Updated from 7:51 a.m. EDT

The backdating scandal has put stock options under the microscope again. But in their focus on how executives gamed the system to get bigger payouts, investors may be missing the big picture.

In recent weeks, analysts have pored over company filings trying to find evidence of whether particular companies

illicitly handed out options to executives at favorable share prices that were known after the fact.

However, what may be more disturbing is what executives have done with options right out in the open -- without bending or breaking any rules.

"Options are one of the great fiascos of all time," says Gary Lutin, an investment banker and shareholder rights' advocate. Corporate managers "came up with lots of creative ways to take shareholders' property, some of which were legal."

A case in point: Many institutional investors and analysts keep track of the dilution that might be caused in the future by outstanding and prospective options grants. But few, if any, have kept track of how much dilution has been caused by options already exercised.

At a number of companies, that form of dilution -- actual as opposed to possible dilution -- amounts to sizable portions of their outstanding share count. At

Yahoo!

(YHOO)

, for instance, employees and executives have exercised 430 million options from 1997 through the first quarter of this year. Those exercised options represent about 29% of the company's overall share count, factoring in the stock buybacks that the company has done in recent years to soak up some of the dilution.

And it's not just Yahoo!. Options exercised since 1998 represent about 27% of what

Broadcom's

(BRCM)

share count would be if not for stock buybacks. At

Apple

(AAPL) - Get Report

, the figure since 1996 is 20%. For

eBay

(EBAY) - Get Report

, 16%, going back to 1999. For

Oracle

(ORCL) - Get Report

, since 1992, about 14%.

This dilutive effect is important, because it essentially represents money taken out of shareholders' wallets.

Without the weight of all those optioned shares holding it down, Yahoo!'s stock would be trading about 35% higher today than it is, assuming it had the same market capitalization. That might not seem like a whole lot, considering that Yahoo!'s shares are up nearly 2,100% over that time period. But considering the stock is down 7% over the last two years, it starts to look more significant. Yahoo! representatives didn't immediately respond to a request for comment on this story.

(Stock options represent the right for an employee or an executive to buy stock at a pre-set, or strike, price. In general, insiders only exercise their options if the market price is greater than the strike price. Because of employee turnover or market fluctuations, many option grants end up unexercised and end up not affecting a company's share count.)

Exercised options also represent a massive transfer of wealth from shareholders to corporate insiders. In 2005 alone, for instance, Yahoo! employees and executives gained an estimated $1.1 billion from exercising options, according to data extrapolated from the company's annual report and the company's average share price last year. In contrast, Yahoo's reported net income last year was, excluding stock options expenses, about $1.9 billion.

Certainly, had companies avoided the use of options, they would have had to compensate their employees in cash, which likely would have lowered reported earnings and companies' stock prices.

But the amount of that higher salary payout would have been far less than what employees reaped through options. Last year, for instance, the average eBay employee made about $65,000 just from exercising options.

"Why would any responsible money manager ever buy these stocks

when the employees are making more money than the company?" asks Albert Meyer, an investment advisor at Bastiat Capital. "You can't run a business over a long period of time on that basis."

But shareholders are losing out in other ways, too. At Yahoo!, excluding the tax benefit the company saw from employee's options sales, the gains from options realized by employees last year represented about $710 million that the company itself could have held on to if it had sold the stock in a public offering.

Through options, companies are "shaving off part of their capital structure to pay operating expenses," says Ken Broad, a portfolio manager at Delaware Investments and a longtime critic of stock options.

The dilution issue also is a pertinent one as proxy season gets into full swing. At their annual meetings, a number of companies, such as eBay, either have or will ask for expansions of their stock programs. The problem is that most analysts who determine the merit of those expansions simply look at the so-called "overhang," which is the number of options that have already been granted and are still outstanding, or that might be granted if the expansion is passed.

In fact, some institutional investors and proxy advisers set a limit on how high they'll allow the overhang to get before they oppose new attempts to expand options plans.

But that focus is "myopic," says Broad, because it ignores the degree to which shareholders have already been diluted. Using those formulas, a company whose employees already exercised the million options they've been granted would look better than a company that still had a million options outstanding, even though the dilution would be the same, he notes.

Indeed, a better way to look at it would be to look at the total of past and potentially future dilution from options exercises, Broad says. So at eBay, in addition to the 226 million options that employees have already exercised, insiders hold another 143.5 million options, or about 10% of the company's current share count.

"To just focus on

the overhang as a measure of dilution is completely wrong," he says. "This is yet another overlooked area" in the options debate.

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