**UNITED
STATES**


**SECURITIES
AND EXCHANGE COMMISSION**
 **WASHINGTON,
D.C. 20549**
 
 **FORM
10-K**
 
 x
    ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF
      1934
      FOR
      THE FISCAL YEAR ENDED DECEMBER 31, 2004**OR**o
    TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF
      1934
      FOR
      THE TRANSITION PERIOD FROM _________ TO
________
 
 COMMISSION
FILE NO. 0-15443
  **THERAGENICS
      CORPORATION****®**(Exact
      name of registrant as specified in its
charter)
 
 
 **Delaware**
    **58-1528626**(State
      of incorporation)
    (I.R.S.
      Employer Identification Number)
 
 **5203
      Bristol Industrial Way Buford, Georgia**
    **30518**(Address
      of principal executive offices)
    (Zip
      Code)
 
 Registrant's
      telephone number, including area code:**(770)
      271-0233**
 
 Securities
registered pursuant to Section 12(b) of the Act:
 
 Title
      of each class
    
    Name
      of each exchange on
      which
      registered**Common
      stock, $.01 par value,**
      **Together
      with associated Common**
      **Stock
      Purchase Rights**
    
    **New
      York Stock Exchange**
 
 
 Securities
registered pursuant to Section 12(g) of the Act: None
 
 Indicate by
check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES x No o
 1
  
 Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive Proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. o
 
 Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act)
 
 Yes x No o
 
 The
aggregate market value of the common stock of the registrant held by
non-affiliates of the registrant, as determined by reference to the closing
price of the Common Stock as reported on the New York Stock Exchange on July 2,
2004, the last business day of the registrant’s most recently completed second
fiscal quarter, was $133,875,461.
 
 As
of March 7,
2005 the
number of shares of Common Stock, $.01 par value, outstanding was
30,023,202 .
 
 Documents
incorporated by reference: Proxy Statement for the registrant’s 2005 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange Commission
not later than 120 days after December 31, 2004, is incorporated by reference in
Part III herein.
 
  2
  **Part
I**
 
 **Item
1. BUSINESS**
 
 **General**
  Theragenics
Corporation ®  (“TheragenicsTM”
or the “Company”), incorporated under Delaware law in 1981, is the manufacturer
of TheraSeed ® , a
rice-sized, FDA-cleared device used to treat solid localized tumors, primarily
prostate cancer , with a
one-time, minimally invasive procedure. TheragenicsTM is the world’s largest
producer of palladium-103, the radioactive isotope that supplies the therapeutic
radiation for its TheraSeed ® device.
Physicians, hospitals and other healthcare providers, primarily located in the
United States, utilize the TheraSeed ® device.
The TheraSeed ® device
has also been approved for marketing throughout the member countries of the
European Union by obtaining its CE Mark. Sales of the TheraSeed ® device
in Europe have not been significant. The majority of sales are channeled through
third-party distributors. The Company also sells its TheraSeed ® devices
directly to physicians.
  The
Company’s website address is http://www.theragenics.com. The
Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports are available free of
charge through its website by clicking on the “Investor Relations” page and
selecting “SEC Filings.” These reports will be available as soon as reasonably
practicable after such material has been electronically filed with, or furnished
to, the SEC. These reports are also available through the SEC’s website at http://www.sec.gov. The
information on these websites and the information contained therein or connected
thereto are not intended to be incorporated by reference into this Form
10-K.
 
 Early in
2003 the Company diversified its product line with the purchase of the U.S.
iodine-125 prostate brachytherapy business of BEBIG Isotopen-und Medizintechnik
GmbH (BEBIG), formerly distributed by Isotope Products Laboratories (both
subsidiaries of a publicly traded German company, Eckert & Ziegler AG). The
purchase gives TheragenicsTM exclusive U.S. manufacturing and distribution rights
to an FDA-cleared iodine-125-based medical device for the treatment of prostate
cancer. TheragenicsTM began distribution of the iodine-125-based medical device
early in 2003, and subsequently began to produce I-Seed (the TheragenicsTM
iodine-125-based medical device) early in 2004, utilizing the automated
production equipment procured in the business acquisition. The Company sells the
I-Seed device directly to physicians, hospitals and other healthcare providers.
The non-exclusive distributors of the TheraSeed ® device
have no distribution rights for the I-Seed device. Non-exclusive rights to
distribute the TheraSeed ® device
in Europe were granted to BEBIG as part of the transaction. The Company believes
that the ability to provide both TheraSeed ® and
I-Seed devices enhances the Company’s ability to market to direct customers who
seek a single source for both palladium-103 and iodine-125 brachytherapy seeds.
The product line and equipment purchase will not affect the Company’s existing
non-exclusive distribution agreements for the TheraSeed ® device.
 
 From May
1997 to August 2000, substantially all TheraSeed ® devices
were sold through an exclusive distributor. Notice of termination of that
exclusive distribution agreement was received in August 2000, ending
TheragenicsTM contractual requirement to use an exclusive distributor. The
contract was subsequently terminated in January 2001. The Company currently
sells its TheraSeed ® devices
directly to physicians and through two non-exclusive third party distributors, a
reduction from the four in place at the beginning of 2003 **.** During
2003, one of the non-exclusive distributors of the TheraSeed ® device
acquired two of **** the other
three non-exclusive distributors of the TheraSeed ® device.
One of the remaining two distributors has exercised its option to extend its
distribution agreement with the Company through December 2006. The domestic and
international distribution agreements with the other distributor allow each
party the right to give notice of non-renewal of the agreements at the end of
December 2004, which would be effective December 31, 2005. During December 2004,
the Company was notified by this distributor that it would not be renewing its
distribution agreements, and accordingly such agreements would terminate
effective December 31, 2005.
 
 3
 
 
 In 1998
the Company received regulatory approval for the marketing of the
TheraSeed â device
throughout the member countries of the European Union by obtaining its CE Mark.
Sales of the TheraSeed â device
in Europe were not significant in any of the three years in the period ended
December 31, 2004.
 
 The U.S.
Department of Energy (DOE) has granted TheragenicsTM access to unique DOE
technology, known as plasma separation process or PSP, for use in production of
isotopes, including palladium-102 (the “PSP Operation”). The Company has
constructed a facility in Oak Ridge, Tennessee to house the equipment,
infrastructure and work force necessary to support the production of isotopes,
including palladium-102, using this DOE technology. The building and the PSP
became operational during the latter half of 2002. The Company also has access
to and has made investments in other unique DOE resources.
 
 In
connection with the Company’s ongoing program targeted at diversifying its
future revenue stream, the Company continues to explore new applications for PSP
technology. Among other things, the PSP technology enables the Company to
conduct feasibility runs designed to validate isotope usage in various diverse
industries and potential markets. The
Company is active in the Federal budget process, and is working to ensure that
the PSP's capabilities are known to Federal agencies such as the Departments of
Defense and Energy.
 
 During
2004 the Company’s Oak Ridge operations enriched palladium-102, which can be
activated in a nuclear reactor to produce palladium-103. The enriched
palladium-102, along with access to specialized reactor and related
capabilities, could potentially supply the palladium-103 radioisotope to support
TheraSeed ® production, if necessary. In addition, the production of palladium-102 allowed
the Company to study the PSP and its interaction with palladium-102 in order to
calibrate the PSP and determine predictable yields generated by the PSP.
 
 The
Company’s diversification program also includes a clinical trial using a
palladium-103 device, called the TheraSource ® Intravascular Brachytherapy System, designed to prevent restenosis or
renarrowing of arteries following treatment of
peripheral vascular disease by percutaneous transluminal angioplasty. Following
the approval of the Investigational Device Exemption granted by the U. S. Food
and Drug Administration (FDA) in August 2002 to initiate the TheraP clinical
trial, TheragenicsTM began a clinical trial using a palladium-103 device (patent
pending) early in 2003. TheragenicsTM closed enrollment in the TheraP trial early
in the second quarter of 2004 at 20 patients. Eighteen patients have progressed
to the six-month endpoint and two patients have elected to discontinue follow-up
in the trial. None of the twenty patients treated with the
TheraSource ® device
has experienced a device-related adverse event. The Company is currently
assessing the results of the trial to determine the most appropriate course of
action going forward.
 
 During
the second quarter of 2004, the Company filed an Investigational Device
Exemption (IDE) with the FDA to begin a human clinical trial for the
TheraSight ® Ocular
Brachytherapy System, a device intended to treat exudative (wet) age-related
macular degeneration (AMD), a disease that leads to loss of eyesight and in some
cases complete blindness. The IDE was approved by the FDA on July 29, 2004, and
enrollment commenced in the fourth quarter of 2004 to test the safety and
feasibility of the TheraSight ® device.
The Company has patents pending on the TheraSight ® device
and plans to run the trial at six separate clinical sites and expects to treat
approximately 30 patients. The first three patients were treated in the
TheraSight ® Trial at
Emory Eye Center in Atlanta, Georgia.
 
 4
 
 
 The
Company has also identified potential opportunities, utilizing its cyclotrons,
for production of radiochemical products, which are typically used in medical
nuclear imaging procedures. During 2004, the Company began regular shipments to
customers of two radiochemicals, produced on the Company’s cyclotrons. The
Company has received a Drug Master File for these products from the FDA, which
will potentially allow access to a wider range of customers. The Company also
continues to assess the markets for other radiochemicals it is able to produce
using the existing cyclotrons.
 
 The
Company is also searching for, reviewing and evaluating external opportunities
for diversification in the form of joint ventures, partnerships, and/or
acquisitions of technologies, products and companies.
 
 **Industry
Overview**
 
 *Prostate
Cancer*
 
 Excluding
skin cancer, prostate cancer is the most common form of cancer, and the second
leading cause of cancer deaths, in men. The American Cancer Society estimates
there will be about 232,090 new cases of prostate cancer diagnosed and an
estimated 30,350 deaths associated with the disease in the United States during
2005.
 
 Prostate
cancer incidence and mortality increase with age. Prostate cancer is found most
often in men who are over the age of 50. More than seven out of ten men
diagnosed with prostate cancer are over the age of 65. According to the American
Cancer Society, approximately one man in six will be diagnosed with prostate
cancer during his lifetime, although only one man in thirty-three will die of
this disease.
 
 Weak or
interrupted urine flow, an inability to urinate, frequent urination and pain
during urination can all be signs of prostate cancer. Additional symptoms can
include blood in the urine, continual lower back pain in the pelvis or pain in
the upper thighs. However, it should be noted that these symptoms are
nonspecific and can be caused from non-malignant conditions.
 
 According
to the American Cancer Society, approximately 86% of all prostate cancers are
found in the local and regional stages (local means it is still confined to the
prostate; regional means it has spread from the prostate to nearby areas, but
not to distant sites such as other organs). The 5-year survival rate for men
with prostate cancers found in the local and regional stages is nearly 100%.
According to the American Cancer Society, the survival rate for all stages of
prostate cancer combined has increased from 67% to 97% over the past 20 years.
 
 In
addition to age, other risk factors are linked to prostate cancer, such as
genetics. Men who have relatives that have been affected, especially if the
relatives were young at diagnosis, have an even higher risk of contracting the
disease. Researchers have discovered changes in certain genes, influenced by DNA
mutations inherited from a parent, may cause some men to be more inclined to
develop prostate cancer. It has also been suggested that environmental factors
such as exposure to cancer-causing chemicals or radiation may cause DNA
mutations in many organs, but this theory has not been confirmed.
 
 Another
factor that may contribute to prostate cancer is diet. A diet high in fat may
play a part in causing prostate cancer. The American Cancer Society suggests
that Lycopenes, found in vegetables and certain fruits such as tomatoes,
grapefruit and watermelon, and the mineral selenium found in fish, meat,
poultry, cereals and vegetables such as mushrooms and asparagus, seem to lower
prostate cancer risk. An increase in prostate cancer may also be related to a
diet high in calcium and low in fructose (fruit sugar).
 
 5
 
 The
prostate is a walnut-sized gland surrounding the male urethra, located below the
bladder and adjacent to the rectum. The two most prevalent prostate diseases are
benign prostatic hyperplasia (BPH) and prostate cancer. BPH is a non-cancerous
enlargement of the innermost part of the prostate. Prostate cancer is a
malignant tumor that begins most often in the periphery of the gland and, like
other forms of cancer, may spread beyond the prostate to other parts of the
body.
 
 The
American Cancer Society recommends that men without symptoms, risk factors and
who have a life expectancy of at least ten years, should begin regular annual
medical exams at the age of 50, and believes that health care providers should
offer as part of the exam the prostate-specific antigen (PSA) blood test and a
digital rectal examination (DRE). The PSA blood test determines the amount of
prostate specific antigen present in the blood. PSA is found in a protein
secreted by the prostate, and elevated levels of PSA can be associated with
either prostatitis (a noncancerous inflammatory condition) or a proliferation of
cancer cells in the prostate. Transrectal ultrasound tests and biopsies are
typically performed on patients with elevated PSA readings to confirm the
existence of cancer.
 
 A tumor
found by a prostate biopsy is usually assigned a grade by a pathologist. The
most common prostate cancer grading system is called the Gleason grading system.
A Gleason score, which ranges from 2 to 10, usually is used to estimate the
tumor’s growth rate. Typically, the lower the score, the slower the cancer
grows. Most localized cancers of the prostate gland are associated with an
intermediate score ranging from Gleason scores 4 through 6.
 
