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Sample Business Contracts

1998 Stock Option Plan - Red Hat Software Inc.

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                             RED HAT SOFTWARE, INC.


                             1998 STOCK OPTION PLAN
                             ----------------------


     1. Purpose. The purpose of the Red Hat Software, Inc. 1998 Stock Option
Plan (the "Plan") is to encourage key employees of Red Hat Software, Inc., a
Delaware corporation (the "Company") and of any present or future parent or
subsidiary of the Company (collectively, "Related Corporations") and other
individuals who render services to the Company or a Related Corporation, by
providing opportunities to participate in the ownership of the Company and its
future growth through (a) the grant of options which qualify as "incentive stock
options" ("ISOs") under Section 422(b) of the Internal Revenue Code of 1986, as
amended (the "Code"); (b) the grant of options which do not qualify as ISOs
("Non-Qualified Options"); (c) awards of stock in the Company ("Awards"); and
(d) opportunities to make direct purchases of stock in the Company
("Purchases"). Both ISOs and Non-Qualified Options are referred to hereafter
individually as an "Option" and collectively as "Options." Options, Awards and
authorizations to make Purchases are referred to hereafter collectively as
"Stock Rights." As used herein, the terms "parent" and "subsidiary" mean "parent
corporation" and "subsidiary corporation," respectively, as those terms are
defined in Section 424 of the Code.

     2. Administration of the Plan.

          A. Board or Committee Administration. The Plan shall be administered
     by the Board of Directors of the Company (the "Board") or, subject to
     paragraph 2(D) (relating to compliance with Section 162(m) of the Code), by
     a committee appointed by the Board (the "Committee"). Hereinafter, all
     references in this Plan to the "Committee" shall mean the Board if no
     Committee has been appointed. Subject to ratification of the grant or
     authorization of each Stock Right by the Board (if so required by
     applicable state law), and subject to the terms of the Plan, the Committee
     shall have the authority to (i) determine to whom (from among the class of
     employees eligible under paragraph 3 to receive ISOs) ISOs shall be
     granted, and to whom (from among the class of individuals and entities
     eligible under paragraph 3 to receive Non-Qualified Options and Awards and
     to make Purchases) Non-Qualified Options, Awards and authorizations to make
     Purchases may be granted; (ii) determine the time or times at which Options
     or Awards shall be granted or Purchases made; (iii) determine the purchase
     price of shares subject to each Option or Purchase, which prices shall not
     be less than the minimum price specified in paragraph 6; (iv) determine
     whether each Option granted shall be an ISO or a Non-Qualified Option; (v)
     determine (subject to paragraph 7) the time or times when each Option shall
     become exercisable and the duration of the exercise period; (vi) extend the
     period during which outstanding Options may be exercised; (vii) determine
     whether restrictions such as repurchase
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     options are to be imposed on shares subject to Options, Awards and
     Purchases and the nature of such restrictions, if any, and (viii) interpret
     the Plan and prescribe and rescind rules and regulations relating to it. If
     the Committee determines to issue a Non-Qualified Option, it shall take
     whatever actions it deems necessary, under Section 422 of the Code and the
     regulations promulgated thereunder, to ensure that such Option is not
     treated as an ISO. The interpretation and construction by the Committee of
     any provisions of the Plan or of any Stock Right granted under it shall be
     final unless otherwise determined by the Board. The Committee may from time
     to time adopt such rules and regulations for carrying out the Plan as it
     may deem advisable. No member of the Board or the Committee shall be liable
     for any action or determination made in good faith with respect to the Plan
     or any Stock Right granted under it.

          B. Committee Actions. The Committee may select one of its members as
     its chairman, and shall hold meetings at such time and places as it may
     determine. A majority of the Committee shall constitute a quorum and acts
     of a majority of the members of the Committee at a meeting at which a
     quorum is present, or acts reduced to or approved in writing by all the
     members of the Committee (if consistent with applicable state law), shall
     be the valid acts of the Committee. From time to time the Board may
     increase the size of the Committee and appoint additional members thereof,
     remove members (with or without cause) and appoint new members in
     substitution therefor, fill vacancies however caused, or remove all members
     of the Committee and thereafter directly administer the Plan.

