change"), no later than
(x) ten days after the approval by the shareholders of the Company of such
merger, consolidation, reorganization, sale, lease or exchange of assets or
dissolution of such election of directors or (y) thirty days after a Corporate
Change of the type described in clause (iv), the Committee, acting in its sole
discretion without the consent or approval of any Holder, shall effect one or
more of the following alternatives, which may vary among individual Holders and
which may vary among Options held by any individual Holder: (1) accelerate the
time at which Options then outstanding may be exercised so that Options may be
exercised in full for a limited period of time on or before a specified date
(before or after such Corporate Change) fixed by the Committee, after which
specified date all unexercised Options and all rights of Holders thereunder
shall terminate, (2) require the mandatory surrender to the Company by selected
Holders of some or all of the outstanding Options held by such Holders
(irrespective of whether such Options are then exercisable under the provisions
of the Plan) as of a date, before or after such Corporate Change, specified by
the Committee, in which event the Committee shall thereupon cancel such Options
and pay to each Holder an amount of cash per share equal to the excess, if any,
of the amount calculated in Subparagraph (d) below (the "Change of Control
Value") of the shares subject to such Option over the exercise price(s) under
such Options for such shares, (3) make such adjustments to Options then
outstanding as the Committee deems appropriate to reflect such Corporate Change
(provided, however, that the Committee may determine in its sole discretion that
no adjustment is necessary to Options then outstanding) or (4) provide that the
number and class of shares of Common Stock covered by an Option theretofore
granted shall be adjusted so that such Option shall thereafter cover the number
and class of shares of stock or other securities or property (including, without
limitation, cash) to which the Holder would have been entitled pursuant to the
terms of the agreement of merger, consolidation or sale of assets and
dissolution if, immediately prior to such merger, consolidation or sale of
assets and dissolution, the Holder had been the holder of record of the number
of shares of Common Stock then covered by such Option.
    
 
     (d) For the purposes of clause (2) in Subparagraph (c) above, the "Change
of Control Value" shall equal the amount determined in clause (i), (ii) or
(iii), whichever is applicable, as follows: (i) the per share price offered to
shareholders of the Company in any such merger, consolidation, sale of assets or
dissolution transaction, (ii) the price per share offered to shareholders of the
Company in any tender offer or exchange offer whereby a Corporate Change takes
place, or (iii) if such Corporate Change occurs other than pursuant to a tender
or exchange offer, the fair market value per share of the shares into which such
Options being surrendered are exercisable, as determined by the Committee as of
the date determined by the Committee to
 
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<PAGE>   24
 
be the date of cancellation and surrender of such Options. In the event that the
consideration offered to shareholders of the Company in any transaction
described in this Subparagraph (d) or Subparagraph (c) above consists of
anything other than cash, the Committee shall determine the fair cash equivalent
of the portion of the consideration offered which is other than cash.
 
   
     (e) In the event of changes in the outstanding Common Stock by reason of
recapitalization, reorganizations, mergers, consolidations, combinations,
split-offs, spin-offs, split-ups, exchanges or other relevant changes in
capitalization occurring after the date of the grant of any Award and not
otherwise provided for by this Paragraph IX, any outstanding Awards and any
agreements evidencing such Awards shall be subject to adjustment by the
Committee at its discretion as to the number and price of shares of Common Stock
or other consideration subject to such Awards. In the event of any such change
in the outstanding Common Stock, the aggregate number of shares available under
the Plan (and the aggregate number of shares that may be granted to any one
individual) may be appropriately adjusted by the Committee, whose determination
shall be conclusive.
    
 
     (f) Any adjustment provided for in the above Subparagraphs shall be subject
to any required shareholder action.
 
     (g) Except as hereinbefore expressly provided, the issuance by the Company
of shares of stock of any class or securities convertible into shares of stock
of any class, for cash, property, labor or services, upon direct sale, upon the
exercise of rights or warrants to subscribe therefor, or upon conversion of
shares or obligations of the Company convertible into such shares or other
securities and in any case whether or not for fair value, shall not affect, and
no adjustment by reason thereof shall be made with respect to, the number of
shares of Common Stock subject to Awards theretofore granted or the purchase
price per share, if applicable.
 
     (h) Plan provisions to the contrary notwithstanding, with respect to any
Restricted Stock Awards outstanding at the time a Corporate Change as described
in Subparagraph (c) above occurs, the Committee may, in its discretion and as of
a date determined by the Committee, fully vest any or all Common Stock awarded
to the Holder pursuant to such Restricted Stock Award and then outstanding and,
upon such vesting, all restrictions applicable to such Restricted Stock Award
shall terminate as of such date. Any action by the Committee pursuant to this
Subparagraph may vary among individual Holders and may vary among the Restricted
Stock Awards held by any individual Holder.
 
                    X. AMENDMENT AND TERMINATION OF THE PLAN
 
     The Board in its discretion may terminate the Plan at any time with respect
to any shares of Common Stock for which Awards have not theretofore been
granted. The Board shall have the right to alter or amend the Plan or any part
thereof from time to time; provided that no change in any Award theretofore
granted may be made which would impair the rights of the Holder without the
consent of the Holder, and provided, further, that the Board may not, without
approval of the shareholders, amend the Plan:
 
   
          (a) to increase the maximum number of shares of Common Stock which may
     be issued on exercise or surrender of Options or pursuant to Restricted
     Stock Awards, except as provided in Paragraph IX; or
    
 
   
          (b) to change the class of individuals eligible to receive Awards
     under the Plan.
    
 
                               XI. MISCELLANEOUS
 
     (a) No Right To An Award. Neither the adoption of the Plan nor any action
of the Board or of the Committee shall be deemed to give an employee any right
to be granted an Option, a right to a Restricted Stock Award, or any other
rights hereunder except as maybe evidenced by an Option Agreement or a
Restricted Stock Agreement duly executed on behalf of the Company, and then only
to the extent and on the terms and conditions expressly set forth therein. The
Plan shall be unfunded. The Company shall be not be required to establish any
special or separate fund or to make any other segregation of funds or assets to
assure the payment of any Award.
 
