eBay

(EBAY) - Get Report

may be a cash machine, but options sales are doing far more to keep the money flowing than its successful auction site.

In the second quarter, eBay raised $249.5 million through the sale of employee stock options, according to its quarterly report. That amount was far greater than what the company saw from options sales last year and was 10 times greater than the company's free cash flow in the quarter. Free cash flow, which represents the difference between cash raised by operations and cash spent on property and equipment, is a widely watched indicator of a company's ability to generate returns for investors.

eBay's options practices have been in the spotlight since last spring, when the company asked shareholders to approve a 50% increase in the amount of options available under its current stock plan. Despite warnings from

analysts and

investors that the company's options grants have been excessive, shareholders approved the proposal at eBay's annual shareholder meeting in June.

The concerns raised appear to have had little effect on eBay's options practices. In the second quarter, the company's net option grant was 2.4 million shares, or 0.4% of the total outstanding at the beginning of the quarter, adjusted for an upcoming stock split. That compares with a split-adjusted 1.2 million share net grant in the year ago-quarter.

eBay plans a two-for-one split of its shares later this month.

The grants would have had a big impact on eBay's net income, if the company included options expenses on its bottom line. Instead, eBay, like many other technology and Internet companies, typically assigns no value to options when they are granted.

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But if the company had expensed the estimated fair value of the options it awarded in the quarter, its second-quarter net income would have shrunk by nearly 70%. Including the cost of options, eBay would have earned $28 million, or 4 cents a share, on $509.3 million in sales in the second quarter. The company's reported second-quarter income, including the cost of a court judgment, was $91.9 million, or 14 cents a share.

In the year-ago quarter, eBay would have reported income of $9.7 million, or 2 cents a share, on $266.3 million in sales, including the cost of options.

Through the first six months of this year, eBay has awarded stock options, worth an estimated $95 million had they been expensed, up from $91.1 million in the first half of last year.

Even as the company handed out more options, eBay employees have cashed in large numbers of options this year. In the second quarter, employees exercised 8.9 million split-adjusted options, or 1.4% of the company's outstanding shares.

The number of options exercised in the quarter increased from the 3.3 million exercised in the year-ago quarter. The average strike price of the exercised options increased from a split-adjusted $11.25 a share in the year-ago quarter to $27.96 in the just-completed quarter.

The amount the company saw from the options sale skyrocketed. When exercised options are sold on the open market, the company sees all the money from each exercised option up to the strike price, while employees receive the amount between the market prices and the strike price.

The nearly $250 million that eBay raised through stock options sales in the second quarter compares with just $37.5 million the company raised in the year-ago period. Through the first half of the year, the company raised $457.9 million through options sales, compared with $64.8 million in the first half of last year.

In contrast, eBay's operations brought in $208.7 million in the second quarter and $398.7 million in the first half of the year. Meanwhile, its free cash flow was $23.2 million in the just-completed quarter and $169.3 million in the first half of the year.

eBay representatives did not return calls seeking comment about its options practices.

eBay shares ended Monday up $1.36, or 1.4%, at $101.86. It is the first time the stock closed up at the end of regular trading since the company reported earnings on July 24.

eBay's shares have lost $14.07, or 12.2%, since the close of regular trading that day. They are up $33.85, or 50.2%, on the year.