 Staging
is the process of determining how far the cancer has spread. The treatment and
recovery outlook depend on the stage of the cancer. The TNM system is the
staging process used most often. The TNM system describes the extent of the
primary tumor (T stage), whether the cancer has spread to nearby lymph nodes (N
stage), and the absence or presence of distant metastasis (M stage). The TNM
descriptions can be grouped together with stages labeled 0 through IV (0-4). The
higher the number, the further the cancer has spread. The following table
summarizes the various stages of prostate cancer.
 
 Stages
    Characteristics
      of prostate cancerT1
      or T2
    Localized
      in the prostateT3
      or T4
    Locally
      advancedN+
      or M+
    Spread
      to pelvic lymph nodes (N+)
      or
      distant organs (M+)
 
 *Treatment
Options*
 
 In
addition to brachytherapy, treatment options for localized prostate cancer
include radical prostatectomy (RP), external beam radiation therapy (EBRT) which
includes intensity modulated radiation therapy (IMRT), cryosurgery, hormone
therapy, watchful waiting, and finasteride, a drug commonly prescribed to treat
benign enlargement of the prostate and male baldness. Some of these therapies
may be combined to address a specific cancer stage or patient need. For example,
the TheraSeed Ò device
has been used in combination with EBRT to treat some locally advanced cases of
prostate cancer. When the cancerous tissue is not completely eliminated, the
cancer typically returns to the primary site, often with metastases to other
areas. The following is a summary of treatment options for prostate cancer other
than seeding.
 
 *Radical
Prostatectomy* is the
most common surgical procedure. Radical Prostatectomy (RP) involves the complete
removal of the prostate gland and has been used for over 30 years in treating
early-stage, localized tumors. RP typically requires a three-day average
hospital stay and a lengthy recovery period (generally three to five weeks).
Possible side effects include impotence and incontinence.
 
 6
 
 
 *External
Beam Radiation Therapy* (EBRT)
involves directing a beam of radiation at the prostate gland from outside the
body to destroy tumorous tissue and has been a common technique for treating
many kinds of cancer since the 1950s. EBRT has typically been reserved for
early-stage prostate cancer in locally advanced cases where the patient is an
inappropriate surgical risk. Patients are usually treated five days per week in
an outpatient center over a period of six to eight weeks. Rectal complications
resulting from damage to the rectal wall caused by the radiation beam as it
travels to the prostate are the most common side effects. Other possible side
effects also include incontinence and impotence, but these side effects
generally occur with less frequency than they do following RP.
 
 Newer
forms of external beam radiation include three-dimensional conformal radiation
therapy (3DCRT), Intensity Modulated Radiation Therapy (IMRT) and conformal
proton beam radiation. Three-dimensional conformal radiation utilizes
computerized mapping and a fitted plastic body mold to keep the patient still so
the radiation can be aimed more accurately at the prostate. The objective of
3DCRT is to minimize the risk of damage to healthy tissue caused by radiation.
However, long-term results are needed to confirm this theory. Intensity
Modulated Radiation Therapy (IMRT) is an advanced form of 3D therapy. In
addition to aiming beams from several directions, the intensity (or strength) of
the beams can be adjusted to decrease the dose of radiation reaching the
sensitive normal tissues while delivering a uniformly high dose to the cancer.
Conformal proton radiation therapy uses a similar approach, but instead of using
x-rays, this technique focuses proton beams on the cancer. Protons typically
cause little damage to tissues and may be able to deliver more radiation to the
prostate. While preliminary results are promising, proton beam radiation is
expensive and there are very few proton beam devices in the U.S. at this
time.
 
 *Cryosurgery* involves
placing several hollow probes (needles) into the prostate using transrectal
ultrasound and killing the cancer by freezing the entire prostate. Patients
usually remain in the hospital for one to two days. There will be some bruising
and soreness of the area where the probe was inserted. Side effects of
cryosurgery may include damage to nerves near the prostate that may cause
impotence and incontinence, damage to bladder and intestines, and a fistula (an
abnormal opening) between the rectum and bladder. Current techniques using
ultrasound guidance have only been available for a few years and outcomes of
long-term (10- to 15-year) follow-up must still be collected and analyzed. For
this reason, according to the American Cancer Society, most doctors do not
include cryosurgery among the options they routinely consider for initial
treatment of prostate cancer.
 
 *Ancillary
Therapies,* primarily consisting of hormone therapy and chemotherapy, are used to slow the
growth of cancer and reduce tumor size, but are generally not intended to be
curative. Ancillary therapies are often used during advanced stages of the
disease to extend life and relieve symptoms. Side effects of hormonal drug
therapy include increased development of breasts, impotence and decreased
libido. In addition, many hormone pharmaceuticals artificially lower PSA levels
in patients, which can interfere with staging the disease and monitoring its
progress. Side effects of chemotherapy include nausea, hair loss and fatigue.
Drug therapy and chemotherapy require long-term, repeated administration of
medication on an outpatient basis.
 
 *Watchful
Waiting,* while
not a treatment, is recommended by some physicians in certain circumstances
based on the severity and growth rate of the disease, as well as on the age and
life expectancy of the patient. The aim of watchful waiting is to monitor the
patient, treat some of the attendant symptoms and determine when more active
intervention is required. Watchful waiting requires periodic physician visits
and PSA monitoring.
 
 In
addition to the treatment options described above, other forms of treatment and
prevention may be developed and tested in clinical settings.
 
 7
 
 **The
TheragenicsTM Solution**
 
 TheragenicsTM
produces TheraSeed Ò , an
FDA-cleared device for treatment of all solid localized tumors and currently
used principally for the treatment of prostate cancer. In the prostate
application, TheraSeed Ò devices
are implanted throughout the prostate gland in a minimally invasive surgical
technique, with transrectal ultrasound guidance. The radiation emitted by the
seeds is contained within the immediate prostate area for the purpose of killing
the tumor while attempting to spare surrounding organs of significant radiation
exposure. The seeds, whose capsules are biocompatible, remain in the prostate
after delivering their radiation dose. The TheraSeed Ò device
is best suited for solid localized tumors.
 
 Management
believes the TheraSeed Ò device
offers significant advantages over RP and EBRT. Recent multi-year clinical
studies indicate that seeding offers success rates for early-stage prostate
cancer that are comparable to or better than those of RP or EBRT and is
associated with reduced complication rates. In addition, the
TheraSeed Ò treatment is a one-time outpatient procedure with a typical two to three day
recovery period. By comparison, RP is an inpatient procedure typically
accompanied by an average three day hospital stay and a three to five week
recovery period, and EBRT involves six to eight weeks of daily radiation
treatments.
 
 The
TheraSeed Ò device
is a radioactive "seed" approximately 4.5 millimeters long and 0.8 millimeters
wide, or roughly the size of a grain of rice. Each seed consists of
biocompatible titanium that encapsulates the radioactive substance
palladium-103. The half-life of palladium-103, or the time required to reduce
the emitted radiation to one-half of its initial level, is 17 days. The
half-life characteristics result in the loss of almost all radioactivity in less
than four months.
 
 The
Company also offers the I-Seed device. This iodine-based device was acquired as
part of the purchase of the U.S. iodine-125 prostate brachytherapy business from
BEBIG during 2003. While Management believes that palladium-103 continues to
have certain advantages over iodine-125, including (i) higher dose rates; (ii) a
shorter half life, which shortens the duration of some radiation induced side
effects by two-thirds; and (iii) reduced radiation exposure to medical personnel
in treatment follow-up, the purchase of the iodine product line enables the
Company to compete more effectively for those direct customers who prefer to buy
both seeds from a single source. The non-exclusive distributors of the
TheraSeed ® device
have no distribution rights for the I-Seed device.
 
 The
I-Seed device is also a radioactive "seed" approximately 4.5 millimeters long
and 0.8 millimeters wide, or roughly the size of a grain of rice. Each seed
consists of biocompatible titanium that encapsulates a ceramic substrate
containing the radioactive substance iodine-125. The half-life of iodine-125, or
the time required to reduce the emitted radiation to one-half of its initial
level, is approximately 60 days. The half-life characteristics result in the
loss of almost all radioactivity in approximately 20 months.
 
 *Treatment
Protocol*
 
 Prostate
cancer patients electing seed therapy first undergo a transrectal ultrasound
test or CT scan, which generates a two-dimensional image of the prostate. With
the assistance of a computer program, a three-dimensional treatment plan is
created that calculates the number and placement of the seeds required for the
best possible distribution of radiation to the prostate.
 
 Once the
implant model has been constructed, the procedure is scheduled and the seeds are
ordered. The number of seeds implanted normally ranges from 50 to 150, but the
number of seeds varies with the size of the prostate. The procedure is usually
performed under local anesthesia in an outpatient setting. A transrectal
ultrasound probe is first positioned in the rectum to guide needle placement and
seed location. Correct needle placement is facilitated by a template, or grid,
that covers the perineum (the area between the scrotum and rectum through which
the needles are inserted). This template is attached to the transrectal
ultrasound probe. Implant needles loaded with seeds are assigned to the
appropriate template holes as indicated in the treatment plan. Each needle is
guided through the template and then through the perineum to its predetermined
position within the prostate under direct transrectal ultrasound visualization.
The seeds are implanted as the needle is withdrawn from the prostate. When all
seeds have been inserted, seed placement is verified through a transrectal
ultrasound image, CT scan, fluoroscope or MRI. An experienced practitioner
typically performs the procedure in approximately 45 minutes, with the patient
often returning home the same day.
 
 8
 
 
 Seeding
has been used as a treatment for prostate cancer for more than 20 years. Twenty
years ago, seeds containing the radioactive isotope iodine-125 were implanted in
prostate tumors under open surgery. However, this technique fell into disfavor
because the seeds were often haphazardly arranged resulting in radiation not
reaching all of the targeted cancerous prostate tissue. Compounding this was the
fact that often an unintended radiation dose was delivered to healthy
surrounding tissues, particularly the urethra and rectum. Clinical results
indicate that the computer modeling, advanced imaging and other techniques used
in seeding today have significantly ameliorated these drawbacks.
 **
 *Clinical
Results*
 
 *Strong
Efficacy Results* .
Clinical data indicates that seeding offers success rates for early-stage
prostate cancer treatment that are comparable to or better than those of radical
prostatectomy (RP) or external beam radiation therapy (EBRT). A number of
published studies on the use of seeding in the treatment of early-stage prostate
cancer have been very positive.
 
 A
twelve-year study published in the Volume 4, Issue 1 (2005) edition of the
journal *Brachytherapy,* revealed
that high-risk prostate cancer patients treated with brachytherapy using
palladium-103 experienced greater success than patients treated with radical
prostatectomy. The study was conducted by Dr. Jerrold Sharkey of the Urology
Health Center in New Port Richey, Florida, Dr. Alan Cantor, et al and
retrospectively reviewed 1,707 prostate cancer patients, treated from 1992 to
2004, 80% of whom were treated with brachytherapy and 20% of whom were treated
with surgery. The study reported that high-risk patients treated with seeding
showed an 88% cure rate compared to a 43% cure rate obtained from surgery at 12
years. The results for intermediate-risk patients reflected a success rate of
89% with seed therapy compared to a 58% success rate with surgery at 12 years
and for low-risk patients the success rate for seeding was 99% compared to a 97%
success rate with surgery at 10 years.
 
 A
twelve-year clinical study published in the 2004 Supplement of *International
Journal of Radiation Oncology, Biology and Physics* ,
reported that the relative survival rate is 84% for low risk cancer patients,
78% for intermediate risk cancer patients and 68% for high risk cancer patients.
The study was conducted by Dr. Lou Potters, et al. of the New York Prostate
Institute and included 1,504 patients treated with brachytherapy between 1992
and 2000.
 
 A study
published in the January 2004 issue of *International
Journal of Radiation Oncology, Biology and Physics* ,
reported that brachytherapy, radical prostatectomy, high-dose external beam
radiation therapy and combined therapies produced similar cure rates. The study
was conducted by Dr. Patrick Kupelian, Dr. Louis Potters, et al. and included
2,991 patients with Stage T1 or T2 prostate cancer. Of these patients, 35% of
patients underwent surgery, 16% received low-dose EBRT, 10% received high-dose
EBRT, 7% received combination therapy and 32% received brachytherapy. After five
years, the biochemical relapse-free survival rate was 83% for brachytherapy, 81%
for radical prostatectomy, 81% for high-dose EBRT, 77% for combination therapy
and 51% for low-dose EBRT.
 
 In the
June 2002 issue of *Current
Science, Inc.* , a study
by Dr. Jerrold Sharkey, Dr. Alan Cantor, et al. compared the effectiveness of
brachytherapy and radical prostatectomy in 1,305 men with stage T1 and T2
prostate cancer. From 1993 to 2002, data from the treated patients were reviewed
and classified by initial PSA level and Gleason scores. According to the
publication, “The results failed to show any superiority of prostatectomy over
brachytherapy with palladium-103 (the TheraSeed ® device)
with respect to time until relapse indicated by PSA level increase. In fact, any
differences between treatments favor brachytherapy, particularly for
intermediate and high-risk groups.”
 
 9
 
 
 A
nine-year clinical study published in the March 2000 issue of *International
Journal of Radiation Oncology, Biology and Physics* ,
reported that 83.5% of the patients treated with the TheraSeed ® device
were cancer-free at nine years. The study was conducted by Dr. John Blasko of
the Seattle Prostate Institute and included 230 patients with clinical stage T1
and T2 prostate cancer. Only 3% experienced cancer recurrence in the prostate.
 
 Seeding
treatment in combination with EBRT has also recorded impressive results in the
treatment of higher risk prostate cancer patients.
 