          C. Grant of Stock Rights to Board Members. Stock Rights may be granted
     to members of the Board. All grants of Stock Rights to members of the Board
     shall in all respects be made in accordance with the provisions of this
     Plan applicable to other eligible persons. Members of the Board who either
     (i) are eligible to receive grants of Stock Rights pursuant to the Plan or
     (ii) have been granted Stock Rights may vote on any matters affecting the
     administration of the Plan or the grant of any Stock Rights pursuant to the
     Plan, except that no such member shall act upon the granting to himself or
     herself of Stock Rights, but any such member may be counted in determining
     the existence of a quorum at any meeting of the Board during which action
     is taken with respect to the granting to such member of Stock Rights.

          D. Performance-Based Compensation. The Board, in its discretion, may
     take such action as may be necessary to ensure that Stock Rights granted
     under the Plan qualify as "qualified performance-based compensation" within
     the meaning of Section 162(m) of the Code and applicable regulations
     promulgated thereunder ("Performance-Based Compensation"). Such action may
     include, in the Board's discretion, some or all of the following (i) if the
     Board determines that Stock Rights granted under the Plan generally shall
     constitute Performance-Based Compensation, the Plan shall be administered,
     to the extent required for such Stock Rights to constitute
     Performance-Based Compensation, by a
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     Committee consisting solely of two or more "outside directors" (as defined
     in applicable regulations promulgated under Section 162(m) of the Code),
     (ii) if any Non-Qualified Options with an exercise price less than the fair
     market value per share of Common Stock are granted under the Plan and the
     Board determines that such Options should constitute Performance-Based
     Compensation, such options shall be made exercisable only upon the
     attainment of a pre-established, objective performance goal established by
     the Committee, and such grant shall be submitted for, and shall be
     contingent upon shareholder approval and (iii) Stock Rights granted under
     the Plan may be subject to such other terms and conditions as are necessary
     for compensation recognized in connection with the exercise or disposition
     of such Stock Right or the disposition of Common Stock acquired pursuant to
     such Stock Right, to constitute Performance-Based Compensation.

     3. Eligible Employees and Others. ISOs may be granted only to employees of
the Company or any Related Corporation. Non-Qualified Options, Awards and
authorizations to make Purchases may be granted to any employee, officer or
director (whether or not also an employee) or consultant of the Company or any
Related Corporation. The Committee may take into consideration a recipient's
individual circumstances in determining whether to grant a Stock Right. The
granting of any Stock Right to any individual or entity shall neither entitle
that individual or entity to, nor disqualify such individual or entity from,
participation in any other grant of Stock Rights.

     4. Stock. The stock subject to Stock Rights shall be authorized but
unissued shares of Common Stock of the Company, $.0001 par value per share (the
"Common Stock"), or shares of Common Stock reacquired by the Company in any
manner. The aggregate number of shares which may be issued pursuant to the Plan
is 1,000,000, subject to adjustment as provided in paragraph 13. If any Option
granted under the Plan shall expire or terminate for any reason without having
been exercised in full or shall cease for any reason to be exercisable in whole
or in part or shall be repurchased by the Company, the unpurchased shares of
Common Stock subject to such Option shall again be available for grants of Stock
Rights under the Plan. In addition, if any shares of Common Stock issued upon
the exercise of any Option shall be repurchased by the Company at cost pursuant
to the terms of the option agreement evidencing such Option, such repurchased
shares shall also again be available for grants of Stock Rights under the Plan.

     No employee of the Company or any Related Corporation may be granted
Options to acquire, in the aggregate, more than 500,000 shares of Common Stock
under the Plan during any fiscal year of the Company. If any Option granted
under the Plan shall expire or terminate for any reason without having been
exercised in full or shall cease for any reason to be exercisable in whole or in
part or shall be repurchased by the Company, the shares subject to such Option
shall be included in the determination of the aggregate number of shares of
Common Stock deemed to have been granted to such employee under the Plan. In
addition, if any shares of Common Stock issued upon the exercise of any Option
shall be repurchased by the Company at cost pursuant to the terms of the option
agreement evidencing such Option, such repurchased shares shall also be included
in the determination of the aggregate number of shares of Common Stock deemed to
have been granted to such employee under the Plan.
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     5. Granting of Stock Rights. Stock Rights may be granted under the Plan at
any time on or after August 31, 1998 and prior to August 31, 2008. The date of
grant of a Stock Right under the Plan will be the date specified by the
Committee at the time it grants the Stock Right; provided, however, that such
date shall not be prior to the date on which the Committee acts to approve the
grant.