                                       A-7
<PAGE>   25
 
     (b) No Employment Rights Conferred. Nothing contained in the Plan shall (i)
confer upon any employee any right with respect to continuation of employment
with the Company or any subsidiary or (ii) interfere in any way with the right
of the Company or any subsidiary to terminate his or her employment at any time.
 
     (c) Other Laws; Withholding. The Company shall not be obligated to issue
any Common Stock pursuant to any Award granted under the Plan at any time when
the shares covered by such Award have not been registered under the Securities
Act of 1933 and such other state and federal laws, rules or regulations as the
Company or the Committee deems applicable and, in the opinion of legal counsel
for the Company, there is no exemption from the registration requirements of
such laws, rules or regulations available for the issuance and sale of such
shares. No fractional shares of Common Stock shall be delivered, nor shall any
cash in lieu of fractional shares be paid. The Company shall have the right to
deduct in connection with all Awards any taxes required by law to be withheld
and to require any payments required to enable it to satisfy its withholding
obligations.
 
     (d) No Restriction on Corporate Action. Nothing contained in the Plan shall
be construed to prevent the Company or any subsidiary from taking any corporate
action which is deemed by the Company or such subsidiary to be appropriate or in
its best interest, whether or not such action would have an adverse effect on
the Plan or any Award made under the Plan. No employee, beneficiary or other
person shall have any claim against the Company or any subsidiary as a result of
any such action.
 
   
     (e) Restrictions on Transfer. An Award (other than an Incentive Stock
Option, which shall be subject to the transfer restrictions set forth in
Paragraph VII(c)) shall not be transferable otherwise than (i) by will or the
laws of descent and distribution , (ii) pursuant to a qualified domestic
relations order as defined by the Code or Title I of the Employee Retirement
Income Security Act of 1974, as amended, or the rules thereunder, or (iii) with
the consent of the Committee.
    
 
   
     (f) Rule 16b-3. It is intended that the Plan and any grant of an Award made
to a person subject to Section 16 of the 1934 Act meet the requirements of Rule
16b-3 so that any transaction under the Plan involving a grant, award, or other
acquisition from the Company or disposition to the Company is exempt from
Section 16(b) of the 1934 Act. If any provision of the Plan or any such Award
would result in any such transaction not being exempt from Section 16(b) of the
1934 Act, such provision or Award shall be construed or deemed amended so that
such transaction will be exempt from Section 16(b) of the 1934 Act.
    
 
   
     (g) Governing Law. This Plan shall be construed in accordance with the laws
of the State of Texas, except to the extent that it implicates matters which are
the subject of the General Corporation Law of the State of Delaware which
matters shall be governed by the latter law.
    

 

 

                               BMC SOFTWARE, INC.
                          2002 EMPLOYEE INCENTIVE PLAN
 
I.  PURPOSE
 
     The purpose of the BMC SOFTWARE, INC. 2002 EMPLOYEE INCENTIVE PLAN (the
"Plan") is to provide a means through which BMC SOFTWARE, INC., a Delaware
corporation (the "Company"), and its Affiliates may attract able persons to
enter the employ of the Company and its Affiliates and to provide a means
whereby those individuals upon whom the responsibilities of the successful
administration and management of the Company and its Affiliates rest, and whose
present and potential contributions to the Company and its Affiliates are of
importance, can acquire and maintain stock ownership, thereby strengthening
their concern for the welfare of the Company and its Affiliates. A further
purpose of the Plan is to provide such individuals with additional incentive and
reward opportunities designed to enhance the profitable growth of the Company
and its Affiliates. Accordingly, the Plan provides for the granting of Incentive
Stock Options, options that do not constitute Incentive Stock Options,
Performance Awards, and Phantom Stock Awards, or any combination of the
foregoing, as is best suited to the circumstances of the particular employee as
provided herein.
 
II.  DEFINITIONS
 
     The following definitions shall be applicable throughout the Plan unless
specifically modified by any paragraph:
 
          (a) "AFFILIATE" means any corporation, partnership, limited liability
     company or partnership, association, trust or other organization which,
     directly or indirectly, controls, is controlled by, or is under common
     control with, the Company.
 
          (b) "AWARD" means, individually or collectively, any Option,
     Performance Award or Phantom Stock Award.
 
          (c) "BOARD" means the Board of Directors of the Company.
 
          (d) "CODE" means the Internal Revenue Code of 1986, as amended.
     Reference in the Plan to any section of the Code shall be deemed to include
     any amendments or successor provisions to such section and any regulations
     under such section.
 
          (e) "COMMITTEE" means a committee of the Board that is selected by the
     Board as provided in Paragraph IV(a).
 
          (f) "COMMON STOCK" means the common stock, par value $.01 per share,
     of the Company, or any security into which such common stock may be changed
     by reason of any transaction or event of the type described in Paragraph X.
 
          (g) "COMPANY" means BMC Software, Inc., a Delaware corporation.
 
          (h) "CORPORATE CHANGE" shall have the meaning assigned to such term in
     Paragraph X(c) of the Plan.
 
          (i) "DIRECTOR" means an individual who is a member of the Board.
 
          (j) An "EMPLOYEE" means any person (including a Director) in an
     employment relationship with the Company or any Affiliate.
 
          (k) "FAIR MARKET VALUE" means, as of any specified date, the mean of
     the high and low sales prices of the Common Stock (i) reported on the stock
     exchange composite tape on that date or (ii) if the Common Stock is not
     listed on a national stock exchange, reported by the National Market System
     of NASDAQ on that date (or such other reporting service approved by the
     Committee); or, in either case,
 
                                        41
<PAGE>
 
     if no prices are reported on that date, on the last preceding date on which
     such prices of the Common Stock are so reported. If the Common Stock is
     traded over the counter at the time a determination of its fair market
     value is required to be made hereunder, its fair market value shall be
     deemed to be equal to the average between the reported high and low or
     closing bid and asked prices of Common Stock on the most recent date on
     which Common Stock was publicly traded. In the event Common Stock is not
     publicly traded at the time a determination of its value is required to be
     made hereunder, the determination of its fair market value shall be made by
     the Committee in such manner as it deems appropriate.
 
