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Repurchased shares become treasury shares. They are held by the company for future use. Companies go through some paperwork with govt to issue new shares. You can also have treasury shares that have been approved for issue, but not yet issued.

Yes, they can be used for any legal purpose including the purchase of other companies for stock rather than cash or in employee incentive programs. But in calculating per share data, only issued shares are counted. Fully diluted means that shares from stock options and convertible bonds or preferred shared are counted as shares.
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