"They are taxed on the difference between the exercise price and the mkt price when they exercise - as ordinary income."

Spot on - and when they sell, they are taxed on the loss/gain against the cost basis using the Market price on the day they exercised.

This is a reason to put off exercising as long as possible (especially if you think it will appreciate) - the only point being that if you exercise and then sell within a year (2 years in certain types of option plans) the loss/gain is treated as ordinary income - otherwise it becomes L/T Cap Gain/Loss.

If the BOD options are underwater, there's not a lot of sense in exercising other than to set the clock running before stock is sold.

I think Cliff's options are reported at $0.10 so now he is "in the money".