          (l) "INCENTIVE STOCK OPTION" means an incentive stock option within
     the meaning of section 422 of the Code
 
          (m) "1934 ACT" means the Securities Exchange Act of 1934, as amended.
 
          (n) "OPTION" means an Award granted under Paragraph VII of the Plan
     and includes both Incentive Stock Options to purchase Common Stock and
     Options that do not constitute Incentive Stock Options to purchase Common
     Stock.
 
          (o) "OPTION AGREEMENT" means a written agreement between the Company
     and a Participant with respect to an Option.
 
          (p) "PARTICIPANT" means an employee who has been granted an Award.
 
          (q) "PERFORMANCE AWARD" means an Award granted under Paragraph VIII of
     the Plan.
 
          (r) "PERFORMANCE AWARD AGREEMENT" means a written agreement between
     the Company and a Participant with respect to a Performance Award.
 
          (s) "PHANTOM STOCK AWARD" means an Award granted under Paragraph IX of
     the Plan.
 
          (t) "PHANTOM STOCK AWARD AGREEMENT" means a written agreement between
     the Company and a Participant with respect to a Phantom Stock Award.
 
          (u) "PLAN" means the BMC Software, Inc. 2002 Employee Incentive Plan,
     as amended from time to time.
 
          (v) "RULE 16B-3" means SEC Rule 16b-3 promulgated under the 1934 Act,
     as such may be amended from time to time, and any successor rule,
     regulation or statute fulfilling the same or a similar function.
 
          (w) "STOCK APPRECIATION RIGHT" shall have the meaning assigned to such
     term in Paragraph VII(d) of the Plan.
 
III.  EFFECTIVE DATE AND DURATION OF THE PLAN
 
     The Plan shall become effective upon the date of its adoption by the Board,
provided the Plan is approved by the stockholders of the Company within 12
months thereafter. Notwithstanding any provision in the Plan, no Option shall be
exercisable and no Performance Award or Phantom Stock Award shall vest or become
satisfiable prior to such stockholder approval. No further Awards may be granted
under the Plan after 10 years from the date the Plan is adopted by the Board.
The Plan shall remain in effect until all Options granted under the Plan have
been exercised or expired and all Performance Awards and Phantom Stock Awards
have been satisfied or expired.
 
IV.  ADMINISTRATION
 
     (a) COMPOSITION OF COMMITTEE.  The Plan shall be administered by a
committee of, and appointed by, the Board that shall be comprised solely of two
or more outside Directors (within the meaning of the term "outside directors" as
used in section 162(m) of the Code and applicable interpretive authority
thereunder and within the meaning of the term "Non-Employee Director" as defined
in Rule 16b-3).
 
                                        42
<PAGE>
 
     (b) POWERS.  Subject to the express provisions of the Plan, the Committee
shall have authority, in its discretion, to determine which employees shall
receive an Award, the time or times when such Award shall be made, the type of
Award that shall be made, the number of shares to be subject to each Option, the
number of shares subject to or the value of each Performance Award, and the
value of each Phantom Stock Award. In making such determinations, the Committee
shall take into account the nature of the services rendered by the respective
employees, their present and potential contribution to the Company's success and
such other factors as the Committee in its sole discretion shall deem relevant.
 
     (c) ADDITIONAL POWERS.  The Committee shall have such additional powers as
are delegated to it by the other provisions of the Plan. Subject to the express
provisions of the Plan, this shall include the power to construe the Plan and
the respective agreements executed hereunder, to prescribe rules and regulations
relating to the Plan, and to determine the terms, restrictions and provisions of
the agreement relating to each Award, including such terms, restrictions and
provisions as shall be requisite in the judgment of the Committee to cause
designated Options to qualify as Incentive Stock Options, and to make all other
determinations necessary or advisable for administering the Plan. The Committee
may correct any defect or supply any omission or reconcile any inconsistency in
the Plan or in any agreement relating to an Award in the manner and to the
extent it shall deem expedient to carry it into effect. The determinations of
the Committee on the matters referred to in this Paragraph IV shall be
conclusive.
 
     (d) DELEGATION OF AUTHORITY BY THE COMMITTEE.  Notwithstanding the
preceding provisions of this Paragraph IV or any other provision of the Plan to
the contrary, the Committee may from time to time, in its sole discretion,
delegate to the Chief Executive Officer of the Company the administration (or
interpretation of any provision) of the Plan, and the right to grant Awards
under the Plan, insofar as such administration (and interpretation) and power to
grant Awards relates to any person who is not subject to Section 16 of the 1934
Act (including any successor section to the same or similar effect). Any such
delegation may be effective only so long as the Chief Executive Officer of the
Company is a Director, and the Committee may revoke such delegation at any time.
The Committee may put any conditions and restrictions on the powers that may be
exercised by the Chief Executive Officer of the Company upon such delegation as
the Committee determines in its sole discretion. In the event of any conflict in
a determination or interpretation under the Plan as between the Committee and
the Chief Executive Officer of the Company, the determination or interpretation,
as applicable, of the Committee shall be conclusive.
 