 An
eight-year clinical study published in the January 2005 issue of *International Journal of Radiation Oncology, Biology and
Physics* ,
reported biochemical progression-free survival rates of 98.2%, 98.4% and 88.2%
for low-, intermediate-, and high-risk patients, respectively, who underwent
brachytherapy using either palladium-103 or iodine-125 and supplemental EBRT or
androgen deprivation therapy (ADT). The study was conducted by Dr. Gregory
Merrick, et al., of the Schiffler Cancer Center and included 668 patients who
underwent brachytherapy between April 1995 and January 2001 followed by EBRT
and/or ADT.
 
 Results
from a 10-year study conducted by Dr. Datolli and Dr. Wallner published in the *International
Journal of Radiation Oncology,*  *Biology
and Physics* in
September 2002, were presented at the October 2002 American Society of
Therapeutic Radiology and Oncology (ASTRO) conference confirming the
effectiveness of the TheraSeed ® device
in patients with aggressive cancer who previously were considered poor
candidates for seeding. The 10-year study was comprised of 175 patients with
Stage T2a-T3 prostate cancer treated from 1991 through 1995. Of these patients
79 percent remained completely free of cancer without the use of hormonal
therapy or chemotherapy.
 
 In their
paper published for the *Seminars
in Surgical Oncology 1997,* Drs.
Blasko, Ragde, Grimm, et al. ** presented
an eight-year actuarial local and distal disease-free rate of 91% and 83%,
respectively for 231 patients who were considered to represent higher risks of
locally advanced prostate cancer and were treated with a combination of
palladium-103 or iodine-125 seeding and a modified dose of EBRT.
 
 A study
by Dr. Michael Dattoli of University Community Hospital, Tampa, Florida, and Dr.
Kent Wallner of Memorial Sloan-Kettering Cancer Center, New York, New York,
published in the *International
Journal of Radiation Oncology, Biology and Physics* in July
1996 found a three-year actuarial freedom from biochemical failure (based on PSA
scores) of 79% among 73 patients with clinically localized, high risk prostate
cancer who were treated with EBRT in combination with palladium-103. This
compares favorably to results reported for patients treated with conventional
dose EBRT alone. These locally advanced cases are significant because typical RP
protocols would not classify them as suitable for surgical
treatment.
 
 *Reduced
Incidence of Side Effects.* Because
the TheraSeed Ò device
delivers a highly concentrated and confined dose of radiation directly to the
prostate, healthy surrounding tissues and organs are typically spared excessive
radiation exposure. This typically results in fewer and less severe side effects
and complications than may be incurred with other conventional therapies.
 
 A
five-year study, using either palladium-103 or iodine-125 seed devices,
published in the August 2001 edition of *International
Journal of Radiation Oncology, Biology and Physics* promotes
brachytherapy treatment for early-stage prostate cancer in men under 65 while
indicating lower incidence of side effects such as incontinence and impotence.
According to Dr. Gregory Merrick of Schiffler Cancer Center in Wheeling, West
Virginia, the findings from the study involving 76 patients ranging in ages
between 48 and 62 years who received seed implants between the period of 1995 to
1999 are encouraging “because it shows younger men that they can survive cancer
with a significantly lower incidence of side effects.”
 
 10
 
 Doctors
Gregory S. Merrick, Kent E. Wallner and Wayne M. Butler, in their paper
“Permanent Interstitial Brachytherapy for the Management of Carcinoma of the
Prostate Gland”, published in the *Journal
of Urology* in May
2003, summarized the permanent prostate brachytherapy literature, including
biochemical outcomes, quality of life parameters and areas of controversy. The
result of this study included the statement that “Using various planning and
intraoperative techniques the majority of the brachytherapy literature
demonstrates durable biochemical outcomes for patients with low, intermediate
and high risk features.” The paper concluded that continued refinements in
brachytherapy planning and implementation techniques, postimplantation
evaluation and continued elucidation of the etiology of urinary, bowel and
sexual dysfunction should result in further improvements in biochemical and
quality of life outcomes.
 
 *Lower
Treatment Cost.* The
total one-time cost of seeding is typically lower than the cost of RP, which
usually requires a three-day average hospital stay, and EBRT, which requires a
six-to-eight week course of treatment.
 
 **Production**
 
 With the
exception of rhodium-103 (Rh-103), all raw materials used in the production of
the TheraSeed ® and
I-Seed devices are relatively inexpensive and readily available from third party
suppliers. Rhodium-103 is readily available on the open market.
 
 Palladium-103
is a radioactive isotope that can be produced by neutron bombardment of
palladium-102 in a nuclear reactor, or by proton bombardment of Rh-103 in a
cyclotron. Following the production of palladium-103 from Rh-103 in a cyclotron,
the palladium-103 is harvested from the cyclotron and moved through a number of
proprietary production processes until it reaches its final seed
form.
 
 The
Company has produced palladium-103 using Company-owned cyclotrons since 1993.
The Company currently has fourteen cyclotrons in production, and has no current
plans to purchase additional cyclotrons. The Company's cyclotrons were designed,
built, installed and tested by a company specializing in the construction of
such equipment.
 
 Cyclotron
operations constitute only one component of the TheraSeed Ò device
manufacturing process. Because the production of the TheraSeed Ò device
is highly sensitive and labor intensive, Management has been focusing attention
and effort on automating and otherwise improving aspects of the Company's
manufacturing process. Certain portions of the Company’s production processes
were automated during the past seven years. Through automation, Management
believes it can continue to improve efficiency, further reduce radiation
exposure to personnel and provide additional production capacity for the
TheraSeed Ò and
I-Seed devices.
 
 The
Company began production of the I-Seed product early in 2004. The automated
production equipment was acquired as part of the purchase of the U.S. iodine-125
prostate brachytherapy business from BEBIG during 2003.
 
 Since
1997, the Company’s quality control system related to its medical device
manufacturing has been certified as meeting all the requirements of the
International Organization for Standards’ ISO 9001/EN46001 Quality System
Standard.
 
 
 11
 
 The
Company constructed a facility in the Oak Ridge, Tennessee area to house the
equipment, infrastructure and work force necessary to support the production of
isotopes, including palladium-103, using unique plasma separation process
( PSP )
technology being leased from the U.S. Department of Energy. PSP technology is a method of separating relatively large quantities of specific
non-radioactive isotopes from specific elements. The PSP technology enables
current and future feasibility runs designed to validate isotope usage in
various diverse markets and industries. Although the PSP technology was
initially acquired to allow for increased manufacturing capacity of
palladium-103 to support TheraSeed ® production and other R&D activities using palladium-103, the technology may
allow for expanded use of palladium-103 or other isotopes in other applications.
 
 **Marketing**
 
 From May
1997 until August 2000, Indigo Medical, Inc. (Indigo), a Johnson and Johnson
Company, held the exclusive worldwide rights to market and sell the
TheraSeed ® device
for prostate cancer under a Sales and Marketing Agreement with
Theragenics TM (the
“Agreement”). Under the Agreement, Indigo had the responsibility for the
exclusive marketing and training related to the TheraSeed ® device.
In August 2000 Indigo exercised its option and gave notice of termination of the
Agreement. As a result of Indigo’s notice of termination, Theragenics regained
the right to directly market and distribute its TheraSeed ® device
for the treatment of prostate cancer to physicians and third-party distributors.
Subsequent to Indigo’s notice of termination, the Company executed non-exclusive
distribution agreements with four companies for the distribution of the
TheraSeed ® device.
The non-exclusive distribution agreements for the distribution of the
TheraSeed ® device
gave each distributor the right to distribute the TheraSeed ® device
in the U.S., Canada and Puerto Rico for the treatment of prostate cancer and
other solid localized cancerous tumors. Two of these non-exclusive agreements
gave the distributors the option to distribute the TheraSeed ® device
internationally.
 
 Currently,
the Company has non-exclusive distribution agreements in place with two
companies for the distribution of the TheraSeed â device,
a reduction from the four distributors in place at the beginning of
2003. **** The
Company’s current two distributors for TheraSeed ® are C.R.
Bard and Medi-Physics, Inc. (formerly d/b/a Nycomed Amersham and now part of
Oncura, a company formed by a merger of the brachytherapy business of Amersham
plc and Galil Medical Ltd. and referred to herein as “Oncura”). During 2003,
C.R. Bard acquired two of the other three non-exclusive distributors of the
TheraSeed ® device.
Total sales to the two existing and the two previous non-exclusive distributors
represented approximately 81%, 81% and 83% of product revenue for the years
ended December 31, 2004, 2003 and 2002, respectively, with sales to two of the
four non-exclusive distributors each exceeding 10% of total revenue for each
year. C.R. Bard, which accounts for the majority of distributor sales, has
exercised its option to extend its distribution agreement with the Company
through December 2006.  The
domestic and international distribution agreements with Oncura allow each party
the right to give notice of non-renewal of the agreements at the end of December
2004, which would be effective December 31, 2005. During December 2004, the
Company was notified by Oncura that it would not be renewing its distribution
agreements, and accordingly such agreements would terminate effective December
31, 2005
 
 Beginning
in 2002, the Company engaged marketing and advertising specialists with
experience in healthcare and direct-to-consumer marketing, and expects
direct-to-consumer activity to continue during 2005. The Company also expects to
continue other activities in an attempt to support its brand name and increase
demand for the TheraSeed ® device,
including advertising to physicians, clinical studies aimed at showing the
advantages of the TheraSeed ® device
in the treatment of prostate cancer, technical field support to
TheraSeed ® customers, and other customer service and patient information activities. During
2002, a small direct sales force comprising brachytherapy specialists was formed
to promote and support the TheraSeed ® brand.
This sales force was expanded during 2003 and 2004 and will continue to be
utilized during 2005.
 
 12
 
 
 During
2004, the Company entered into a three-year exclusive strategic alliance with
International Urology Network (IUN). This will provide group purchasing services
to over 3,500 of IUN’s community-based urologists for the Company’s
TheraSeed ® and
I-Seed devices. IUN is a diversified physician services organization
specializing in the support of community-based practices, offering its members a
variety of value-added services that enable practices to remain efficient,
effective, and to continue to deliver quality patient care.
 
 **Patents
and Licenses; Trade Secrets**
 
 The
Company holds nine United States patents directed to radiation delivery
devices for therapeutic uses, including palladium and iodine delivery devices,
processes for making such devices, and containers for storing and shipping such
devices, and has several additional United States patent applications pending
that also relate to this subject matter. The Company also has some corresponding
issued patents in Australia, Canada, Mexico and New Zealand, as well as
some corresponding pending patent applications in Australia, Canada, Japan, the
European Patent Office (representing up to 24 European Countries), New Zealand,
and South Africa, as well as one pending Patent Cooperation Treaty
patent application currently designating more than 120 countries. The Company
also has an issued United States patent relating to the use of
isotopes and isotopic compositions for secure identification of various articles
of commerce, as well as corresponding pending patent applications in Canada and
the European Patent Office. In addition, the Company has six
pending United States patent applications relating to other new
products and services related to the business of the Company. The
Company considers the ownership of patents important, but not necessarily
essential, to its operations. The Company also uses a strategy of
confidentiality agreements and trade secret treatment to provide primary
protection to a number of proprietary design modifications in the cyclotrons, as
well as various production processes.
 
 The
Company also holds a worldwide exclusive license from the University of Missouri
for the use of technology required for producing the TheraSphere Ò device.
TheragenicsTM holds the rights to all improvements developed by the University of
Missouri on this technology. The Company, in turn, sublicenses exclusive
worldwide rights to this technology and all improvements to Nordion
International, Inc. Pursuant to its licensing agreement with the University of
Missouri, the Company is obligated to pay the University the greater of a fixed
annual amount or a percentage of the gross sales amount derived from sales of
the TheraSphere Ò device.
 
 The
Company holds an exclusive license to patents for technology concerning methods
for delivery of the TheraSphere Ò device
in several countries, including the United States, Canada, Australia, Argentina,
South Africa and the countries of the European Patent Convention, and has an
exclusive license to some additional patent applications on file in other
countries, including Japan. The Company exclusively sub-licenses this technology
to Nordion International, Inc. for worldwide use.
 
 The
Company also relies to a significant degree on trade secrets, proprietary
know-how and technological advances that are either not patentable or which the
Company chooses not to patent. In particular, the Company has designed certain
modifications to its cyclotrons as well as various production processes that it
deems to be proprietary. The Company seeks to protect non-patented proprietary
information, in part, by confidentiality agreements with suppliers, employees
and consultants.
 
 **Seasonality**
 
 Although
effects from seasonality cannot be identified in relation to a specific quarter
or quarters, Management believes that holidays, major medical conventions and
vacations taken by physicians, patients and patients’ families, may have a
seasonal impact on sales for the TheraSeed ® and
I-Seed devices.
 
 13
 
 **Research
and Development**
 
 Research
and development (R&D) expenses were $9.6 million, $7.5 million, and $6.5
million in 2004, 2003 and 2002, respectively. R&D expenses have related
primarily to the peripheral vascular and macular degeneration programs, as well
as development efforts to improve the Company’s proprietary production
processes, and include the cost of palladium-103 utilized in R&D initiatives
(see Item 7 - “ *Management’s
Discussion and Analysis of Financial Condition and Results of Operations, 2004
compared to 2003 and 2003 compared to 2002”* ).
 