     6. Minimum Option Price; ISO Limitations.

          A. Price for Non-Qualified Options, Awards and Purchases. Subject to
     paragraph 2(D) (relating to compliance with Section 162(m) of the Code),
     the exercise price per share specified in the agreement relating to each
     Non-Qualified Option granted, and the purchase price per share of stock
     granted in any Award or authorized as a Purchase, under the Plan may be
     less than the fair market value of the Common Stock of the Company on the
     date of grant; provided that, in no event shall such exercise price or such
     purchase price be less than the minimum legal consideration required
     therefor under the laws of any jurisdiction in which the Company or its
     successors in interest may be organized.

          B. Price for ISOs. The exercise price per share specified in the
     agreement relating to each ISO granted under the Plan shall not be less
     than the fair market value per share of Common Stock on the date of such
     grant. In the case of an ISO to be granted to an employee owning stock
     possessing more than ten percent (10%) of the total combined voting power
     of all classes of stock of the Company or any Related Corporation, the
     price per share specified in the agreement relating to such ISO shall not
     be less than one hundred ten percent (110%) of the fair market value per
     share of Common Stock on the date of grant. For purposes of determining
     stock ownership under this paragraph, the rules of Section 424(d) of the
     Code shall apply.

          C. $100,000 Annual Limitation on ISO Vesting. Each eligible employee
     may be granted Options treated as ISOs only to the extent that, in the
     aggregate under this Plan and all incentive stock option plans of the
     Company and any Related Corporation, ISOs do not become exercisable for the
     first time by such employee during any calendar year with respect to stock
     having a fair market value (determined at the time the ISOs were granted)
     in excess of $100,000. The Company intends to designate any Options granted
     in excess of such limitation as Non-Qualified Options, and the Company
     shall issue separate certificates to the optionee with respect to Options
     that are Non-Qualified Options and Options that are ISOs.

          D. Determination of Fair Market Value. If, at the time an Option is
     granted under the Plan, the Company's Common Stock is publicly traded,
     "fair market value" shall be determined as of the date of grant or, if the
     prices or quotes discussed in this sentence are unavailable for such date,
     the last business day for which such prices or quotes are available prior
     to the date of grant and shall mean
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     (i) the average (on that date) of the high and low prices of the Common
     Stock on the principal national securities exchange on which the Common
     Stock is traded, if the Common Stock is then traded on a national
     securities exchange; or (ii) the last reported sale price (on that date) of
     the Common Stock on the Nasdaq National Market, if the Common Stock is not
     then traded on a national securities exchange; or (iii) the closing bid
     price (or average of bid prices) last quoted (on that date) by an
     established quotation service for over-the-counter securities, if the
     Common Stock is not reported on the Nasdaq National Market. If the Common
     Stock is not publicly traded at the time an Option is granted under the
     Plan, "fair market value" shall mean the fair value of the Common Stock as
     determined by the Committee after taking into consideration all factors
     which it deems appropriate, including, without limitation, recent sale and
     offer prices of the Common Stock in private transactions negotiated at
     arm's length.

     7. Option Duration. Subject to earlier termination as provided in
paragraphs 9 and 10 or in the agreement relating to such Option, each Option
shall expire on the date specified by the Committee, but not more than (i) ten
years from the date of grant in the case of Options generally and (ii) five
years from the date of grant in the case of ISOs granted to an employee owning
stock possessing more than ten percent (10%) of the total combined voting power
of all classes of stock of the Company or any Related Corporation, as determined
under paragraph 6(B). Subject to earlier termination as provided in paragraphs 9
and 10, the term of each ISO shall be the term set forth in the original
instrument granting such ISO, except with respect to any part of such ISO that
is converted into a Non-Qualified Option pursuant to paragraph 16.