V.  SHARES SUBJECT TO THE PLAN; AWARD LIMITS; GRANT OF AWARDS
 
     (a) SHARES SUBJECT TO THE PLAN AND AWARD LIMITS.  Subject to adjustment in
the same manner as provided in Paragraph X with respect to shares of Common
Stock subject to Options then outstanding, the aggregate number of shares of
Common Stock that may be issued under the Plan shall not exceed 3,000,000
shares. Shares shall be deemed to have been issued under the Plan only (i) to
the extent actually issued and delivered pursuant to an Award or (ii) to the
extent an Award denominated in shares of Common Stock is settled in cash. To the
extent that an Award lapses or the rights of its holder terminate, any shares of
Common Stock subject to such Award shall again be available for the grant of an
Award under the Plan. Notwithstanding any provision in the Plan to the contrary,
(1) the maximum number of shares of Common Stock that may be subject to Awards
(other then Options) denominated in shares of Common Stock is 1,500,000 shares
of Common Stock (subject to adjustment in the same manner as provided in
Paragraph X with respect to shares of Common Stock subject to Options then
outstanding), (2) the maximum number of shares of Common Stock that may be
subject to Awards denominated in shares of Common Stock granted to any one
individual during the term of the Plan may not exceed 1,500,000 shares of Common
Stock (subject to adjustment in the same manner as provided in Paragraph X with
respect to shares of Common Stock subject to Options then outstanding), and (3)
the maximum amount of compensation that may be paid under all Performance Awards
denominated in cash (including the Fair Market Value of any shares of Common
Stock paid in satisfaction of such Performance Awards) granted to any one
individual during any calendar year may not exceed $5,000,000, and any payment
due with respect to a Performance Award shall be paid no later than 10 years
after the date of grant of such Performance Award. The limitations set forth in
clauses (2) and (3) of the preceding sentence shall be applied in a manner that
will permit compensation generated under the Plan to
 
                                        43
<PAGE>
 
constitute "performance-based" compensation for purposes of section 162(m) of
the Code, including, without limitation, counting against such maximum number of
shares, to the extent required under section 162(m) of the Code and applicable
interpretive authority thereunder, any shares subject to Options that are
canceled or repriced.
 
     (b) GRANT OF AWARDS.  The Committee may from time to time grant Awards to
one or more employees determined by it to be eligible for participation in the
Plan in accordance with the terms of the Plan.
 
     (c) STOCK OFFERED.  Subject to the limitations set forth in Paragraph V(a),
the stock to be offered pursuant to the grant of an Award may be authorized but
unissued Common Stock or Common Stock previously issued and outstanding and
reacquired by the Company. Any of such shares which remain unissued and which
are not subject to outstanding Awards at the termination of the Plan shall cease
to be subject to the Plan but, until termination of the Plan, the Company shall
at all times make available a sufficient number of shares to meet the
requirements of the Plan.
 
VI.  ELIGIBILITY
 
     Awards may be granted only to persons who, at the time of grant, are
employees. An Award may be granted on more than one occasion to the same person,
and, subject to the limitations set forth in the Plan, such Award may include an
Incentive Stock Option, an Option that is not an Incentive Stock Option, a
Performance Award, a Phantom Stock Award, or any combination thereof.
 
VII.  STOCK OPTIONS
 
     (a) OPTION PERIOD.  The term of each Option shall be as specified by the
Committee at the date of grant, but in no event shall an Option be exercisable
after the expiration of 10 years from the date of grant.
 
     (b) LIMITATIONS ON EXERCISE OF OPTION.  An Option shall be exercisable in
whole or in such installments and at such times as determined by the Committee.
 
     (c) SPECIAL LIMITATIONS ON INCENTIVE STOCK OPTIONS.  An Incentive Stock
Option may be granted only to an individual who is employed by the Company or
any parent or subsidiary corporation (as defined in section 424 of the Code) at
the time the Option is granted. To the extent that the aggregate Fair Market
Value (determined at the time the respective Incentive Stock Option is granted)
of Common Stock with respect to which Incentive Stock Options are exercisable
for the first time by an individual during any calendar year under all incentive
stock option plans of the Company and its parent and subsidiary corporations
exceeds $100,000, such Incentive Stock Options shall be treated as Options which
do not constitute Incentive Stock Options. The Committee shall determine, in
accordance with applicable provisions of the Code, Treasury Regulations and
other administrative pronouncements, which of a Participant's Incentive Stock
Options will not constitute Incentive Stock Options because of such limitation
and shall notify the Participant of such determination as soon as practicable
after such determination. No Incentive Stock Option shall be granted to an
individual if, at the time the Option is granted, such individual owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company or of its parent or subsidiary corporation, within the
meaning of section 422(b)(6) of the Code, unless (i) at the time such Option is
granted the option price is at least 110% of the Fair Market Value of the Common
Stock subject to the Option and (ii) such Option by its terms is not exercisable
after the expiration of five years from the date of grant. An Incentive Stock
Option shall be exercisable during the Participant's lifetime only by such
Participant or the Participant's guardian or legal representative.
 
     (d) OPTION AGREEMENT.  Each Option shall be evidenced by an Option
Agreement in such form and containing such provisions not inconsistent with the
provisions of the Plan as the Committee from time to time shall approve,
including, without limitation, provisions to qualify an Incentive Stock Option
under section 422 of the Code. Each Option Agreement shall specify the effect of
termination of employment on the exercisability of the Option. An Option
Agreement may provide for the payment of the option price, in whole or in part,
by the delivery of a number of shares of Common Stock (plus cash if necessary)
having a Fair Market Value equal to such option price. Moreover, an Option
Agreement may provide for a "cashless
 
                                        44
<PAGE>
 
exercise" of the Option by establishing procedures satisfactory to the Committee
with respect thereto. Further, an Option Agreement may provide for the surrender
of the right to purchase shares under the Option in return for a payment in cash
or shares of Common Stock or a combination of cash and shares of Common Stock
equal in value to the excess of the Fair Market Value of the shares with respect
to which the right to purchase is surrendered over the option price therefor
("Stock Appreciation Rights"), on such terms and conditions as the Committee in
its sole discretion may prescribe. In the case of any such Stock Appreciation
Right that is granted in connection with an Incentive Stock Option, such right
shall be exercisable only when the Fair Market Value of the Common Stock exceeds
the price specified therefor in the Option or the portion thereof to be
surrendered. The terms and conditions of the respective Option Agreements need
not be identical. Subject to the consent of the Participant, the Committee may,
in its sole discretion, amend an outstanding Option Agreement from time to time
in any manner that is not inconsistent with the provisions of the Plan
(including, without limitation, an amendment that accelerates the time at which
the Option, or a portion thereof, may be exercisable).
 