 **Competition**
 
 The
Company competes in a market characterized by technological innovation,
extensive research efforts and significant competition. In general, the
TheraSeed ® and
I-Seed devices compete with conventional methods of treating localized cancer,
including, but not limited to, radical prostatectomy (RP) and external beam
radiation therapy (EBRT) which includes intensity modulated radiation therapy
(IMRT), as well as competing permanent devices. RP currently represents the most
common medical treatment for early-stage, localized prostate cancer. EBRT is
also a well-established method of treatment and is widely accepted for patients
who represent a poor surgical risk or whose prostate cancer has advanced beyond
the stage for which surgical treatment is indicated. Management believes that if
general conversion from these treatment options (or other established or
conventional procedures) to brachytherapy treatment does occur, such conversion
will likely be the result of a combination of equivalent or better efficacy,
reduced incidence of side effects and complications, lower cost, other quality
of life issues and pressure by health care providers and patients. In addition,
a third-party study commissioned by the Company indicated the direct historical
correlation between fair reimbursement for brachytherapy and the number of
brachytherapy procedures performed (see also Item 7 “ *Management’s
Discussion and Analysis of Financial Condition and Results of Operations,
Medicare Developments”).*
 
 Several
companies produce and distribute palladium-103 and iodine-125 seeds, which
compete directly with the TheraSeed ® and
I-Seed devices. Management believes that TheragenicsTM has competitive advantages
over these companies including, but not limited to: (i) its proprietary
production processes that have been developed and patented; (ii) its record of
reliability and safety in its manufacturing operations; (iii) the time and
resources required for competitors’ production capabilities to ramp up to
commercial production on a scale comparable to TheragenicsTM; (iv) outsourcing of
the Company’s cancer information center to healthcare specialist, Telerx, a
subsidiary of Merck Pharmaceutical and (v) its direct sales force, the
non-exclusive distribution agreements that the Company currently has in place,
and the strategic alliance with International Urology Network, which allow it to
leverage multiple distribution channels and access multiple marketing approaches
and philosophies.
 
 At any
point in time, Management of TheragenicsTM and/or its non-exclusive distributors
may change their respective pricing policies for the TheraSeed ® or
I-Seed (in the case of TheragenicsTM) device in order to take advantage of market
opportunities or respond to competitive situations. Responding to market
opportunities and competitive situations, including but not limited to
competitor selling tactics, could have an adverse effect on the prices of the
TheraSeed ® or
I-Seed device and/or could have a favorable effect on market share and volumes,
while failure to do so could adversely affect market share and volumes although
per unit pricing could possibly be maintained.
 
 14
 
 In
addition to the competition from the procedures and companies noted above, many
companies, both public and private, are researching new and innovative methods
of preventing and treating cancer. In addition, many companies, including many
large, well-known pharmaceutical, medical device and chemical companies that
have significant resources available to them, are engaged in radiological
pharmaceutical and device research. These companies are located in the United
States, Europe and throughout the world. Significant developments by any of
these companies could have a material adverse effect on the demand for
Theragenics’TM products.
 
 **Government
Regulation**
 
 The
Company’s present and future intended activities in the development, manufacture
and sale of cancer therapy products are subject to extensive laws, regulations,
regulatory approvals and guidelines. Within the United States, the Company’s
therapeutic radiological devices must comply with the U.S. Federal Food, Drug
and Cosmetic Act, which is enforced by the FDA. The Company is also subject to
regulation by other governmental agencies, including the Occupational Safety and
Health Administration, the Environmental Protection Agency, the Nuclear
Regulatory Commission, and other federal and state agencies. As a result of
receiving its CE Mark during 1998, the Company must also comply with the
regulations of the Competent Authorities of the European Union for any
TheraSeed ® device
sold in the member nations of the European Union.
 
 The
Company is also required to adhere to applicable FDA regulations for Quality
System Regulation (previously known as Good Manufacturing Practices), including
extensive record keeping and periodic inspections of manufacturing
facilities.
 
 The
Company obtained FDA 510(k) clearance in 1986 to market the
TheraSeed ® device
for, in general, the treatment of localized solid tumors. A new 510(k) clearance
would be required for any modifications in the device or its labeling that could
significantly affect the safety or effectiveness of the original
product.
 
 The
Company’s manufacturing, distribution and security of radioactive materials are
governed by the State of Georgia in agreement with the Nuclear Regulatory
Commission (NRC). The users of the TheraSeed ® device
are also required to possess licenses issued either by the states in which they
reside or the NRC (depending upon the state involved and the production process
used). The Company’s expansion plans required the Company to secure additional
permits and licenses from a number of environmental, health and safety
regulatory agencies. To date, the Company has not experienced delays in
licensing any of its facilities or cyclotrons.
 
 The
Company is required under its radioactive materials license to maintain
radiation control and radiation safety personnel, procedures, equipment and
processes, and to monitor its facilities and its employees and contractors. The
Company is also required to provide financial assurance that adequate funding
will exist for end-of-life radiological decommissioning of its cyclotrons and
other areas of its property where radioactive materials are handled. The
Company’s decommissioning obligations will increase if production capacity is
expanded.
 
 The
Company is also subject to federal, state and local environmental regulations
ensuring the general protection of the environment. During 2003, the Company
became aware of the need for an Industrial Process Waste Water Permit from the
city of Buford, Georgia. The Company has taken all the required steps to obtain
this permit and expects to obtain this permit, but has also requested a
determination of non-applicability. The Company has been authorized by the City
to discharge industrial process waste water to the municipal sewage system while
the City considers its final decision.
 
 15
 
 
 The
Company transfers low-level radioactive waste to licensed commercial radioactive
waste treatment or disposal facilities for incineration or land disposal. The
Company provides training and monitoring of its personnel to facilitate the
proper handling of all materials.
 
 The U.S.
Department of Energy has granted TheragenicsTM access to unique DOE technology,
known as the PSP, for use in production of isotopes. U.S. Government Export
Control Laws and Regulations, and classification restrictions, govern the export
of certain products which can be produced in the PSP and the disclosure and
export of certain technology and capabilities associated with the PSP. As a
result of the sensitive nature of the PSP equipment and the specialized
technology involved, the DOE is able to terminate the Company's access in the
event of national emergency or in the interest of national defense, or require
the Company to perform programmatic work involving use of the technology for the
DOE in connection with carrying out its governmental mission. The Company would
be entitled to compensation in the event of termination in connection with
national emergency or defense or for programmatic use of the technology for the
DOE.
 
 
 **Employees**
 
 As of
December 31, 2004, the Company had 178 full time employees (including full time
temporary employees and executive personnel). Of this total, 138  were
engaged in the development and production of the Company’s products. The
remainder of the employees were engaged in sales, marketing and general
corporate activities. The Company’s employees are not represented by a union or
a collective bargaining agreement, and Management considers employee relations
to be good.
 
 **Item
2.  Properties**
 
 The
Company owns two manufacturing facilities located in Buford, Georgia. One
facility houses cyclotrons, raw material processing, assembly and shipping
operations. The second facility, which is adjacent to the first facility, houses
additional cyclotrons as well as research and development activities of the
Company. The Company also owns an administrative facility adjacent to its
production facilities in Buford.
 
 The
Company owns approximately 32 acres in Buford Georgia on which its two
manufacturing facilities and administration facilities are located. Land remains
available for future development adjacent to its current Buford location.
Management intends to use this land for long term expansion of its manufacturing
and support operations, if such expansion is required.
 
 The
Company leases 21 acres of land in the Oak Ridge, Tennessee area, on which it
has constructed a facility to house the equipment, infrastructure and workforce
necessary to support operations using technology leased from the U.S. Department
of Energy (see *Item
7* - *“Management’s
Discussion and Analysis of Financial Condition and Results of
Operations”* ).
 
 **Item
3.  Legal Proceedings**
 
 In
January 1999, the Company and certain of its officers and directors were named
as defendants in certain securities actions alleging violations of the federal
securities laws, including Sections 10(b), 20(a) and Rule 10b-5 of the
Securities and Exchange Act of 1934, as amended. These actions were consolidated
into a single action in the U.S. District Court for the Northern District of
Georgia. The complaint, as amended, purported to represent a class of investors
who purchased or sold securities during the time period from January 29, 1998 to
January 11, 1999. The amended complaint generally alleged that the defendants
made certain misrepresentations and
omissions in connection with the performance of the Company during the class
period and sought unspecified damages. On May 14, 1999 a stockholder of the
Company filed a derivative complaint in the Delaware Court of Chancery
purportedly on behalf of the Company, alleging that certain directors breached
their fiduciary duties by engaging in the conduct that was alleged in the
consolidated federal class action complaint. The derivative action was stayed by
the agreement of the parties. On July 19, 2000, the Court granted the Company’s
motion to dismiss the consolidated federal class action complaint for failure to
state a claim against the Company, and granted the plaintiffs leave to amend
their complaint. On August 21, 2000, the plaintiffs filed a second amended
complaint and on March 30, 2001, the Court denied the defendant’s motion to
dismiss the plaintiffs’ second amended complaint. The Court also denied the
Company’s motion for reconsideration. Subsequently, the Court certified the
class and the parties commenced discovery. Discovery was completed, and the
Company filed a motion for summary judgment on September 30, 2003.
  16
 
 
 On July
1, 2004, while the summary judgment motion was pending, the Company, the
Company’s directors and officers’ liability insurance carrier, and the
plaintiffs’ counsel reached an agreement to settle the consolidated federal
class action for an amount within the remaining limits of the Company’s
directors and officers’ liability insurance. The plaintiffs dismissed their
lawsuit against the defendants and, on behalf of the settling class, released
defendants from any and all liability arising from the incidents alleged in the
second amended complaint. The Company was not required to make any financial
contribution toward the settlement. On September 29, 2004, the Court gave final
approval to the settlement, with no objectors and no requests for exclusion. The
final approval allowed the right to appeal the final order until November 1,
2004. No appeals were made to the final order and the case was officially over
as of that date. The derivative lawsuit is still pending. Its status is
currently being reevaluated in light of the settlement of the securities class
action lawsuit.
 
 The
Company and one of its distributors, Oncura, are currently arbitrating claims
arising in connection with the Company’s non-exclusive distribution agreement
with Oncura. Oncura claims that the Company has not addressed Oncura’s concerns
about pricing by renegotiating pricing in good faith. Oncura is seeking a change
in the pricing terms of the distribution agreement through the arbitration
proceeding, and has indicated that it will seek to recover a portion of payments
previously made. The Company filed a counterclaim against Oncura alleging that
Oncura breached its obligations under the distribution agreement concerning
marketing brachytherapy products and the use of the Company’s trademarks. The
arbitrators have been appointed and the parties are conducting discovery.
Management believes that Oncura’s claims are without merit and is opposing them
vigorously. Management believes the Company has meritorious counter-claims
against Oncura.
 
 From time
to time the Company may be a party to claims that arise in the ordinary course
of business, none of which, in the view of Management, is expected to have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
 
 **Item
4.  Submission of Matters to a Vote of Security
Holders**
 
 The
Company did not submit any matter to a vote of its security holders during the
fourth quarter of calendar year 2004.
 
 **PART
II**
 
 **Item
5.** **Market
for Registrant's Common Equity and Related**
 **Stockholder
Matters**
 
 The
Company’s Common Stock, $.01 par value, (Common Stock) is traded on the New York
Stock Exchange (NYSE) under the symbol “TGX”. The high and low prices for the
Company’s Common Stock as reported on the NYSE for each quarterly period in 2004
and 2003 are as follows:
 
 17
 
 
 ****
    **High**
    **Low****2004**First
      Quarter
    $6.20
    $
      5.00Second
      Quarter
    5.42
    4.20Third
      Quarter
    4.60
    3.53Fourth
      Quarter
    4.35
    3.50**2003**First
      Quarter
    $4.71
    $
      3.12Second
      Quarter
    4.81
    3.55Third
      Quarter
    6.02
    4.05Fourth
      Quarter
    6.20
    4.31
 
 As of
March 7, 2005, the closing price of the Company's Common Stock was $3.28 per
share. Also, as of that date, there were approximately 530 holders of record of
the Company's Common Stock. The number of record holders does not reflect the
number of beneficial owners of the Company's Common Stock for whom shares are
held by depositary trust companies, brokerage firms and others.
 
 The
Company has a Stockholder Rights Plan (the “Rights Plan”), which contains
provisions designed to protect the Company’s stockholders. Pursuant to the
Rights Plan, each share of the Company’s Common Stock contains a share purchase
right (a “Right”). The Rights expire in February 2007, and do not become
exercisable unless certain events occur; including, the acquisition of, or
commencement of a tender offer for, 15% or more of the outstanding Common Stock.
In the event certain triggering events occur, including the acquisition of 20%
or more of the outstanding Common Stock, each Right that is not held by the 20%
or more stockholders will entitle its holder to purchase additional shares of
Common Stock at a substantial discount to then current market prices. The Rights
Plan and the terms of the Rights, which are set forth in a Rights Agreement
between the Company and SunTrust Bank, Atlanta, as Rights Agent, could add
substantially to the cost of acquiring the Company, and consequently could delay
or prevent a change in control of the Company.
 
 **Dividend
Policy**
 
 The
Company has never declared or paid a cash dividend on its Common Stock. It is
the present policy of the Board of Directors to retain all earnings to support
operations and to finance expansion. Consequently, the Board of Directors does
not anticipate declaring or paying cash dividends on the Common Stock in the
foreseeable future. In addition, the Company's current credit facility prohibits
the payment of dividends.
 
 **Item
6.  Selected Financial Data**
 
 The
selected financial data set forth below as of December 31, 2004 and 2003 and for
each of the three years in the period ended December 31, 2004, have been derived
from the financial statements of the Company included elsewhere herein, which
have been audited by Grant Thornton LLP, independent registered public
accountants. The selected financial data as of December 31, 2002, 2001 and 2000,
and for each of the two years in the period ended December 31, 2001, have been
derived from the financial statements of the Company, which have been audited by
Grant Thornton LLP but are not included herein. The selected financial data set
forth below should be read in conjunction with the financial statements of the
Company and related notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere
herein.
 
