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W-2 block 14 - http://www.irs.gov/pub/irs-pdf/fw2.pdf contains informational reporting.
The IRS requires the company to report the income from the disqualified disposition on W-2.
The gain on the sale is being reported on his W-2 as wages and considered a disqualifying transaction. The amount therefore should be included into box 1 - please verify.
In the box 14 you likely see what amount of ISO was included as wages and should use this amount as basis on the schedule D - that will eliminate possibility of double taxation.