Incentive stock option:
Plan created by the Economic Recovery Tax Act of 1981 (ERTA) whereby qualifying options are free of taxes when granted and when exercised. Profits on exercised shares sold are taxed as ordinary income--until 1987, it was subject to capital gains tax if the shares were held at least one year.
www.portfoliopoint.com/ims2/invest_glosry_InInd.htm

A statutory stock option that allows an employee to purchase stock of the employer below current market price. No income tax consequences result from the grant or exercise of such an option and, if holding period requirements are met, gain on the eventual sale of the stock is long-term capital gain.
www.bookkeeperlist.com/definitionsi.shtml

It's available only to employees of a company. With this type of option, income is reported only when the stock is sold, not when the option is received or exercised. If the stock is held long enough, the employee may report long-term capital gains instead of compensation income, which could offer a significant tax saving.
www.blonnet.com/life/2002/01/21/stories/2002012100140100.ht...

An option that meets certain rules for preferential tax treatment. If several conditions are met, the holder is not required to pay ordinary income tax upon exercise.
www.networthstrategies.com/Resources/Docs/glossary.html

incentive option: an option granted to corporate executives if the company achieves certain financial goals
www.cogsci.princeton.edu/cgi-bin/webwn2.1

nonqualified stock option:

With this type of stock option, which has become very popular, the employee must report income upon exercising the stock. The gain - the difference between the sale price and the purchase price - is treated as income for tax purposes.
www.salary.com/advice/layouthtmls/advl_display_nocat_Ser56_...