 18
 
 
 **Year
      Ended December 31,****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000****(Amounts
      in thousands, except per share data)****Statement
      of Earnings Data:**Product
      sales
    
    **$******
    ******33,030**
    
    $
    35,393
    
    $
    41,512
    
    $
    49,667
    
    $
    43,898Licensing
      fees
    
    
    **308**
    
    
    187
    
    
    352
    
    
    333
    
    
    106Total
      revenue
    
    
    **33,338**
    
    
    35,580
    
    
    41,864
    
    
    50,000
    
    
    44,004Cost
      of product sales
    
    
    **14,122**
    
    
    15,628
    
    
    14,677
    
    
    14,641
    
    
    13,578Gross
      profit
    
    
    **19,216**
    
    
    19,952
    
    
    27,187
    
    
    35,359
    
    
    30,426Selling,
      general and administrative
    
    
    **17,619**
    
    
    13,788
    
    
    12,845
    
    
    10,448
    
    
    6,872Research
      and development
    
    
    **9,583**
    
    
    7,467
    
    
    6,538
    
    
    2,671
    
    
    2,108Operating
      profit (loss)
    
    
    **(7,986**
    **)**
    
    (1,303
    )
    
    7,804
    
    
    22,240
    
    
    21,446Other
      income
    
    
    **1,134**
    
    
    894
    
    
    897
    
    
    1,408
    
    
    7,253Net
      earnings (loss) before income tax and cumulative effect of change in
      accounting principle
    
    
    **(6,852**
    **)**
    
    (409
    )
    
    8,701
    
    
    23,648
    
    
    28,699Income
      tax expense (benefit)
    
    
    **(2,542**
    **)**
    
    (319
    )
    
    3,145
    
    
    8,514
    
    
    10,019Earnings
      (loss) before cumulative effect of change in accounting
      principle
    
    
    **(4,310**
    **)**
    
    (90
    )
    
    5,556
    
    
    15,134
    
    
    18,680Cumulative
      effect of change in accounting principle
    
    
    -
    
    
    (222
    )
    
    -
    
    
    -
    
    
    -Net
      earnings (loss)
    
    **$**
    **(4,310**
    **)**
    $
    (312
    )
    $
    5,556
    
    $
    15,134
    
    $
    18,680Earnings
      (loss) per common shareBasic:Earnings
      (loss) before cumulative effect of change in accounting
      principle
    
    **$**
    **(0.14**
    **)**
    $
    (0.00
    )
    $
    0.19
    
    $
    0.51
    
    $
    0.63Cumulative
      effect of change in accounting principle
    
    
    **-**
    
    
    (0.01
    )
    
    -
    
    
    -
    
    
    -Net
      earnings (loss)
    
    **$**
    **(0.14**
    **)**
    $
    (0.01
    )
    $
    0.19
    
    $
    0.51
    
    $
    0.63Diluted:Earnings
      (loss) before cumulative effect of change in accounting
      principle
    
    **$**
    **(0.14**
    **)**
    $
    (0.00
    )
    $
    0.19
    
    $
    0.50
    
    $
    0.62Cumulative
      effect of change in accounting principle
    
    
    -
    
    
    (0.01
    )
    
    -
    
    
    -
    
    
    -Net
      earnings (loss)
    
    **$**
    **(0.14**
    **)**
    $
    (0.01
    )
    $
    0.19
    
    $
    0.50
    
    $
    0.62Weighted
      average common sharesBasic
    
    
    **29,971**
    
    
    29,902
    
    
    29,746
    
    
    29,627
    
    
    29,534Diluted
    
    
    **29,971**
    
    
    29,902
    
    
    29,994
    
    
    30,029
    
    
    29,962
 
  **December
      31,****2004**
    
    **2003**
    
    **2002**
    
    **2001**
    
    **2000****(In
      thousands)****Balance
      Sheet Data:**Cash
      and short-term investments
    
    **$**
    **28,450**
    
    $
    45,104
    
    $
    56,344
    
    $
    45,373
    
    $
    29,722Marketable
      securities
    
    
    **33,811**
    
    
    21,327
    
    
    11,977
    
    
    10,852
    
    
    15,459Property,
      plant and equipment, net
    
    
    **70,215**
    
    
    73,372
    
    
    74,050
    
    
    76,830
    
    
    75,632Total
      assets
    
    
    **148,678**
    
    
    152,789
    
    
    151,395
    
    
    144,007
    
    
    130,700Long-term
      debt, including current installments
    
    
    **-**
    
    
    -
    
    
    -
    
    
    -
    
    
    -Shareholders'
      equity
    
    **$**
    **138,060**
    
    $
    142,326
    
    $
    142,090
    
    $
    136,007
    
    $
    120,163
 
 19
 
 
 **THERAGENICS
CORPORATION** **®**
 
 **Item
      7.**
    **Management’s
      Discussion and Analysis of Financial Condition and**
      **Results
      of Operations**
 
 ***Overview***
 
 Theragenics
Corporation ® is the
manufacturer of TheraSeed ® , a
rice-sized, FDA-cleared device used to treat solid localized tumors, primarily
pr ostate
cancer, with a one-time, minimally invasive procedure. TheragenicsTM is the
world’s largest producer of palladium-103, the radioactive isotope that supplies
the therapeutic radiation for its TheraSeed ® device.
Physicians, hospitals and other healthcare providers, primarily located in the
United States, utilize the TheraSeed ® device.
The TheraSeed ® device
has also been approved for marketing throughout the member countries of the
European Union by obtaining its CE Mark. Sales of the TheraSeed ® device
in Europe have not been significant. The majority of sales are channeled through
two third-party distributors. The Company also sells its TheraSeed ® devices
directly to physicians.
  Early in
2003 the Company diversified its product line with the purchase of the U.S.
iodine-125 prostate brachytherapy business of BEBIG Isotopen-und Medizintechnik
GmbH (BEBIG), formerly distributed by Isotope Products Laboratories (both
subsidiaries of a publicly traded German company, Eckert & Ziegler AG). The
purchase gives TheragenicsTM exclusive U.S. manufacturing and distribution rights
to an FDA-cleared iodine-125-based medical device for the treatment of prostate
cancer. TheragenicsTM began distribution of the iodine-125-based medical device
early in 2003, and subsequently began to produce I-Seed (the TheragenicsTM
iodine-125-based medical device) early in 2004, utilizing the automated
production equipment procured in the business acquisition. The Company sells the
I-Seed device directly to physicians, hospitals and other healthcare providers. The
non-exclusive distributors of the TheraSeed ® device have no
distribution rights for the I-Seed device. Non-exclusive
rights to distribute the TheraSeed ® device
in Europe were granted to BEBIG as part of the transaction. The Company believes
that the ability to provide both TheraSeed ® and
I-Seed devices enhances the Company’s ability to market to direct customers who
seek a single source for both palladium-103 and iodine-125 brachytherapy seeds.
The product line and equipment purchase will not affect the Company’s existing
non-exclusive distribution agreements for the TheraSeed ® device.
 
 The U.S.
Department of Energy (DOE) has granted TheragenicsTM access to unique DOE
technology, known as plasma separation process or PSP, for use in production of
isotopes, including palladium-102 (the “PSP Operation”). The Company has
constructed a facility in Oak Ridge, Tennessee to house the equipment,
infrastructure and work force necessary to support the production of isotopes,
including palladium-102, using this DOE technology. The building and the PSP
became operational during the latter half of 2002. The Company also has access
to and has made investments in other unique DOE resources. Additional equipment
in the amount of $1.7 million, which is physically located within DOE facilities
in Oak Ridge, has not yet been placed in service and is recorded as
construction-in-progress on the accompanying balance sheets. Due to delays by
the DOE’s primary contractor in Oak Ridge, the Company currently anticipates
that this additional equipment will become operational during the first half of
2005. As a result of the sensitive nature of the PSP equipment and other unique
DOE resources and facilities, the specialized technology involved and the
restrictions on access to unique DOE-operated facilities, the Company has
contracted with the DOE’s primary contractor for its Oak Ridge facilities to
handle certain technical and operational services that are critical to the
operation, including designing and fabricating new parts and modifications to
the equipment and DOE facilities, operating and providing ongoing access to DOE
facilities, and providing access to other DOE resources. The success of the PSP
Operation is, in part, dependent on the continued cooperation of the DOE and its
primary contractor, which could be adversely affected by future changes in governmental
program priorities and funding. If there are problems with the operation or
modification of the DOE-operated facilities, problems with access to other DOE
resources, or if unforeseen challenges arise, the PSP Operation may not be
successful or the costs or availability associated with the PSP Operation could
be adversely affected. Additionally, as a result of the sensitive nature of the
PSP equipment and the specialized technology involved, the DOE is able to
terminate the Company’s access in the event of national emergency or in the
interest of national defense, or require the Company to perform programmatic
work involving use of the technology for the DOE in connection with carrying out
its governmental mission. The Company would be entitled to compensation in the
event of termination in connection with national emergency or defense or for
programmatic use of the technology for the DOE. Use of the PSP by TheragenicsTM
is also subject to classification and export control restrictions imposed by the
DOE and the U.S. government.
  20
 
 
 In
connection with the Company’s ongoing program targeted at diversifying its
future revenue stream, the Company continues to explore new applications for PSP
technology. Among other things, the PSP technology enables the Company to
conduct feasibility runs designed to validate isotope usage in various diverse
industries and potential markets. The
Company is actively looking at other opportunities for utilization of the PSP,
including, but not limited to, being active in the Federal budget process, and
working to ensure that the PSP's capabilities are known to Federal agencies such
as the Departments of Defense and Energy.
 
 In the
first quarter of 2004 the Company’s Oak Ridge operations began to enrich
palladium-102, which can be activated in a nuclear reactor to produce
palladium-103. The enriched palladium-102, along with access to specialized
reactor and related capabilities, could potentially supply the palladium-103
radioisotope to support TheraSeed ® production, if necessary. In addition, the production of palladium-102 allowed
the Company to study the PSP and its interaction with palladium-102 in order to
calibrate the PSP and determine predictable yields generated by the PSP. The
Company completed PSP production of palladium-102 at the Oak Ridge facility
during October 2004, and completed chemical recovery and processing in December
2004. The Company sold the excess palladium metal remaining after the production
of palladium-102 for approximately $431,000 in November 2004, which reduced the
carrying value of inventory by this amount. As a result of the cessation of
production of palladium-102 at the Oak Ridge facility, in 2005 the Company will
cease capitalization of all of the palladium-102 production costs.
 
 The
Company’s diversification program also includes a clinical trial using a
palladium-103 device, called the TheraSource ® Intravascular Brachytherapy System, designed to prevent restenosis or
renarrowing of arteries following treatment of
peripheral vascular disease by percutaneous transluminal angioplasty. Following
the approval of the Investigational Device Exemption granted by the U. S. Food
and Drug Administration (FDA) in August 2002 to initiate the TheraP clinical
trial, TheragenicsTM began a clinical trial using a palladium-103 device (patent
pending) early in 2003. TheragenicsTM closed enrollment in the TheraP trial early
in the second quarter of 2004 at 20 patients. Eighteen patients have progressed
to the six-month endpoint and two patients have elected to discontinue follow-up
in the trial. None of the twenty patients treated with the
TheraSource ® device
has experienced a device-related adverse event. The Company is currently
assessing the results of the trial to determine the most appropriate course of
action going forward.
 
 During
the second quarter of 2004, the Company filed an Investigational Device
Exemption (IDE) with the FDA to begin a human clinical trial for the
TheraSight ® Ocular
Brachytherapy System, a device intended to treat exudative (wet) age-related
macular degeneration (AMD), a disease that leads to loss of eyesight and in some
cases complete blindness. The IDE was approved by the FDA on July 29, 2004, and
enrollment commenced in the fourth quarter of 2004 to test the safety and
feasibility of the TheraSight ® device.
The Company has patents pending on the TheraSight ® device
and plans to run the trial at six separate clinical sites and expects to treat
approximately 30 patients. The first three patients were treated in the
TheraSight ® Trial at
Emory Eye Center in Atlanta, Georgia. The Company continues to be mindful of the
potential competition in this market, including but not limited to, existing
treatments and other on-going clinical trials in this area. Research and
development expenditures are likely to continue as our diversification
initiatives are pursued.
 
 21
 
 The
Company has also identified potential opportunities, utilizing its cyclotrons,
for production of radiochemical products, which are typically used in medical
nuclear imaging procedures. During 2004, the Company began regular shipments to
customers of two radiochemicals, produced on the Company’s cyclotrons. The
revenue recognized during the twelve months ended December 31, 2004 was not
material. The Company has received a Drug Master File for these products from
the FDA, which will potentially allow access to a wider range of customers. The
Company also continues to assess the markets for other radiochemicals it is able
to produce using the existing cyclotrons. These developments could, if pursued,
increase research and development expenses. R adiochemical
product sales are not expected to have a material impact on revenue during
2005.
 
 The
Company is also searching for, reviewing and evaluating external opportunities
for diversification in the form of joint ventures, partnerships, and/or
acquisitions of technologies, products and companies.
  