     (e) OPTION PRICE AND PAYMENT.  The price at which a share of Common Stock
may be purchased upon exercise of an Option shall be determined by the Committee
but, subject to adjustment as provided in Paragraph X, such purchase price shall
not be less than the Fair Market Value of a share of Common Stock on the date
such Option is granted. The Option or portion thereof may be exercised by
delivery of an irrevocable notice of exercise to the Company, as specified by
the Committee. The purchase price of the Option or portion thereof shall be paid
in full in the manner prescribed by the Committee. Separate stock certificates
shall be issued by the Company for those shares acquired pursuant to the
exercise of an Incentive Stock Option and for those shares acquired pursuant to
the exercise of any Option that does not constitute an Incentive Stock Option.
 
     (f) RESTRICTIONS ON REPRICING OF OPTIONS.  Except as provided in Paragraph
X, the Committee may not, without approval of the stockholders of the Company,
amend any outstanding Option Agreement to lower the option price (or cancel and
replace any outstanding Option Agreement with Option Agreements having a lower
option price).
 
     (g) STOCKHOLDER RIGHTS AND PRIVILEGES.  The Participant shall be entitled
to all the privileges and rights of a stockholder only with respect to such
shares of Common Stock as have been purchased under the Option and for which
certificates of stock have been registered in the Participant's name.
 
     (h) OPTIONS AND RIGHTS IN SUBSTITUTION FOR OPTIONS GRANTED BY OTHER
EMPLOYERS.  Options and Stock Appreciation Rights may be granted under the Plan
from time to time in substitution for options held by individuals providing
services to corporations or other entities who become employees as a result of a
merger or consolidation or other business transaction with the Company or any
Affiliate.
 
VIII.  PERFORMANCE AWARDS
 
     (a) PERFORMANCE PERIOD.  The Committee shall establish, with respect to and
at the time of each Performance Award, the number of shares of Common Stock
subject to, or the maximum value of, the Performance Award and the performance
period over which the performance applicable to the Performance Award shall be
measured.
 
     (b) PERFORMANCE MEASURES.  A Performance Award shall be awarded to a
Participant contingent upon future performance of the Company or any Affiliate,
division, or department thereof during the performance period. The Committee
shall establish the performance measures applicable to such performance either
(i) prior to the beginning of the performance period or (ii) within 90 days
after the beginning of the performance period if the outcome of the performance
targets is substantially uncertain at the time such targets are established, but
not later than the date that 25% of the performance period has elapsed; provided
such measures may be made subject to adjustment for specified significant
extraordinary items or events. The performance measures may be absolute,
relative to one or more other companies, or relative to one or more indexes. The
performance measures established by the Committee may be based upon (1) the
price of a share of Common Stock, (2) the Company's earnings per share, (3) the
Company's market share, (4) the market share of a business unit of the Company
designated by the Committee, (5) the Company's sales, (6) the sales
 
                                        45
<PAGE>
 
of a business unit of the Company designated by the Committee, (7) the
maintenance revenue or deferred revenue of the Company or of a business unit of
the Company designated by the Committee, (8) the ratable license revenue of the
Company or of a business unit of the Company designated by the Committee, (9)
the linearity of sales or the percentage of sales of the Company, or of a
business unit of the Company designated by the Committee, before a specified
time period in a quarter or fiscal year, (10) the return on capital employed by
the Company, (11) the Company's margin or the margin of a business unit of the
Company designated by the Committee, (12) the return on capital employed by a
business unit of the Company designated by the Committee, (13) the net income
(before or after taxes) of the Company or any business unit of the Company
designated by the Committee, (14) the cash flow of the Company or any business
unit of the Company designated by the Committee, (15) the earnings before or
after interest, taxes, depreciation, and/or amortization of the Company or any
business unit of the Company designated by the Committee, (16) the economic
value added, (17) the return on stockholders' equity achieved by the Company,
(18) the total stockholders' return achieved by the Company, (19) the
productivity of employees of the Company or of a business unit of the Company
designated by the Committee as measured by revenues, costs or earnings per
employee, (20) the expenses or operating expenses of the Company or any business
unit of the Company designated by the Committee or (21) a combination of any of
the foregoing. The Committee, in its sole discretion, may provide for an
adjustable Performance Award value based upon the level of achievement of
performance measures.
 
     (c) AWARDS CRITERIA.  In determining the value of Performance Awards, the
Committee shall take into account a Participant's responsibility level,
performance, potential, other Awards, and such other considerations as it deems
appropriate. The Committee, in its sole discretion, may provide for a reduction
in the value of a Participant's Performance Award during the performance period.
 
     (d) PAYMENT.  Following the end of the performance period, the holder of a
Performance Award shall be entitled to receive payment of an amount not
exceeding the number of shares of Common Stock subject to, or the maximum value
of, the Performance Award, based on the achievement of the performance measures
for such performance period, as determined and certified in writing by the
Committee. Payment of a Performance Award may be made in cash, Common Stock, or
a combination thereof, as determined by the Committee. Payment shall be made in
a lump sum or in installments as prescribed by the Committee. If a Performance
Award covering shares of Common Stock is to be paid in cash, such payment shall
be based on the Fair Market Value of the Common Stock on the payment date.
 
     (e) TERMINATION OF AWARD.  A Performance Award shall terminate if the
Participant does not remain continuously in the employ of the Company and its
Affiliates at all times during the applicable performance period, except as may
be determined by the Committee.
 
     (f) PERFORMANCE AWARD AGREEMENTS.  At the time any Award is made under this
Paragraph VIII, the Company and the Participant shall enter into a Performance
Award Agreement setting forth each of the matters contemplated hereby, and such
additional matters as the Committee may determine to be appropriate. The terms
and provisions of the respective Performance Award Agreements need not be
identical.
 
