What is the difference between primary and fully diluted earnings per share?

Primary earnings per share (EPS) is calculated by dividing a corporation’s reported net income by the average number of shares outstanding during the year. It is a measure of a company’s per-share performance as it actually happened. Fully diluted earnings per share measures what would have happened to EPS if all options on the company’s stock had been exercised at the beginning of the year, increasing the average number of outstanding shares and possibly changing net income. For example, if a company’s outstanding convertible bonds had been exchanged for common stock, interest expense would have been reduced and the number of outstanding shares would have increased. Both measures must be reported with a company’s income statements under GAAP accounting rules.