This excerpt taken from the MOLX DEF 14A filed Sep 23, 2005.
U.S. Tax Consequences When an Option Is Exercised
NQSOs - Ordinary Tax. An exercise of any portion of a NQSO results in ordinary income for federal income tax purposes for the employees in the calendar year of exercise. The amount of ordinary income in any given year of exercise is equal to the aggregate fair market value on the date of exercise less the aggregate option price paid for the particular number of shares. Molex is allowed a deduction equal to the amount recognized by the employee as additional ordinary income.
Such option exercises under the 2005 ISO Plan are subject to income tax withholding, and the Company is obligated to collect the tax applicable to such income. The Committee may, in its discretion, satisfy that tax obligation by withholding from the shares to be delivered in connection with the award a number of shares having a value equal to the minimum statutory federal income tax withholding, plus state, if applicable, and payroll taxes. The value of each share to be withheld will be the fair market value of the Stock at the time of the exercise.
Qualified Options (“ISOs”) - Ordinary Tax. The vesting or exercise of any portion of an ISO results in the recognition of no ordinary income for federal income tax purposes in the calendar year of vesting. However, exercise may result in alternative minimum tax on the amount that would have been taxed upon exercise if the option were a NQSO. The Company is allowed no deduction.