To answer your questions:
Is this the right approach? Maybe, if your changes are generally useful I would attempt to contribute to the project instead of forking.
Can I fork this project? Yes. The BSD license allows you to fork it. You don't need to ask permission to fork.
How to track changes...? Add your name to the copyright notice for the files you changed. And make sure it is in files you add. If you want more details your SCM tool will keep track of who changed what.
What must I do before releasing...? If you are releasing the source the copyright notices in the source is enough if you are releasing binaries make sure the original copyright notice is in your supporting documentation.
The usual IANAL applies etc. etc.
It looks to me as if the author tried to turn the BSD license into a viral license by demanding that the original license terms be unchanged for this and any derived work.
While this is a perfectly viable idea, I doubt it would stand up in court under all circumstances - the various versions of GPL are quite long, and there is a good reason why they have to be. Viral licensing is delicate matter, because it walks a thin line - you have to define carefully what is "source" and what is a "binary distribution", what constitutes a "derived work", etc., all the while avoiding clashes with existing law that might render the license partially void. More permissive licenses like BSD-2 can be much shorter for the simple reason that they do not have to make these distinctions: as long as you retain the copyright notice and author credits, you are free to copy and modify as you please.
What the consequence of this license would be is a bit unclear: it could be that the last clause is void, which would make it equivalent to plain BSD-2; or it could be that it overrides most of the freedom that regular BSD-2 would give you, which would make it even more restrictive than GPL.
The problem is that the author tries to release under BSD-2, but at the same time forbidding redistribution under a viral license, which is contradictory, because forbidding relicensing would basically make the license viral itself.
All that theoretical and legal mumbo-jumbo aside, the obvious solution is to contact the author and ask for permission; if he's fine with you including his code in your project, then there is no problem.
Best Answer
See for example how Apple does it.
On iOS you can reach a Copyright menu inside the settings menu. It's a rather long entry, listing all copyrights, including BSD licenses.