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                                                                     EXHIBIT 4.3

                 BMC Software, Inc. 2002 Employee Incentive Plan

                               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.

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         (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, 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.

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         (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).

         (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

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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 than 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 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

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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

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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 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).

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         (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 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

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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.

         (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.

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         (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

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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 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

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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 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.

                                      -11-
<PAGE>

                   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 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.

                                      -12-
<PAGE>

         (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.

                                      -13-<PAGE>
                                                                     EXHIBIT 4.2

                                 FORM OF WARRANT

         Effective as of the date of this Agreement (the "Grant Date"),
Portfolio Recovery Associates, Inc. (the "Company") hereby grants to [_________]
("Warrantholder") warrants (the "Warrants") to acquire [_______] shares of the
common stock of the Company, par value $0.01 per share ("Share"), subject to the
terms and conditions set forth below. The exercise price per Share subject to
the Warrant is $[_______] (the per Share "Exercise Price").

        This Warrant is issued to Warrantholder under and pursuant to the Equity
Exchange Agreement between Portfolio Recovery Associates, L.L.C., the Company
and the additional parties named therein. The grant of the Warrants has been
approved by the sole non-employee director of the Company and by the
stockholders of the Company. [Vesting provisions of Warrants to be added.] The
Warrants shall cease to be exercisable and shall terminate on [_________] (the
"Expiration Date"). The Warrants may be exercised in whole or in part, but not
in fractional Shares.

        Once Warrantholder decides to exercise all or part of the Warrant,
Warrantholder shall notify the Company by registered or certified mail, return
receipt requested, addressed to its principal office as to the number of Shares
which he, she or it desires to purchase under the Warrants, which notice shall
be accompanied by payment (by cash or certified check) of the Exercise Price. As
soon as practicable thereafter, the Company shall record Warrantholder's
purchase of additional Shares in accordance with its policies then in effect.

        Warrantholder may not give, grant, sell, exchange, transfer legal title,
pledge, assign or otherwise encumber or dispose of the Warrants or any interest
herein, otherwise than by will or the laws of descent and distribution, and the
Warrants shall be exercisable during his or her lifetime only by Warrantholder.

        Warrantholder shall have no rights as a shareholder with respect to the
Shares subject to this Warrant until such time as Warrantholder exercises the
Warrants in accordance with the terms hereunder. The Company shall reserve the
right to amend the terms and conditions of this award, including the number and
kind of Shares and the Exercise Price, provided that no such amendment shall be
made which would adversely affect Warrantholder without Warrantholder's prior
written consent. In the event that the Shares are converted into a different
form of security, Warrantholder's Warrants shall be appropriately adjusted to
reflect such conversion as determined by the Company.

        Warrantholder agrees to cooperate with the Company to take all steps
necessary or appropriate for any required withholding of taxes by the Company
under law or regulation in connection therewith.

        The Warrant granted under this Agreement is not intended to qualify as
an "incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended.

<PAGE>

        [Provisions regarding exercise of the Warrants applicable to
Warrantholders which are employees of the Company to be added.]

-----------------------------           PORTFOLIO RECOVERY ASSOCIATES, INC.
Warrantholder

                                        By: -----------------------------
-------------                               Name:
Date                                        Title:

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