IX.  PHANTOM STOCK AWARDS
 
     (a) PHANTOM STOCK AWARDS.  Phantom Stock Awards are rights to receive
shares of Common Stock (or the Fair Market Value thereof), or rights to receive
an amount equal to any appreciation or increase in the Fair Market Value of
Common Stock over a specified period of time, which vest over a period of time
as established by the Committee, without satisfaction of any performance
criteria or objectives. The Committee may, in its discretion, require payment or
other conditions of the Participant respecting any Phantom Stock Award.
 
     (b) AWARD PERIOD.  The Committee shall establish, with respect to and at
the time of each Phantom Stock Award, a period over which the Award shall vest
with respect to the Participant.
 
                                        46
<PAGE>
 
     (c) AWARDS CRITERIA.  In determining the value of Phantom Stock Awards, the
Committee shall take into account a Participant's responsibility level,
performance, potential, other Awards, and such other considerations as it deems
appropriate.
 
     (d) PAYMENT.  Following the end of the vesting period for a Phantom Stock
Award (or at such other time as the applicable Phantom Stock Award Agreement may
provide), the holder of a Phantom Stock Award shall be entitled to receive
payment of an amount, not exceeding the maximum value of the Phantom Stock
Award, based on the then vested value of the Award. Payment of a Phantom Stock
Award may be made in cash, Common Stock, or a combination thereof as determined
by the Committee. Payment shall be made in a lump sum or in installments as
prescribed by the Committee. Any payment to be made in cash shall be based on
the Fair Market Value of the Common Stock on the payment date. Cash dividend
equivalents may be paid during or after the vesting period with respect to a
Phantom Stock Award, as determined by the Committee.
 
     (e) TERMINATION OF AWARD.  A Phantom Stock Award shall terminate if the
Participant does not remain continuously in the employ of the Company and its
Affiliates at all times during the applicable vesting period, except as may be
otherwise determined by the Committee.
 
     (f) PHANTOM STOCK AWARD AGREEMENTS.  At the time any Award is made under
this Paragraph IX, the Company and the Participant shall enter into a Phantom
Stock Award Agreement setting forth each of the matters contemplated hereby, and
such additional matters as the Committee may determine to be appropriate. The
terms and provisions of the respective Phantom Stock Award Agreements need not
be identical.
 
X.  RECAPITALIZATION OR REORGANIZATION
 
     (a) NO EFFECT ON RIGHT OR POWER.  The existence of the Plan and the Awards
granted hereunder shall not affect in any way the right or power of the Board or
the stockholders of the Company to make or authorize any adjustment,
recapitalization, reorganization or other change in the Company's or any
Affiliate's capital structure or its business, any merger or consolidation of
the Company or any Affiliate, any issue of debt or equity securities ahead of or
affecting Common Stock or the rights thereof, the dissolution or liquidation of
the Company or any Affiliate or any sale, lease, exchange or other disposition
of all or any part of its assets or business or any other corporate act or
proceeding.
 
     (b) SUBDIVISION OR CONSOLIDATION OF SHARES; STOCK DIVIDENDS.  The shares
with respect to which Awards may be granted are shares of Common Stock as
presently constituted, but if, and whenever, prior to the expiration of an Award
theretofore granted, the Company shall effect a subdivision or consolidation of
shares of Common Stock or the payment of a stock dividend on Common Stock
without receipt of consideration by the Company, the number of shares of Common
Stock with respect to which such Award may thereafter be exercised or satisfied,
as applicable (i) in the event of an increase in the number of outstanding
shares shall be proportionately increased, and the purchase price per share
shall be proportionately reduced, and (ii) in the event of a reduction in the
number of outstanding shares shall be proportionately reduced, and the purchase
price per share shall be proportionately increased. Any fractional share
resulting from such adjustment shall be rounded up to the next whole share.
 
     (c) RECAPITALIZATIONS AND CORPORATE CHANGES.  If the Company recapitalizes,
reclassifies its capital stock, or otherwise changes its capital structure (a
"recapitalization"), the number and class of shares of Common Stock covered by
an Award theretofore granted shall be adjusted so that such Award shall
thereafter cover the number and class of shares of stock and securities to which
the Participant would have been entitled pursuant to the terms of the
recapitalization if, immediately prior to the recapitalization, the Participant
had been the holder of record of the number of shares of Common Stock then
covered by such Award. If (i) the Company shall not be the surviving entity in
any merger or consolidation (or survives only as a subsidiary of an entity),
(ii) the Company sells, leases or exchanges or agrees to sell, lease or exchange
all or substantially all of its assets to any other person or entity, (iii) the
Company is to be dissolved and liquidated, (iv) any person or entity, including
a "group" as contemplated by Section 13(d)(3) of the 1934 Act, acquires or gains
ownership or control (including, without limitation, power to vote) of more than
50% of the outstanding shares of the Company's voting stock (based upon voting
power), or (v) as a result of or in connection with a
 
                                        47
<PAGE>
 
contested election of Directors, the persons who were Directors of the Company
before such election shall cease to constitute a majority of the Board (each
such event is referred to herein as a "Corporate Change"), no later than (x) 10
days after the approval by the stockholders of the Company of such merger,
consolidation, reorganization, sale, lease or exchange of assets or dissolution
or such election of Directors or (y) 30 days after a Corporate Change of the
type described in clause (iv), the Committee, acting in its sole discretion
without the consent or approval of any Participant, shall effect one or more of
the following alternatives, which alternatives may vary among individual
Participants and which may vary among Options held by any individual
Participant: (1) accelerate the time at which Options then outstanding may be
exercised so that such Options may be exercised in full for a limited period of
time on or before a specified date (before or after such Corporate Change) fixed
by the Committee, after which specified date all unexercised Options and all
rights of Participants thereunder shall terminate, (2) require the mandatory
surrender to the Company by selected Participants of some or all of the
outstanding Options held by such Participants (irrespective of whether such
Options are then exercisable under the provisions of the Plan) as of a date,
before or after such Corporate Change, specified by the Committee, in which
event the Committee shall thereupon cancel such Options and the Company shall
pay (or cause to be paid) to each Participant an amount of cash per share equal
to the excess, if any, of the amount calculated in Subparagraph (d) below (the
"Change of Control Value") of the shares subject to such Option over the
exercise price(s) under such Options for such shares, or (3) make such
adjustments to Options then outstanding as the Committee deems appropriate to
reflect such Corporate Change (provided, however, that the Committee may
determine in its sole discretion that no adjustment is necessary to Options then
outstanding), including, without limitation, adjusting an Option to provide that
the number and class of shares of Common Stock covered by such Option shall be
adjusted so that such Option shall thereafter cover securities of the surviving
or acquiring corporation or other property (including, without limitation, cash)
as determined by the Committee in its sole discretion.
 