     8. Exercise of Option. Subject to the provisions of paragraphs 9 through
12, each Option granted under the Plan shall be exercisable as follows:

          A. Vesting. The Option shall either be fully exercisable on the date
     of grant or shall become exercisable thereafter in such installments as the
     Committee may specify.

          B. Full Vesting of Installments. Once an installment becomes
     exercisable, it shall remain exercisable until expiration or termination of
     the Option, unless otherwise specified by the Committee.

          C. Partial Exercise. Each Option or installment may be exercised at
     any time or from time to time, in whole or in part, for up to the total
     number of shares with respect to which it is then exercisable.

          D. Acceleration of Vesting. The Committee shall have the right to
     accelerate the date that any installment of any Option becomes exercisable;
     provided that the Committee shall not, without the consent of an optionee,
     accelerate the permitted exercise date of any installment of any Option
     granted to any employee as an ISO (and not previously converted into a
     Non-Qualified Option pursuant to paragraph 16) if such acceleration would
     violate the annual
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                                       -6-


     vesting limitation contained in Section 422(d) of the Code, as described in
     paragraph 6(C).

     9. Termination of Employment. Unless otherwise specified in the agreement
relating to such ISO, if an ISO optionee ceases to be employed by the Company
and all Related Corporations other than by reason of death or disability as
defined in paragraph 10, no further installments of his or her ISOs shall become
exercisable, and his or her ISOs shall terminate on the earlier of (a) three
months after the date of termination of his or her employment, or (b) their
specified expiration dates, except to the extent that such ISOs (or unexercised
installments thereof) have been converted into Non-Qualified Options pursuant to
paragraph 16. For purposes of this paragraph 9, employment shall be considered
as continuing uninterrupted during any bona fide leave of absence (such as those
attributable to illness, military obligations or governmental service) provided
that the period of such leave does not exceed 90 days or, if longer, any period
during which such optionee's right to reemployment is guaranteed by statute or
by contract. A bona fide leave of absence with the written approval of the
Committee shall not be considered an interruption of employment under this
paragraph 9, provided that such written approval contractually obligates the
Company or any Related Corporation to continue the employment of the optionee
after the approved period of absence. ISOs granted under the Plan shall not be
affected by any change of employment within or among the Company and Related
Corporations, so long as the optionee continues to be an employee of the Company
or any Related Corporation. Nothing in the Plan shall be deemed to give any
grantee of any Stock Right the right to be retained in employment or other
service by the Company or any Related Corporation for any period of time.

     10. Death; Disability.

          A. Death. If an ISO optionee ceases to be employed by the Company and
     all Related Corporations by reason of his or her death, any ISO owned by
     such optionee may be exercised, to the extent otherwise exercisable on the
     date of death, by the estate, personal representative or beneficiary who
     has acquired the ISO by will or by the laws of descent and distribution,
     until the earlier of (i) the specified expiration date of the ISO or (ii)
     180 days from the date of the optionee's death.

          B. Disability. If an ISO optionee ceases to be employed by the Company
     and all Related Corporations by reason of his or her disability, such
     optionee shall have the right to exercise any ISO held by him or her on the
     date of termination of employment, for the number of shares for which he or
     she could have exercised it on that date, until the earlier of (i) the
     specified expiration date of the ISO or (ii) 180 days from the date of the
     termination of the optionee's employment. For the purposes of the Plan, the
     term "disability" shall mean "permanent and total disability" as defined in
     Section 22(e)(3) of the Code or any successor statute.

     11. Assignability. No ISO shall be assignable or transferable by the
optionee except by will or by the laws of descent and distribution, and during
the lifetime of the optionee shall be
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exercisable only by such optionee. Stock Rights other than ISOs shall be
transferable to the extent set forth in the agreement relating to such Stock
Right.

