The E-trade Stock Plan transaction supplemental report does not list them as ordinary income.  They are classified (column on far right) as to the type of gain to report.

The W-2 income reported on this Supplemental document shows the adjustment you need to make to the basis reported on the actual 1099 form from E-trade.  Study the Supplemental document for a  bit, and you'll get it.  It is very useful.