     (d) CHANGE OF CONTROL VALUE.  For the purposes of clause (2) in
Subparagraph (c) above, the "Change of Control Value" shall equal the amount
determined in clause (i), (ii) or (iii), whichever is applicable, as follows:
(i) the per share price offered to stockholders of the Company in any such
merger, consolidation, sale of assets or dissolution transaction, (ii) the price
per share offered to stockholders of the Company in any tender offer or exchange
offer whereby a Corporate Change takes place, or (iii) if such Corporate Change
occurs other than pursuant to a tender or exchange offer, the fair market value
per share of the shares into which such Options being surrendered are
exercisable, as determined by the Committee as of the date determined by the
Committee to be the date of cancellation and surrender of such Options. In the
event that the consideration offered to stockholders of the Company in any
transaction described in this Subparagraph (d) or Subparagraph (c) above
consists of anything other than cash, the Committee shall determine the fair
cash equivalent of the portion of the consideration offered which is other than
cash.
 
     (e) OTHER CHANGES IN THE COMMON STOCK.  In the event of changes in the
outstanding Common Stock by reason of recapitalizations, reorganizations,
mergers, consolidations, combinations, split-ups, split-offs, spin-offs,
exchanges or other relevant changes in capitalization or distributions to the
holders of Common Stock occurring after the date of the grant of any Award and
not otherwise provided for by this Paragraph X, such Award and any agreement
evidencing such Award shall be subject to adjustment by the Committee at its
sole discretion as to the number and price of shares of Common Stock or other
consideration subject to such Award. In the event of any such change in the
outstanding Common Stock or distribution to the holders of Common Stock, or upon
the occurrence of any other event described in this Paragraph X, the aggregate
number of shares available under the Plan, the maximum number of shares that may
be subject to Performance Awards denominated in shares, and the maximum number
of shares that may be subject to Awards granted to any one individual shall be
appropriately adjusted to the extent, if any, determined by the Committee, whose
determination shall be conclusive. Notwithstanding the foregoing, except as
otherwise provided by the Committee, upon the occurrence of a Corporate Change,
the Committee, acting in its sole discretion without the consent or approval of
any Participant, may require the mandatory surrender to the Company by selected
Participants of some or all of the outstanding Performance Awards and Phantom
Stock Awards as of a date, before or after such Corporate Change, specified by
the Committee, in which event the Committee shall thereupon cancel such
Performance Awards and Phantom Stock Awards and the Company shall pay (or cause
to be paid) to each Participant an amount of cash equal to the maximum value of
such
 
                                        48
<PAGE>
 
Performance Award or Phantom Stock Award which, in the event the applicable
performance or vesting period set forth in such Performance Award or Phantom
Stock Award has not been completed, shall be multiplied by a fraction, the
numerator of which is the number of days during the period beginning on the
first day of the applicable performance or vesting period and ending on the date
of the surrender, and the denominator of which is the aggregate number of days
in the applicable performance or vesting period.
 
     (f) STOCKHOLDER ACTION.  Any adjustment provided for in the above
Subparagraphs shall be subject to any required stockholder action.
 
     (g) NO ADJUSTMENTS UNLESS OTHERWISE PROVIDED.  Except as hereinbefore
expressly provided, the issuance by the Company of shares of stock of any class
or securities convertible into shares of stock of any class, for cash, property,
labor or services, upon direct sale, upon the exercise of rights or warrants to
subscribe therefor, or upon conversion of shares or obligations of the Company
convertible into such shares or other securities, and in any case whether or not
for fair value, shall not affect, and no adjustment by reason thereof shall be
made with respect to, the number of shares of Common Stock subject to Awards
theretofore granted or the purchase price per share, if applicable.
 
XI.  AMENDMENT AND TERMINATION OF THE PLAN
 
     The Board in its discretion may terminate the Plan at any time with respect
to any shares of Common Stock for which Awards have not theretofore been
granted. The Board shall have the right to alter or amend the Plan or any part
thereof from time to time; provided that no change in the Plan may be made that
would impair the rights of a Participant with respect to an Award theretofore
granted without the consent of the Participant, and provided, further, that the
Board may not, without approval of the stockholders of the Company, (a) amend
the Plan to increase the maximum aggregate number of shares that may be issued
under the Plan or change the class of individuals eligible to receive Awards
under the Plan, or (b) amend or delete Paragraph VII(f).
 
XII.  MISCELLANEOUS
 
     (a) NO RIGHT TO AN AWARD.  Neither the adoption of the Plan nor any action
of the Board or of the Committee shall be deemed to give any individual any
right to be granted an Option, a right to a Performance Award or a right to a
Phantom Stock Award, or any other rights hereunder except as may be evidenced by
an Award agreement duly executed on behalf of the Company, and then only to the
extent and on the terms and conditions expressly set forth therein. The Plan
shall be unfunded. The Company shall not be required to establish any special or
separate fund or to make any other segregation of funds or assets to assure the
performance of its obligations under any Award.
 