     12. Terms and Conditions of Options. Options shall be evidenced by
instruments (which need not be identical) in such forms as the Committee may
from time to time approve. Such instruments shall conform to the terms and
conditions set forth in paragraphs 6 through 11 hereof and may contain such
other provisions as the Committee deems advisable which are not inconsistent
with the Plan, including restrictions applicable to shares of Common Stock
issuable upon exercise of Options. The Committee may specify that any
Non-Qualified Option shall be subject to the restrictions set forth herein with
respect to ISOs, or to such other termination and cancellation provisions as the
Committee may determine. The Committee may from time to time confer authority
and responsibility on one or more of its own members and/or one or more officers
of the Company to execute and deliver such instruments. The proper officers of
the Company are authorized and directed to take any and all action necessary or
advisable from time to time to carry out the terms of such instruments.

     13. Adjustments. Upon the occurrence of any of the following events, an
optionee's rights with respect to Options granted to such optionee hereunder
shall be adjusted as hereinafter provided, unless otherwise specifically
provided in the written agreement between the optionee and the Company relating
to such Option:

          A. Stock Dividends and Stock Splits. If the shares of Common Stock
     shall be subdivided or combined into a greater or smaller number of shares
     or if the Company shall issue any shares of Common Stock as a stock
     dividend on its outstanding Common Stock, the number of shares of Common
     Stock deliverable upon the exercise of Options shall be appropriately
     increased or decreased proportionately, and appropriate adjustments shall
     be made in the purchase price per share to reflect such subdivision,
     combination or stock dividend.

          B. Consolidations or Mergers. If (i) the Company is a party to a
     consolidation or merger (other than a merger in which the Company is the
     continuing corporation), (ii) the Company sells all or substantially all of
     its assets, or (iii) a person or group (as defined in Rule 13d-5(b)(1) of
     the Securities Exchange Act of 1934, as amended) acquires in a transaction
     or a series of related transactions of at least sixty-six and two-thirds
     percent (66 2/3%) of the outstanding voting stock of the Company (an
     "Organic Change"), the Committee or the board of directors of any entity
     assuming the obligations of the Company hereunder (the "Successor Board"),
     shall, as to outstanding Options, make appropriate provision for the
     continuation of such Options by substituting on an equitable basis for the
     shares then subject to such Options either (a) the consideration payable
     with respect to the outstanding shares of Common Stock in connection with
     the Organic Change, (b) shares of stock of a surviving or successor
     corporation or (c) such other securities as the Successor Board deems
     appropriate, the fair market value of which, at the time of the Organic
     Change,
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                                       -8-


     shall equal the fair market value of the shares of Common Stock subject to
     such Options immediately preceding the Organic Change.

          C. Recapitalization or Reorganization. In the event of a
     recapitalization or reorganization of the Company (other than a transaction
     described in subparagraph B above) pursuant to which securities of the
     Company or of another corporation are issued with respect to the
     outstanding shares of Common Stock, an optionee upon exercising an Option
     shall be entitled to receive for the purchase price paid upon such exercise
     the securities he or she would have received if he or she had exercised
     such Option prior to such recapitalization or reorganization.

          D. Modification of ISOs. Notwithstanding the foregoing, any
     adjustments made pursuant to subparagraphs A, B or C with respect to ISOs
     shall be made only after the Committee, after consulting with counsel for
     the Company, determines whether such adjustments would constitute a
     "modification" of such ISOs (as that term is defined in Section 424 of the
     Code) or would cause any adverse tax consequences for the holders of such
     ISOs. If the Committee determines that such adjustments made with respect
     to ISOs would constitute a modification of such ISOs or would cause adverse
     tax consequences to the holders, it may refrain from making such
     adjustments.

          E. Dissolution or Liquidation. In the event of the proposed
     dissolution or liquidation of the Company, then the Committee shall, as to
     outstanding Options, at its discretion provide, upon written notice to the
     optionees, (i) that all Options must be exercised, to the extent then
     exercisable, within a specified number of days of the date of such notice,
     at the end of which period the Options shall terminate or (ii) that such
     Options (including those which have not yet vested) shall be exercisable
     within a specified number of days of such notice, at the end of which
     period the Options shall terminate.