 ***Results
of Operations***
 **
 *Year
Ended December 31, 2004, Compared to Year Ended December 31,
2003*
 
 Total
revenue was $33.3 million in 2004 compared to $35.6 million in 2003, a decrease
of $2.3 million, or 6.3%. The decline in revenue was primarily due to an 8.0%
decrease in unit sales of the TheraSeed ® device,
partially offset by $852,000 of revenue recognized during 2004 for ancillary
services to one distributor. I-Seed unit sales represented approximately 4% of
total unit sales in both 2004 and 2003. The average selling price of the
TheraSeed ® device
was consistent during 2004 when compared to the average selling price during
2003.
 
 During
2004, the Company sold approximately 17.0% of total unit sales of the Company’s
palladium-103 (TheraSeed ® ) device
and iodine-125 (I-Seed) device directly to customers compared to 16.3% of total
unit sales (TheraSeed ® and
I-Seed) directly to customers during 2003. Total revenue from sales to direct
customers (TheraSeed ® and
I-Seed) was 18.9% of total product revenue during 2004 compared to 19.2% of
total product revenue during 2003. Revenue from distributors, including the
$852,000 of revenue generated from ancillary services, decreased approximately
6.2% during 2004 compared to 2003.
 
 Currently,
the Company has non-exclusive distribution agreements in place with two
companies for the distribution of the TheraSeed â device,
a reduction from the four distributors in place at the beginning of 2003. During
2003, C.R. Bard acquired two of the other three non-exclusive distributors of
the TheraSeed ® device.
Comparing unit sales to C.R. Bard during 2004 to the same three distributor’s
unit sales during 2003 on a combined basis shows a 1.2% increase for the twelve
months ended December 31, 2004 compared to the corresponding period of 2003.
C.R. Bard has exercised its option to extend its distribution agreement with the
Company through December 2006.
 
 The
domestic and international distribution agreements with the other distributor,
Oncura, allow each party the right to give notice of non-renewal of the
agreements at the end of December 2004, which would be effective December 31,
2005. During December 2004, the Company was notified by Oncura that it would not
be renewing its distribution agreements effective December 31, 2005. Sales to
Oncura during 2004 declined by 28.4% compared to the corresponding period of
2003. The Company believes that sales through Oncura have been adversely
affected by the distributor’s efforts to market prostate cancer treatments other
than the TheraSeed ® device or
brachytherapy.
 
 22
 
 The
Company and Oncura are currently arbitrating claims arising in connection with
the Company’s non-exclusive distribution agreement with Oncura. Oncura claims
that the Company has not addressed Oncura’s concerns about pricing by
renegotiating pricing in good faith. Oncura is seeking a change in the pricing
terms of the distribution agreement through the arbitration proceeding, and has
indicated that it will seek to recover a portion of payments previously made.
The Company filed a counterclaim against Oncura alleging that Oncura breached
its obligations under the distribution agreement concerning marketing
brachytherapy products and the use of the Company’s trademarks. The arbitrators
have been appointed and the parties are conducting discovery. Management
believes that Oncura’s claims are without merit and is opposing them vigorously.
Management believes the Company has meritorious counter-claims against Oncura.
 
 In
addition to the impact of disappointing performance by one of the two
distributors of TheraSeed ® ,
Management believes that the brachytherapy industry continues to be affected by
competition from alternative therapies, changes in medicare reimbursement,
declining prices for iodine-125 and palladium-103 seeds, competitors’ selling
tactics and the effects of consolidation in the industry. At any point in time,
TheragenicsTM and/or its non-exclusive distributors may change their respective
pricing policies for the TheraSeed ® or
I-Seed (in the case of TheragenicsTM) device in order to take advantage of market
opportunities or respond to competitive situations. Responding to market
opportunities and competitive situations could have an adverse effect on the
prices of the TheraSeed ® or
I-Seed device and could have a favorable effect or prevent an unfavorable effect
on market share and volumes. Conversely, the Company and its non-exclusive
distributors could individually and independently decide to maintain per unit
pricing under certain competitive situations that could adversely affect current
or potential market share and volumes.
 
 The
Company’s licensing fees revenue represents licensing payments for the Company’s
TheraSphere ® technology. Such licensing fees are not expected to become material in the
foreseeable future.
  Cost of
sales was $14.1 million during 2004 compared to $15.6 million in 2003. Gross
profit was approximately 57.6% of revenue in 2004, compared to 56.1% in 2003.
The increase in gross profit percentage in 2004 compared to 2003 was largely due
to the capitalization
of costs associated with the first production of palladium-102 material using
the PSP technology at the Company’s Oak Ridge, Tennessee facility. Total
production costs capitalized were approximately $1.3 million during 2004. The
total cost of the inventory, including the material and production costs
capitalized, is $1.5 million and is included in work-in-process inventory in the
accompanying December 31, 2004 balance sheet. The
Company completed PSP production of palladium-102 at the Oak Ridge facility
during October 2004, and completed chemical recovery and processing in December
2004. The Company sold the excess palladium metal remaining after the production
of palladium-102 for approximately $431,000 in November 2004, which reduced the
carrying value of inventory by this amount. As a result of the cessation of
production of palladium-102 at the Oak Ridge facility, in 2005 the Company will
cease capitalization of all of the palladium-102 production costs. The gross
margin in 2004 was also favorably impacted by $852,000 of revenue from ancillary
services to one distributor during the twelve months ended December 31, 2004. Gross
margin during 2004 was negatively impacted by the considerable fixed cost
component of Theragenics’TM operations in combination with lower revenue during
the twelve months ended December 31, 2004 compared to the corresponding period
of 2003.
 
 23
 
 Selling,
general and administrative (SG&A) expenses were $17.6 million in 2004,
compared to $13.8 million in 2003, an increase of $3.8 million, or 27.8%. The
increase in 2004, compared to 2003, was due primarily to costs incurred to
comply with Section 404 of the Sarbanes-Oxley Act of 2002, an
increase in professional fees for assistance in various key strategic
initiatives, an increase in marketing and advertising costs and an increase in
compensation and related expenses due primarily to the expansion of the direct
sales force.
 
 R&D
expenses increased to $9.6 million, or 28.7% of revenue in 2004, from $7.5
million, or 21.0% of revenue in 2003. The
increase in research and development expense during 2004 was primarily
attributable to an increase in costs to support the Company’s peripheral
vascular and macular degeneration programs and include the cost of palladium-103
produced for use in R&D initiatives (see “Overview” above).
 
 Other
income, primarily comprising interest income, was $1.1 million in 2004 compared
to $894,000 in 2003. The
increase during 2004 is primarily the result of better returns on the Company’s
investments as a result of higher interest rates in 2004. The Company’s
investments consist primarily of short-term cash investments and high-credit
quality corporate and municipal obligations, in accordance with the Company’s
investment policies. Funds available for investment have and will continue to be
utilized for the Company’s current and future expansion programs, R&D
activities, and strategic opportunities for growth and diversification. As funds
continue to be used for these programs and activities, and as interest rates
continue to change, Management expects other income to fluctuate
accordingly.
 
 The
Company’s effective income tax rate was a benefit of 37.1% during the twelve
months ended December 31, 2004 compared to a benefit of 78.0% during the twelve
months ended December 31, 2003. The Company’s income tax rate in each period
differed from statutory rates primarily due to the recognition of tax credits
generated by the Company’s investments in its expansion projects, research
activities and tax-exempt interest income.
  *Year
Ended December 31, 2003, Compared to Year Ended December 31,
2002*
 
 Total
revenue was $35.6 million in 2003 compared to $41.9 million in 2002, a decrease
of $6.3 million, or 15.0%. The decline in revenue was primarily due to a 17%
decrease in unit sales of the TheraSeed ® device.
TheraSeed ® sales
direct to customers and to third party distributors remained comparable as a
percentage of total TheraSeed ® sales in
2003 and 2002. Although the average selling price of TheraSeed ® remained
steady in 2003 when compared to 2002, the overall decrease in revenues is the
direct result of the decrease in total unit sales, both direct and to
third-party distributors.
 
 The
Company has non-exclusive distribution agreements in place with two companies
for the distribution of the TheraSeed â device,
a reduction from the four distributors in place at the beginning of 2003. During
2003, one of the non-exclusive distributors of the TheraSeed ® device
acquired two of the other three non-exclusive distributors of the
TheraSeed ® device.
Sales to this acquiring distributor, combined with sales to the distributors it
acquired, decreased approximately 24% in 2003 as compared to 2002.
 
 The
Company believes that the decrease in unit sales throughout the year was a
combination of several factors including disappointing sales by the Company’s
non-exclusive distribution partners; consolidation and ownership changes in the
brachytherapy market; continued deep discounting in the market by many
competitors, including iodine seeds throughout the year and palladium seeds in
the latter part of the year; and uncertainty related to changing rules for
Medicare reimbursement (see ” *Medicare
Developments* ” below).
  
 24
 
 The
Company diversified its product line in 2003 with the introduction of I-Seed, an
iodine-based brachytherapy device (see “ *Overview* ” above).
The Company believes the ability to provide both devices, i.e.,
TheraSeed ® and
I-Seed, will allow access to direct customers otherwise not available. I-Seed
sales represented approximately 4% of total brachytherapy product sales during
2003. The non-exclusive distributors of the TheraSeed ® device
have no distribution rights for the I-Seed device.
 
 The
Company’s licensing fees revenue represents licensing payments for the Company’s
TheraSphere ® technology. Such licensing fees are not expected to become material in the
foreseeable future.
  At any
point in time, TheragenicsTM and/or its non-exclusive distributors may change
their respective pricing policies for the TheraSeed ® device
in order to take advantage of market opportunities or to respond to competitive
situations. Responding to market opportunities and competitive situations could
have an adverse effect on the prices of the TheraSeed ® device
and could have a favorable effect or prevent an unfavorable effect on market
share and volumes. Failure to respond to market opportunities and competitive
situations in order to maintain per unit pricing could adversely affect current
or potential market share and volumes and/or result in a decrease in
margins.
  Cost of
sales was $15.6 million during 2003 compared to $14.7 million in 2002. Gross
profit was approximately 56.1% of revenue in 2003, compared to 64.9% in 2002.
The decrease in gross profit percentage in 2003 compared to 2002 was largely due
to the considerable fixed cost component of Theragenics’TM operations, partially
offset by the transfer of material and resources to support research and
development initiatives and the completion of depreciation, early in 2003, of
the first cyclotron placed in service. Approximately $3.6 million of operating
expenses related to the PSP facility, including approximately $1.2 million of
depreciation, were recognized in cost of sales during 2003 compared to $2.0
million during the second half of 2002. In addition, as a
result of the purchase of the U.S. iodine-125 prostate brachytherapy business of
BEBIG early in
2003 (see “ *Overview* ” above),
approximately $860,000 of operating expenses were included in cost of sales
during 2003 for direct costs related to the I-Seed device. The I-Seed production
line at the Company’s Buford facility became operational early in 2004. As a
result, depreciation and costs incurred to support this production line will be
included in cost of sales during 2004.
  Selling,
general and administrative (SG&A) expenses were $13.8 million in 2003,
compared to $12.8 million in 2002, an increase of $1.0 million, or 7.8%. The
increase in 2003, compared to 2002, was due primarily to an increase in
headcount and expenses associated with the direct sales force as a result of
hiring brachytherapy specialists to promote the TheraSeed ® brand.
SG&A expenses were also higher during 2003 as a result of outsourcing the
Company’s cancer information center to healthcare specialist, Telerx, a
subsidiary of Merck Pharmaceutical, and a significant increase in Directors and
Officers liability insurance premiums. These increases were partially offset by
a reduction in the start-up expenses related to the PSP facility, which became
operational in the second half of 2002. (see “ *Overview* ” above
and *“Liquidity
and Capital Resources”* below).
 
 R&D
expenses increased to $7.5 million, or 21.0% of revenue in 2003, from $6.5
million, or 15.6% of revenue in 2002. The increase in R&D expenses in 2003
was a result of the Company’s diversification initiatives geared to expand the
application of palladium-103 to other oncological and non-oncological uses, and
to explore options for using the Company’s expertise and capabilities in other
areas. The bulk of these expenses were associated with the Company’s peripheral
vascular and macular degeneration programs and include the cost of palladium-103
produced for use in R&D initiatives (see “ *Overview* ” above).
 
 25
 
 
 Other
income, primarily comprising interest income, was $894,000 in 2003 compared to
$897,000 in 2002. The Company’s investments consist primarily of short-term cash
investments and high-credit quality municipal obligations, in accordance with
the Company’s investment policies. Funds available for investment have been and
will continue to be utilized for the Company’s current and future expansion
programs and R&D activities, and may be used for the acquisition of
technologies, products or companies consistent with the goals of
Theragenics TM . As
funds continue to be used for these programs and activities, and as interest
rates continue to change, Management expects other income to fluctuate
accordingly.
  The
Company’s effective income tax rate was a benefit of 78% in 2003, primarily due
to permanent differences related to tax-exempt interest income on municipal and
government securities, compared to an expense of 36% in 2002. The Company’s
income tax rate in each period differed from statutory rates primarily due to
the recognition of tax credits generated by the Company’s investments in its
expansion projects, research activities, and tax-exempt interest income.
  
