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third-quarter per-share earnings would have been lower by more than 40% if the company had included the cost of stock options.

In a filing with the

Securities and Exchange Commission

on Wednesday, the online auction company reported that it would have earned $59.9 million, or 9 cents a share, in the third quarter if it included stock option expenses. Without such costs, the company last month

reported earnings of $103.3 million, or 16 cents a share.

eBay's option-granting practices have been under scrutiny since this past spring when it

sought approval from shareholders for a greater-than-50% increase in its shares available for grant under its current stock option plan. Critics of the proposal noted that the company's liberal option-granting practices were severely diluting shareholder value at a time when other companies are reining in their options programs.

However, despite opposition from the

California Public Employees' Retirement System and other large

investors, eBay shareholders

passed the increase overwhelmingly.

In the third quarter, eBay gave employees and managers a net grant of 5.1 million options, up from a net grant of 3.1 million options in the same period last year. eBay estimates that the options it handed out in the third quarter were worth about $44.4 million.

For the year, eBay has handed out a net grant of 20.4 million options worth about $139.3 million by its estimates.

In the third quarter, eBay employees exercised 3.9 million options at an average exercise price of about $25.19. Assuming the stock traded at an average of $55 a share, employees realized some $117 million from the sale of options in the quarter.

In the first nine months of this year, eBay employees have realized an estimated $330.1 million from options exercises, or more than $62,000 per employee.

The company also has seen a huge cash windfall from stock options this year.

Although eBay does not count option grants as an expense in its financial reports to investors, like other companies it does claim options exercises as a business expense when filing its taxes. Through the first nine months of this year, eBay saw a tax benefit related to stock-options exercises of $105.6 million. That amount was equivalent to about 17% of its operating cash flow.

When employees sell options, they see the gain between the market value of the company's shares and the strike price. When those options are sold on the open market, the company gets to keep all the money up to the strike price. The net effect is almost like a continuous public offering of stock.

Through this form of financing, eBay raised $570.2 million in the first nine months of this year. In contrast, the company posted free cash flow in the first nine months of about $337.1 million. Free cash flow, an often-viewed indicator of a company's profit-making potential, is the difference between cash raised through operations and a company's capital expenditures.

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