          F. Issuances of Securities. Except as expressly provided herein, no
     issuance by the Company of shares of stock of any class, or securities
     convertible into shares of stock of any class, shall affect, and no
     adjustment by reason thereof shall be made with respect to, the number or
     price of shares subject to Options. No adjustments shall be made for
     dividends paid in cash or in property other than securities of the Company.

          G. Fractional Shares. No fractional shares shall be issued under the
     Plan and the optionee shall receive from the Company cash in lieu of such
     fractional shares.

          H. Adjustments. Upon the happening of any of the events described in
     subparagraphs A, B, C above, the class and aggregate number of shares set
     forth in paragraph 4 hereof that are subject to Stock Rights which
     previously have been or subsequently may be granted under the Plan shall
     also be appropriately
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     adjusted to reflect the events described in such subparagraphs. The
     Committee or the Successor Board shall determine the specific adjustments
     to be made under this paragraph 13 and, subject to paragraph 2, its
     determination shall be conclusive.

     14. Means of Exercising Options; Restriction on Issuance of Shares.

          A. An Option (or any part or installment thereof) shall be exercised
     by giving written notice to the Company at its principal office address, or
     to such transfer agent as the Company shall designate. Such notice shall
     identify the Option being exercised and specify the number of shares as to
     which such Option is being exercised, accompanied by full payment of the
     purchase price therefor either (a) in United States dollars in cash or by
     check, (b) at the discretion of the Committee, through delivery of shares
     of Common Stock having a fair market value equal as of the date of the
     exercise to the cash exercise price of the Option (provided such shares of
     Common Stock have been held by the optionee free of any substantial risk of
     forfeiture for at least six (6) months), (c) at the discretion of the
     Committee, by delivery of the grantee's personal recourse note bearing
     interest payable not less than annually at no less than 100% of the lowest
     applicable Federal rate, as defined in Section 1274(d) of the Code, (d) at
     the discretion of the Committee and consistent with applicable law, through
     the delivery of an assignment to the Company of a sufficient amount of the
     proceeds from the sale of the Common Stock acquired upon exercise of the
     Option and an authorization to the broker or selling agent to pay that
     amount to the Company, which sale shall be at the participant's direction
     at the time of exercise, or (e) at the discretion of the Committee, by any
     combination of (a), (b), (c) and (d) above. If the Committee exercises its
     discretion to permit payment of the exercise price of an ISO by means of
     the methods set forth in clauses (b), (c), (d) or (e) of the preceding
     sentence, such discretion shall be exercised in writing at the time of the
     grant of the ISO in question. The holder of an Option shall not have the
     rights of a shareholder with respect to the shares covered by such Option
     until the date of issuance of a stock certificate to such holder for such
     shares. Except as expressly provided above in paragraph 13 with respect to
     changes in capitalization and stock dividends, no adjustment shall be made
     for dividends or similar rights for which the record date is before the
     date such stock certificate is issued.

     15. Term and Amendment of Plan. This Plan was adopted by the Board on
August 31, 1998, subject, with respect to the validation of ISOs granted under
the Plan, to approval of the Plan by the stockholders of the Company at the next
Meeting of Stockholders or, in lieu thereof, by written consent. If the approval
of stockholders is not obtained prior to August 31, 1999, any grants of ISOs
under the Plan made prior to that date will be rescinded. The Plan shall expire
at the end of the day on August 31, 2008 (except as to Options outstanding on
that date). Subject to the provisions of paragraph 5 above, Options may be
granted under the Plan prior to the date of stockholder approval of the Plan.
The Board may terminate or amend the Plan in any respect at any time, except
that, without the approval of the stockholders obtained within 12 months before
or after the Board adopts a resolution authorizing any of the following
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actions: (a) the total number of shares that may be issued under the Plan may
not be increased (except by adjustment pursuant to paragraph 13); (b) the
provisions of paragraph 3 regarding eligibility for grants of ISOs may not be
modified; (c) the provisions of paragraph 6(B) regarding the exercise price at
which shares may be offered pursuant to ISOs may not be modified (except by
adjustment pursuant to paragraph 13); and (d) the expiration date of the Plan
may not be extended. Except as otherwise provided in this paragraph 15, in no
event may action of the Board or stockholders alter or impair the rights of a
grantee, without such grantee's consent, under any Stock Right previously
granted to such grantee.