     (b) NO EMPLOYMENT RIGHTS CONFERRED.  Nothing contained in the Plan shall
(i) confer upon any employee any right with respect to continuation of
employment with the Company or any Affiliate or (ii) interfere in any way with
the right of the Company or any Affiliate to terminate his or her employment at
any time.
 
     (c) OTHER LAWS; WITHHOLDING.  The Company shall not be obligated to issue
any Common Stock pursuant to any Award granted under the Plan at any time when
the shares covered by such Award have not been registered under the Securities
Act of 1933, as amended, and such other state and federal laws, rules and
regulations as the Company or the Committee deems applicable and, in the opinion
of legal counsel for the Company, there is no exemption from the registration
requirements of such laws, rules and regulations available for the issuance and
sale of such shares. No fractional shares of Common Stock shall be delivered,
nor shall any cash in lieu of fractional shares be paid. The Company shall have
the right to deduct in connection with all Awards any taxes required by law to
be withheld and to require any payments required to enable it to satisfy its
withholding obligations.
 
     (d) NO RESTRICTION ON CORPORATE ACTION.  Nothing contained in the Plan
shall be construed to prevent the Company or any Affiliate from taking any
action which is deemed by the Company or such Affiliate to be appropriate or in
its best interest, whether or not such action would have an adverse effect on
the Plan or any
 
                                        49
<PAGE>
 
Award made under the Plan. No Participant, beneficiary or other person shall
have any claim against the Company or any Affiliate as a result of any such
action.
 
     (e) RESTRICTIONS ON TRANSFER.  An Incentive Stock Option shall not be
transferable otherwise than by will or the laws of descent and distribution. An
Award that does not constitute an Incentive Stock Option shall not be
transferable otherwise than (i) by will or the laws of descent and distribution,
(ii) pursuant to a qualified domestic relations order as defined by the Code or
Title I of the Employee Retirement Income Security Act of 1974, as amended, or
the rules thereunder, or (iii) with the consent of the Committee.
 
     (f) GOVERNING LAW.  THE PLAN SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF TEXAS, WITHOUT REGARD TO CONFLICTS OF
LAWS PRINCIPLES THEREOF.
 
                                        50
<PAGE>
 
                                                                      APPENDIX D
 
                         TEXT OF PROPOSED AMENDMENT TO
              THE BMC SOFTWARE, INC. 1994 EMPLOYEE INCENTIVE PLAN
 
     The Plan is hereby amended to permit an exchange of outstanding Options by
current employees of the Company and its subsidiaries, other than (a) the
Company's Chief Executive Officer, Chief Financial Officer, any Senior Vice
President or any member of the Board, (b) any employee not residing in the
United States or (c) any employee who has received any options from the Company
during the six months preceding the exchange offer, who hold Options having an
exercise price per share equal to or greater than $30.00 for replacement Options
to be granted on a date determined by the Committee that is within five (5)
business days following the date that is six months from the latest surrender
date, having an exercise price per share equal to the Fair Market Value of a
share of Common Stock on the date of grant. Any employee not employed by the
Company or a subsidiary on the date of grant of the replacement Options will not
receive replacement Options.
 
     The exchange ratios for shares covered by surrendered Options in exchange
for shares covered by future replacement options shall be as follows:
 
<Table>
<Caption>
EXERCISE PRICE                                         EXCHANGE RATIO
--------------                                         --------------
<S>                              <C>
$30.00 to $39.99...............  2 surrendered Option shares for 1 replacement Option share
$40.00 to $49.99...............  3 surrendered Option shares for 1 replacement Option share
$50.00 and above...............  5 surrendered Option shares for 1 replacement Option share
</Table>
 
     To participate in the exchange offer, an employee must surrender all of the
eligible Options issued to such employee in a single grant.
 
     Each replacement Option will have a term equal to the remaining term of the
surrendered Option it replaces. Each replacement Option will be vested to the
same extent that the surrendered Option it replaces would have been vested had
the Option not been surrendered, and such replacement Option will continue to
vest according to the same vesting schedule as the surrendered Option. All other
terms and conditions of the Option exchange and the replacement Options shall be
determined in the sole discretion of the Committee.
 
                                        51
<PAGE>
 
                         TEXT OF PROPOSED AMENDMENT TO
           THE BMC SOFTWARE, INC. 2000 EMPLOYEE STOCK INCENTIVE PLAN
 
     The Plan is hereby amended to permit an exchange of outstanding Options by
current employees of the Company and its subsidiaries, other than (a) the
Company's Chief Executive Officer, Chief Financial Officer, any Senior Vice
President or any member of the Board, (b) any employee not residing in the
United States or (c) any employee who has received any options from the Company
during the six months preceding the exchange offer, who hold Options having an
exercise price per share equal to or greater than $30.00 for replacement Options
to be granted on a date determined by the Committee that is within five (5)
business days following the date that is six months from the latest surrender
date, having an exercise price per share equal to the Fair Market Value of a
share of Common Stock on the date of grant. Any employee not employed by the
Company or a subsidiary on the date of grant of the replacement Options will not
receive replacement Options.
 
     The exchange ratios for shares covered by surrendered Options in exchange
for shares covered by future replacement options shall be as follows:
 
<Table>
<Caption>
EXERCISE PRICE                                         EXCHANGE RATIO
--------------                                         --------------
<S>                              <C>
$30.00 to $39.99...............  2 surrendered Option shares for 1 replacement Option share
$40.00 to $49.99...............  3 surrendered Option shares for 1 replacement Option share
$50.00 and above...............  5 surrendered Option shares for 1 replacement Option share
</Table>
 
     To participate in the exchange offer, an employee must surrender all of the
eligible Options issued to such employee in a single grant.
 
     Each replacement Option will have a term equal to the remaining term of the
surrendered Option it replaces. Each replacement Option will be vested to the
same extent that the surrendered Option it replaces would have been vested had
the Option not been surrendered, and such replacement Option will continue to
vest according to the same vesting schedule as the surrendered Option. All other
terms and conditions of the Option exchange and of the replacement Options shall
be determined in the sole discretion of the Committee.
 
                                        52