Thanks for the clarification. The detail is helpful. I wish I could tell you that what you are describing would work but unfortunately it will not. The forms and instructions do not give you the opportunity to choose when or to what degree you can take your losses.
You can take all your losses up to your gains +$3,000 in losses. However once you use up your losses they are gone. You must take all losses up to gains on a year by year basis, you cannot choose to equalize your losses as you are describing.
Here is how it will work out:
2002-- capitol loss $70,000
2002-- capitol gain ISO stock $40,000 net loss $30,000 carried forward to 2003
2003-- capitol gain ISO stock $40,000 net gain $10,000
The $30,000 carry forward could be reduced by up to $3,000 to reduce other income for 2003. If that were to occur then you would have $27,000 to carry forward to 2003 and your net gain would be $13,000 in 2003.
I hope this clarifies my answer. If you have further questions on this topic be sure and get back to me.