     16. Modifications of ISOs; Conversion of ISOs into Non-Qualified Options.
Subject to paragraph 13(D), without the prior written consent of the holder of
an ISO, the Committee shall not alter the terms of such ISO (including the means
of exercising such ISO) if such alteration would constitute a modification
(within the meaning of Section 424(h)(3) of the Code). The Committee, at the
written request or with the written consent of any optionee, may in its
discretion take such actions as may be necessary to convert such optionee's ISOs
(or any installments or portions of installments thereof) that have not been
exercised on the date of conversion into Non-Qualified Options at any time prior
to the expiration of such ISOs, regardless of whether the optionee is an
employee of the Company or a Related Corporation at the time of such conversion.
Such actions may include, but shall not be limited to, extending the exercise
period or reducing the exercise price of the appropriate installments of such
ISOs. At the time of such conversion, the Committee (with the consent of the
optionee) may impose such conditions on the exercise of the resulting
Non-Qualified Options as the Committee in its discretion may determine, provided
that such conditions shall not be inconsistent with this Plan. Nothing in the
Plan shall be deemed to give any optionee the right to have such optionee's ISOs
converted into Non-Qualified Options, and no such conversion shall occur until
and unless the Committee takes appropriate action. Upon the taking of such
action, the Company shall issue separate certificates to the optionee with
respect to Options that are Non-Qualified Options and Options that are ISOs.

     17. Application Of Funds. The proceeds received by the Company from the
sale of shares pursuant to Options granted and Purchases authorized under the
Plan shall be used for general corporate purposes.

     18. Notice to Company of Disqualifying Disposition. By accepting an ISO
granted under the Plan, each optionee agrees to notify the Company in writing
immediately after such optionee makes a Disqualifying Disposition (as described
in Sections 421, 422 and 424 of the Code and regulations thereunder) of any
stock acquired pursuant to the exercise of ISOs granted under the Plan. A
Disqualifying Disposition is generally any disposition occurring on or before
the later of (a) the date two years following the date the ISO was granted or
(b) the date one year following the date the ISO was exercised.

     19. Withholding of Additional Income Taxes. Upon the exercise of a
Non-Qualified Option, the transfer of a Non-Qualified Stock Option pursuant to
an arm's-length transaction, the grant of an Award, the making of a Purchase of
Common Stock for less than its fair market value, the making of a Disqualifying
Disposition (as defined in paragraph 18), the
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                                      -11-


vesting or transfer of restricted stock or securities acquired on the exercise
of an Option hereunder, or the making of a distribution or other payment with
respect to such stock or securities, the Company may withhold taxes in respect
of amounts that constitute compensation includible in gross income. The
Committee in its discretion may condition (i) the exercise of an Option, (ii)
the transfer of a Non-Qualified Stock Option, (iii) the grant of an Award, (iv)
the making of a Purchase of Common Stock for less than its fair market value, or
(v) the vesting or transferability of restricted stock or securities acquired by
exercising an Option, on the grantee's making satisfactory arrangement for such
withholding. Such arrangement may include payment by the grantee in cash or by
check of the amount of the withholding taxes or, at the discretion of the
Committee, by the grantee's delivery of previously held shares of Common Stock
or the withholding from the shares of Common Stock otherwise deliverable upon
exercise of a Option shares having an aggregate fair market value equal to the
amount of such withholding taxes.