 ***Critical
Accounting Policies***
 
 The
financial statements of Theragenics Corporation â are
prepared in conformity with accounting principles generally accepted in the
United States of America. Management is required to make certain estimates,
judgments and assumptions that we believe are reasonable based upon the
information available. These estimates and assumptions affect the reported
amounts of assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the periods presented. The
significant accounting policies which we believe are the most critical to aid in
fully understanding and evaluating our reported financial results include the
following:
  *Property,
plant and equipment.* Property,
plant and equipment are recorded at cost and depreciated on a straight-line
basis over the estimated useful lives of such assets. The Company’s estimates
can result in differences from the actual useful lives of certain assets. The
Company currently owns and operates 14 cyclotrons, the first of which entered
service in 1993. Each of the Company’s cyclotrons is depreciated using an
estimated 10-year life. Management’s estimate of the useful life of these
cyclotrons is based on the Company’s experience to date with these cyclotrons.
Based on experience gained relative to the operation, refurbishment, and
maintenance of the cyclotrons, Management believes there is a substantive basis
for the current depreciable lives of the cyclotrons. Although the older
cyclotrons require increased maintenance, all the cyclotrons remain in service,
including fully depreciated cyclotrons, because the material produced by each
machine is required for ongoing operations and the Company’s current research
and development initiatives.
  The PSP
equipment was placed in service during the second half of 2002 and is
depreciated using an estimated fifteen-year life. The PSP equipment utilizes
specialized, unique technology.
 
 Management
will continue to periodically examine estimates used for depreciation for
reasonableness. If the Company should determine that the useful life of
property, plant or equipment should be shortened or lengthened, depreciation
expense would be adjusted accordingly for the remaining useful life/(lives) of
the identified asset/(s).
 
 A
significant portion of the Company’s depreciable assets is utilized in the
production of its product. Management assesses the impairment of its depreciable
assets whenever events or circumstances indicate that such assets might be
impaired. In the event the expected undiscounted future cash flow attributable
to the asset is less than the carrying value of the asset, an impairment loss
equal to the excess of the asset’s carrying value over its fair value is
recorded. Management believes that no impairment of depreciable assets exists as
of December 31, 2004. It is possible, however, that Management’s estimates
concerning the realizability of the Company’s depreciable assets could change in
the future.
 
 26
 
 
 *Goodwill*.
Early in 2003 the Company entered into an agreement to purchase the
brachytherapy business of BEBIG Isotopen-und Medizintechnik GmbH (BEBIG), a
subsidiary company of Eckert & Ziegler AG. A total of approximately $6.3
million was paid in connection with the acquisition and the payments were
allocated between the fair value of the assets in the amount of $3.7 million and
$2.6 million to goodwill. The equipment became operational during the first
quarter of 2004. The Company has determined that the production line will be
amortized over a fifteen-year life.
 
 The
Company accounts for goodwill and other intangible assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets (“SFAS 142”). Under SFAS 142, goodwill and intangible
assets with indefinite lives are not amortized to expense and must be reviewed
for impairment annually or more frequently if events or changes in circumstances
indicate that the asset might be impaired. The first step of the impairment
test, used to identify potential impairment, compares the fair value of a
reporting unit with its carrying amount, including goodwill and intangible
assets with indefinite lives. The Company operates as one reporting unit and
therefore compares its book value to market value (market capitalization plus a
control premium). If fair value exceeds book value, goodwill is considered not
impaired, and the second step of the impairment test is unnecessary. If book
value exceeds market value, the second step of the impairment test is preformed
to measure the amount of impairment loss, if any. For this step the implied fair
value of the goodwill is compared with the book value of the goodwill. If the
carrying amount of the goodwill exceeds the implied fair value of the goodwill,
an impairment loss would be recognized in an amount equal to that excess. Any
loss recognized cannot exceed the carrying amount of goodwill. After an
impairment loss is recognized, the adjusted carrying amount of goodwill is its
new accounting basis. Subsequent reversal of a previously recognized impairment
loss is prohibited once the measurement of that loss is completed. The Company
completed its annual goodwill impairment assessment as of November 28, 2004 and
determined that goodwill was not impaired and no impairment charge was
recorded.
 
 Intangible
assets with definite lives are being amortized and this amortization is included
in the accompanying statements of operations.
 
 *Allowance
for doubtful accounts.* Management judgments and estimates are made and used in connection with
establishing an allowance for the possibility that portions of our accounts
receivable balances may become uncollectable. Accounts receivable are reduced by
this allowance. Specifically, Management analyzes accounts receivable in
relation to current economic trends and changes in our customer payment history
in establishing this allowance. The accounts receivable balance, net of the
provision for trade accounts receivables allowance of $177,000, was
approximately $5.8 million as of December 31, 2004.
 
 *Stock-based
compensation.* The
Company has granted performance restricted stock rights. The number of shares
issuable upon vesting of the performance restricted stock rights will vary based
on total shareholder return or TSR over the vesting period as compared to an
industry peer group, as further described in Note H of the Notes to Financial
Statements. Each quarter the Company estimates TSR and records compensation
expense based on TSR experienced to date. To the extent that TSR varies
significantly from period to period, the Company may record additional
compensation expense or adjust previously recorded compensation expense to
reflect the current estimate of TSR over the vesting period.
 
 
 27
 
 **Commitments
and Other Contractual Obligations**
  The
principal commitments of the Company include land leases, rental space and
office equipment under operating, non-cancelable leases that expire at various
dates through April 2029, and asset purchase obligations. Approximate minimum
payments of these obligations are as follows:
  Obligation
    
    Payments
      due by periodTotal
    
    2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    ThereafterLand
      lease (1)
    
    $
    3,321,500
    
    $
    136,500
    
    $
    136,500
    
    $
    136,500
    
    $
    136,500
    
    $
    136,500
    
    $
    2,639,000Rental
      Space, Equipment and automobile
    
    
    882,305
    
    
    204,327
    
    
    195,598
    
    
    182,380
    
    
    180,000
    
    
    120,000
    
    
    -Total
      operating leases
    
    
    4,203,805
    
    
    340,827
    
    
    332,098
    
    
    318,880
    
    
    316,500
    
    
    256,500
    
    
    2,639,000Purchase
      obligations (2)
    
    
    456,000
    
    
    456,000
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    -Total
      obligations
    
    $
    4,659,805
    
    $
    796,827
    
    $
    332,098
    
    $
    318,880
    
    $
    316,500
    
    $
    256,500
    
    $
    2,639,000
   (1)
    Land
      lease payments are subject to adjustments for increases in the Consumer
      Price Index, January 1, 2005 and every five years
    thereafter.(2)
    In
      June 2004 the Company entered into an asset purchase agreement with a
      contractor for the design and manufacture of certain equipment. The
      capital asset purchase agreement in the amount of $570,000 is expected to
      be completed in early 2005. At year-end 2004, progress payments in the
      amount of approximately $114,000 had been paid in relation to the purchase
      agreement.
 
 The
Company has issued standby letters of credit from time to time as security for
certain liabilities. At December 31, 2004, total outstanding letters of credit,
under the Credit Agreement, approximated $933,000. These letters of credit are
related to asset retirement liabilities of long-lived assets, as well as a
utility deposit to the City of Oak Ridge, Tennessee.
 **
 ***Liquidity
and Capital Resources***
 **
 The
Company had cash, short-term investments and marketable securities of $62.3
million at December 31, 2004, compared to $66.4 million at December 31, 2003.
Cash and short-term investments were $28.5 million at December 31, 2004 compared
to $45.1 million at December 31, 2003. Marketable securities were $33.8 million
at December 31, 2004 compared to $21.3 million at December 31, 2003. Marketable
securities consist primarily of short-term cash investments and high-credit
quality corporate and municipal obligations, in accordance with the Company’s
investment policies. The aggregate decrease in cash, short-term investments and
marketable securities was primarily a result of capital expenditures. Working
capital was $72.6 million at December 31, 2004, compared to $74.0 million at
December 31, 2003. The Company also has a Credit Agreement with a financial
institution that provides for revolving borrowings of up to $40.0 million,
including a $5.0 million sub-limit for letters of credit, through a credit
facility with a three-year term. No borrowings were outstanding under the Credit
Agreement as of December 31, 2004. Letters of credit totaling $933,000 were
outstanding under the Credit Agreement as of December 31, 2004. These letters of
credit represent decommission funding required by the Georgia Department of
Natural Resources and a utility deposit to the City of Oak Ridge, Tennessee in
connection with the PSP facility.
 
 28
 
 Cash
generated by operations was $126,000 and $5.4 million in 2004 and 2003,
respectively. Cash used by or generated from operations consists of net
earnings/(loss) plus non-cash expenses such as depreciation, amortization, and
changes in balance sheet items such as accounts receivable, inventories, prepaid
expenses and payables. Accounts receivable increased approximately $2.0 million
during 2004 as a result of increased revenue in the fourth quarter of 2004 as
compared to the fourth quarter of 2003 and the timing of payments received from
the Company’s distributors. Inventories increased $1.1 million during 2004
primarily as a result of the capitalization of $1.3 million of costs associated
with the first production of palladium-102 material using the PSP technology at
the Company’s Oak Ridge, Tennessee facility, partially offset by the sale of the
excess palladium metal for $431,000 during the fourth quarter of 2004. The
excess palladium metal remained after completion of production of palladium-102
during the fourth quarter of 2004. Prepaid expenses and other current assets
decreased $539,000 during 2004 primarily as a result of a reduction of
prepayments under the Company’s advertising program and group health insurance
programs during 2004 compared to 2003. Trade accounts payable decreased $267,000
during 2004 due primarily to the payment of liabilities associated with the
Company’s I-Seed acquisition during the first quarter of 2004 and the timing of
payments for other accounts payable. Other current liabilities increased
$269,000 during 2004 primarily as a result of costs associated with the internal
controls requirements of Section 404 of the Sarbanes-Oxley Act of
2002.
 
 Capital
expenditures totaled $3.3 million and $2.5 million during 2004 and 2003,
respectively. In addition, the Company made payments of $1.0 million and $5.2
million during 2004 and 2003, respectively, as part of the Company’s purchase of
the U. S. iodine-125 prostate brachytherapy business of BEBIG (see “ *Overview* ” above).
The Company procured an automated production line as part of the agreement that
became operational during the first quarter of 2004. The $1.0 million payment
during the first quarter of 2004 was the last payment required under the
agreement.
 
 The
Company expects that R&D spending will decline during 2005 as compared to
the level of R&D spending during 2004 (see “ *Results
of Operations* ” above).
Cash could be used in 2005 for increased marketing and TheraSeed ® support
activities and in the pursuit of diversification efforts such as the purchase of
technologies, products or companies.
 
 In
addition to capital expenditures, cash used for investing activities during 2004
included $27.6 million used to purchase marketable securities, offset by
maturities of other investments amounting to $15.0 million. Marketable
securities, consisting primarily of short-term cash investments and high-credit
quality corporate and municipal obligations, are purchased in accordance with
the Company’s investment policies. The Company expects to continue to invest
cash as available.
 
 Cash
provided by financing activities was $108,000 and $505,000 during 2004 and 2003,
respectively, consisting of cash proceeds from the exercise of stock options and
the Company’s Employee Stock Purchase Plan.
 
 The
Company believes that current cash and investment balances and cash from future
operations and credit facilities will be sufficient to meet its current
anticipated working capital and capital expenditure requirements. In the event
additional financing becomes necessary, Management may choose to raise those
funds through other means of financing as appropriate.
 
 29
 
 During
the fourth quarter of 2003, the Company executed a Credit Agreement with a
financial institution. The Credit Agreement, which expires October 29, 2006
(subject to earlier termination by the lender upon the occurrence of certain
events of default), provides for revolving borrowings of up to $40.0 million at
any time outstanding, including a $5.0 million sub-limit for letters of credit.
Interest on outstanding borrowings is payable at the rate of interest
periodically designated by the financial institution as its base rate, or, at
the option of the Company, interest may accrue at a LIBOR based rate, plus an
applicable margin which is subject to quarterly adjustment. Interest on base
rate loans is payable monthly, while interest on LIBOR loans is payable on the
last day of the applicable one, two or three month interest period. As of
December 31, 2004 no borrowings were outstanding under the Credit Agreement. We
have issued standby letters of credit from time to time as security for certain
liabilities. At December 31, 2004, total outstanding letters of credit, under
the Credit Agreement, approximated $933,000. These letters of credit are related
to asset retirement liabilities of long-lived assets, as well as a utility
deposit to the City of Oak Ridge, Tennessee.
 
 The
Credit Agreement is unsecured, but provides for a “springing lien” to be
established on substantially all of the assets of the Company (subject to
certain exceptions) in the event certain events of default occur under the
Credit Agreement. The Credit Agreement contains representations and warranties,
as well as affirmative, reporting and negative covenants, customary for
financings of this type. Among other things, certain provisions of the Credit
Agreement limit the incurrence of additional debt and require the maintenance of
certain financial ratios.
 
 The
Credit Agreement replaced the August 1999 unsecured credit agreement with the
Company’s previous lender, which would have expired on October 31, 2003.
The prior unsecured credit agreement provided for a $40.0 million revolving loan
and letter of credit commitment, and an additional uncommitted $10.0 million
line of credit.
 
 
 ***Medicare
Developments***
 **
 Previously,
Theragenics’TM TheraSeed ® device
and other brachytherapy seeds fell within various “transitional pass-through
codes,” which were separate from the procedure payment codes that comprise much
of Medicare’s Outpatient Prospective Payment System (OPPS). On April 1, 2002,
the Centers for Medicare and Medicaid Services (CMS) implemented changes in
hospital payments for brachytherapy and other services provided under Medicare’s
OPPS for the remainder
of 2002. Through December 31, 2002, CMS
bundled a portion of pass-through reimbursement for all brachytherapy seeds and
other devices with the associated
procedure codes, thereby effectively sheltering seeds from “pro rata reductions”
that would otherwise have applied under Medicare Law. To the extent that these
pass-through device costs exceeded the bundled amount, the remaining cost was subject
to a 63.6% pro-rated reduction in reimbursement.
 