     20. Purchase for Investment; Rights of Holder on Subsequent Registration.
Unless the shares to be issued upon exercise of an Option granted under the Plan
have been effectively registered under the Securities Act of 1933, as now in
force or hereafter amended, the Company shall be under no obligation to issue
any shares covered by any option unless the person who exercised such Option, in
whole or in part, shall give a written representation and undertaking to the
Company which is satisfactory in form and scope to counsel for the Company and
upon which, in the opinion of such counsel, the Company may reasonably rely,
that he or she is acquiring the shares issued pursuant to such exercise of the
Option for his or her own account as an investment and not with a view to, or
for sale in connection with, the distribution of any such shares, and that he or
she will make no transfer of the same except in compliance with any rules and
regulations in force at the time of such transfer under the Securities Act of
1933, or any other applicable law, and that if shares are issued without such
registration, a legend to this effect may be endorsed upon the securities so
issued. In the event that the Company shall, nevertheless, deem it necessary or
desirable to register under the Securities Act of 1933 or other applicable
statutes any shares with respect to which an Option shall have been exercised,
or to qualify any such shares for exemption from the Securities Act of 1933 or
other applicable statutes, then the Company may take such action and may require
from each optionee such information in writing for use in any registration
statement, supplementary registration statement, prospectus, preliminary
prospectus or offering circular as is reasonably necessary for such purpose and
may require reasonable indemnity to the Company and its officers and directors
and controlling persons from such holder against all losses, claims, damages and
liabilities arising from such use of the information so furnished and caused by
any untrue statement of any material fact therein or caused by the omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances under which
they were made.

     21. Governmental Regulation. The Company's obligation to sell and deliver
shares of the Common Stock under this Plan is subject to the approval of any
governmental authority required in connection with the authorization, issuance
or sale of such shares.

     Government regulations may impose reporting or other obligations on the
Company with respect to the Plan. For example, the Company may be required to
send tax information statements to employees and former employees that exercise
ISOs under the Plan, and the
<PAGE>


                                      -12-


Company may be required to file tax information returns reporting the income
received by grantees of Options in connection with the Plan.

     22. Governing Law. The validity and construction of the Plan and the
instruments evidencing Stock Rights shall be governed by the laws of Delaware,
or the laws of any jurisdiction in which the Company or its successors in
interest may be organized.
<PAGE>


                                      -13-


                                 AMENDMENT NO. 1
                                     TO THE
                             RED HAT SOFTWARE, INC.
                             1998 STOCK OPTION PLAN

     Pursuant to a Written Consent of the Board of Directors of Red Hat
Software, Inc. (the "Company") dated as of September 28, 1998 and a Written
Consent of the Stockholders of the Company dated as of September 29, 1998, the
Company's 1998 Stock Option Plan (the "Plan") is amended by increasing the
number of shares reserved for issuance under the Plan by 1,917,400 shares so
that an aggregate of 2,917,400 shares may be issued under the Plan.
<PAGE>


                                      -14-


                                 AMENDMENT NO. 2
                                     TO THE
                             RED HAT SOFTWARE, INC.
                             1998 STOCK OPTION PLAN

     Pursuant to a Written Consent of the Board of Directors of Red Hat
Software, Inc. (the "Company") dated as of February 4, 1999, the Company's 1998
Stock Option Plan, as amended (the "Plan"), is further amended by increasing the
maximum number of Options that may be granted to any employee of the Company or
any Related Corporation under the Plan during any fiscal year of the Company by
1,000,000 shares to 2,000,000 shares.
<PAGE>


                                      -15-


                                 AMENDMENT NO. 3
                                     TO THE
                             RED HAT SOFTWARE, INC.
                             1998 STOCK OPTION PLAN

     Pursuant to a Written Consent of the Board of Directors of Red Hat
Software, Inc. (the "Company") dated as of February 24, 1999 and a Written
Consent of the Stockholders of the Company dated as of February 24, 1999, the
Company's 1998 Stock Option Plan, as amended (the "Plan"), is further amended by
increasing the number of shares reserved for issuance under the Plan by 800,000
shares so that an aggregate of 3,717,400 shares may be issued under the Plan.
<PAGE>


                                      -16-


                                 AMENDMENT NO. 4
                                     TO THE
                             RED HAT SOFTWARE, INC.
                             1998 STOCK OPTION PLAN

     Pursuant to a Written Consent of the Board of Directors of Red Hat
Software, Inc. (the "Company") dated as of June 2, 1999 and a Written Consent
of the Stockholders of the Company dated as of June 3, 1999, the Company's 1998
Stock Option Plan, as amended (the "Plan"), is further amended by increasing the
number of shares reserved for issuance under the Plan by 1,000,000 shares so
that an aggregate of 4,717,400 shares may be issued under the Plan.