 During
2003, CMS further revised its policies by bundling the
costs of the prostate brachytherapy procedure, as well as the costs for
catheters, needles and all seeds, into t wo new codes for
prostate brachytherapy (one for palladium-103 and one for iodine-125). By
creating two codes and setting separate reimbursement amounts for palladium-103
seed brachytherapy (including the TheraSeed ® device)
and iodine-125 seed brachytherapy (including the I-Seed device), CMS made an
important, positive change in its final rule for 2003 compared to its initial
proposal published on August 9, 2002.  Specifically,
the per-patient reimbursement amount under the 2003 final rule for palladium-103
prostate brachytherapy exceeded the original payment amount proposed in August
2002 for both palladium-103 and iodine-125. The final 2003 per-patient amount
for palladium-103 prostate brachytherapy also exceeded the 2003 payment amount
for iodine-125 prostate brachytherapy. To the
extent that the brachytherapy costs for either seed, for an individual patient
exceeded the bundled payment amount during 2003, the remaining costs could not
be submitted for additional reimbursement.
 
 On
December 8, 2003, the President signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 into law that provides for improved
reimbursement and coding policies in 2004 and beyond for brachytherapy
seeds/sources under Medicare’s OPPS. To reflect the changes in the statute, CMS
revised its November 7, 2003 final rule by publishing a new interim final rule
for 2004 on January 6, 2004.
 
 30
 
 
 The
brachytherapy provisions in the 2003 Medicare legislation, which went into
effect on January 1, 2004, require Medicare to unbundle the cost of the seeds
from the costs of the brachytherapy procedure, catheters and needles under the
OPPS. More specifically, the 2003 Medicare legislation requires Medicare to
reimburse hospitals for each brachytherapy seed/source furnished between January
1, 2004 to December 31, 2006 based on the hospital’s costs for each patient
(calculated from the hospital’s charges adjusted by the hospital’s specific
cost-to-charge ratio). This means that hospital reimbursement is no longer
limited to or dictated by the reimbursement amounts assigned to the
brachytherapy codes, which CMS used in 2003.
 
 With
respect to coding, the legislation requires the Medicare program to create and
use coding that classifies brachytherapy seeds/sources separately from all the
other services and items reimbursed under the OPPS. These separate codes for
brachytherapy seeds/sources must be used in a manner that reflects the type of
radioactive isotope (for example, palladium-103), the radioactive intensity and
the number of brachytherapy seeds/sources used to treat each patient.
 
 Depending
on the number of seeds needed to treat each prostate cancer patient, the total
reimbursement (for the combination of the unbundled procedure codes and seeds)
for the payment methodology in place until at least December 31, 2006 may be
higher than the 2003 bundled payment amounts. The legislation enacted in 2003
also directs the U.S. General Accounting Office (GAO) to conduct a study
examining future payment policies for brachytherapy seeds.
 
 The
Company believes its efforts in assisting policymakers in formulating and
revising Medicare policies to recognize the unique aspects of classification and
reimbursement that apply to brachytherapy devices such as TheraSeed â were
pivotal to the enactment of the improved 2003 Medicare legislation for
brachytherapy seeds/sources. The Company plans to continue working to assist
policymakers regarding these important issues in the future.
 
 The
Company believes that the significant number of proposed and actual changes in
Medicare coding and reimbursement policy in the years preceding and during 2003,
created confusion for hospitals and doctors, which may have had a detrimental
impact on sales in 2004 and 2003 (see “ *Results
of Operations”* above).
In addition, due to the fact that the Medicare rules governing coding of
brachytherapy seeds/sources have undergone significant change during the past
few years, the Company believes that Medicare reimbursement may continue to
create confusion for hospitals and doctors going forward. In that regard,
Management continues to closely monitor any effects of the reimbursement
structure on the brachytherapy market as it continues to evaluate pricing,
marketing and distribution strategies. The
Company continues to engage a consulting firm specializing in reimbursement
practices to help communicate brachytherapy reimbursement guidelines to
customers.
 
 ***Forward
Looking and Cautionary Statements***
 
 This
document contains certain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 including, without limitation,
statements regarding sales, marketing and distribution efforts, the Company’s
direct sales organization, including, but not limited to, its growth and
effectiveness, third-party reimbursement, CMS policy, sales mix, effectiveness
and continuation of non-exclusive distribution agreements, pricing for the
TheraSeed ® and
I-Seed devices, future cost of sales, R&D efforts and expenses, inventory
investment, SG&A expenses, other income, timing and ultimate outcome of the
Company’s activities in peripheral vascular and macular degeneration programs
and other diversification efforts, potential new products and opportunities, the
PSP-related operations, the development of new markets and technologies, the
capabilities of the PSP to produce enriched isotopes, opportunities for isotopes
produced by TheragenicsTM, including, but not limited to, stable isotopes and
radiochemical products, the identification and development of new markets and
applications for isotopes, Theragenics’TM plans and strategies for
diversification, and the
 
 31
 
 sufficiency
of the Company’s liquidity and capital resources. From time to time, the Company
may also make other forward-looking statements relating to such matters as well
as statements relating to anticipated financial performance, business prospects,
technological developments, other research and development activities and
similar matters. These forward-looking statements are subject to certain risks,
uncertainties and other factors which could cause actual results to differ
materially from those anticipated, including risks associated with research and
development activities, including animal studies and clinical trials related to
new products, risks associated with new product development cycles,
effectiveness and execution of marketing and sales programs of
Theragenics TM and its
non-exclusive distributors, risks associated with customer distribution
concentration and consolidation among non-exclusive distributors and potential
changes in distributor relationships, potential costs and delays in capacity
expansion and start-up, potential costs and delays in PSP-related operations,
effect of palladium-103 demand on cyclotron and PSP capacity and investment in
inventory, the iodine-125 product line, actual or potential changes in product
pricing, competitive conditions and selling tactics of the Company’s
competitors, continued acceptance of TheraSeed ® or the
I-Seed devices by the market, management of growth, acceptance and efficacy of
palladium-103 for other applications, adverse changes in governmental program
priorities and budgetary funding by the relevant governmental authorities,
continuing access to unique DOE technology, the DOE’s ability to require the
Company to use DOE technology for governmental purposes or terminate the
Company’s use in the event of a national emergency or for national defense,
government regulation of the therapeutic radiological pharmaceutical and device
business, potential changes in third-party reimbursement, risks associated with
market development activities, potential inability of the PSP to produce
isotopes suited for a particular application, potential inability to produce
selected isotopes at costs competitive to other options or potential inability
to produce selected isotopes at costs to make applications economically
feasible, risks associated with governmental regulations and related export
controls and security requirements for PSP technology and products. All forward
looking statements and cautionary statements included in this document are made
as of the date hereby based on information available to the Company as of the
date hereof, and the Company assumes no obligation to update any forward looking
statement or cautionary statement.
 
 ***Quarterly
Results***
 
 The
following table sets forth certain statement of operations data for each of the
Company's last eight quarters. This unaudited quarterly information has been
prepared on the same basis as the annual audited information presented elsewhere
in this Form 10-K, reflects all adjustments (consisting only of normal,
recurring adjustments) which are, in Management’s opinion, necessary for a fair
presentation of the information for the periods covered and should be read in
conjunction with the financial statements and notes thereto. The operating
results for any quarter are not necessarily indicative of results for any future
period. Quarterly data presented may not reconcile to totals for full year
results due to rounding.
 
 32






**2004**
    
    **2003****First**
      **Qtr**
    ****
    ****
    **Second**
      **Qtr**
    ****
    ****
    **Third**
      **Qtr**
    ****
    ****
    **Fourth**
      **Qtr**
    ****
    ****
    **First**
      **Qtr**
    ****
    ****
    **Second**
      **Qtr**
    ****
    ****
    **Third**
      **Qtr**
    ****
    ****
    **Fourth**
      **Qtr****(Amounts
      in thousands, except per share data)**Total
      revenue
    
    $
    7,953
    
    $
    8,646
    
    $
    8,283
    
    $
    8,456
    
    $
    11,102
    
    $
    8,949
    
    $
    8,519
    
    $
    7,010Cost
      of product sales
    
    
    3,398
    
    
    3,467
    
    
    3,282
    
    
    3,975
    
    
    4,537
    
    
    3,959
    
    
    3,614
    
    
    3,518Gross
      profit
    
    
    4,555
    
    
    5,179
    
    
    5,001
    
    
    4,481
    
    
    6,565
    
    
    4,990
    
    
    4,905
    
    
    3,492Selling,general
      and
      administrative
    
    
    4,072
    
    
    4,470
    
    
    4,463
    
    
    4,616
    
    
    3,391
    
    
    3,230
    
    
    3,404
    
    
    3,763Research
      and development
    
    
    2,278
    
    
    2,308
    
    
    2,749
    
    
    2,248
    
    
    1,501
    
    
    1,612
    
    
    2,348
    
    
    2,006Other
      income
    
    
    173
    
    
    257
    
    
    355
    
    
    349
    
    
    228
    
    
    225
    
    
    225
    
    
    216Net
      earnings (loss) before income taxes and cumulative effect of change in
      accounting principle
    
    
    (1,622
    )
    
    (1,342
    )
    
    (1,856
    )
    
    (2,034
    )
    
    1,901
    
    
    373
    
    
    (622
    )
    
    (2,061
    )Income
      tax expense (benefit)
    
    
    (656
    )
    
    (408
    )
    
    (734
    )
    
    (745
    )
    
    682
    
    
    107
    
    
    (234
    )
    
    (874
    )Net
      earnings (loss) before cumulative effect of change in accounting
      principle
    
    
    (966
    )
    
    (934
    )
    
    (1,122
    )
    
    (1,289
    )
    
    1,219
    
    
    266
    
    
    (388
    )
    
    (1,187
    )Cumulative
      effect of change in accounting principle
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (222
    )
    
    -
    
    
    -
    
    
    -Net
      earnings (loss)
    
    $
    (966
    )
    $
    (934
    )
    $
    (1,122
    )
    $
    (1,289
    )
    $
    997
    
    $
    266
    
    $
    (388
    )
    $
    (1,187
    )Earnings
      per common share:BasicNet
      earnings (loss) before cumulative effect of change in accounting
      principle
    
    $
    (0.03
    )
    $
    (0.03
    )
    $
    (0.04
    )
    $
    (0.04
    )
    $
    0.04
    
    $
    0.01
    
    $
    (0.01
    )
    $
    (0.04
    )Cumulative
      effect of change in accounting principle
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (0.01
    )
    
    -
    
    
    -
    
    
    -Net
      earnings (loss)
    
    $
    (0.03
    )
    $
    (0.03
    )
    $
    (0.04
    )
    $
    (0.04
    )
    $
    0.03
    
    $
    0.01
    
    $
    (0.01
    )
    $
    (0.04
    )DilutedNet
      earnings (loss) before cumulative effect of change in accounting
      principle
    
    $
    (0.03
    )
    $
    (0.03
    )
    $
    (0.04
    )
    $
    (0.04
    )
    $
    0.04
    
    $
    0.01
    
    $
    (0.01
    )
    $
    (0.04
    )Cumulative
      effect of change in accounting principle
    
    
    -
    
    
    -
    
    
    -
    
    
    -
    
    
    (0.01
    )
    
    -
    
    
    -
    
    
    -Net
      earnings (loss)
    
    $
    (0.03
    )
    $
    (0.03
    )
    $
    (0.04
    )
    $
    (0.04
    )
    $
    0.03
    
    $
    0.01
    
    $
    (0.01
    )
    $
    (0.04
    )Weighted
      average sharesoutstanding:Basic:
    
    
    29,957
    
    
    29,969
    
    
    29,974
    
    
    29,983
    
    
    29,829
    
    
    29,908
    
    
    29,932
    
    
    29,940Diluted
    
    
    29,957
    
    
    29,969
    
    
    29,974
    
    
    29,983
    
    
    29,925
    
    
    29,996
    
    
    29,932
    
    
    29,940


33
 
 **Inflation**
 
 Management
does not believe that the relatively moderate levels of inflation, which have
been experienced in the United State in recent years, have had a significant
effect on the Company’s results of operations.
 
 **Item
7A. Quantitative and
Qualitative Disclosure About Market Risk**
 
 The
Company's market risk exposure, related to market risk sensitive financial
instruments, is not material. Letters of credit totaling approximately $933,000
were outstanding under the terms of the Credit Agreement as of December 31,
2004. No borrowings were outstanding under the Credit Agreement as of December
31, 2004. (See *Liquidity
and Capital Resources* above).
 
 **Item
8.   
Financial Statements and Supplementary Data**
 
 See index
to Financial Statements (Page 40) and following pages.
 
 **Item
9.    Changes in and
Disagreements on Accounting and Financial Disclosure**
 
 None
 
 **Item
9A.         Controls and
Procedures**
 **Evaluation
of Disclosure Controls and Procedures**
 
 The
Company’s Chief Executive Officer and Chief Financial Officer are responsible
for establishing and maintaining disclosure controls and procedures as defined
in the rules promulgated under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). The Company evaluated the effectiveness of the design and
operation of its disclosure controls and procedures as of December 31, 2004 and,
based on that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that these controls and procedures were effective as of
December 31, 2004.
 
 Disclosure
controls and procedures are the controls and other procedures designed to ensure
that information that the Company is required to disclose in its reports under
the Exchange Act is recorded, processed, summarized and reported within the time
periods required. Disclosure controls and procedures include, without
limitation, controls and procedures designed to ensure that information the
Company is required to disclose in the reports that it files under the Exchange
Act is accumulated and communicated to Management of the Company, including the
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
 
 34
 
 
 **Design
and Evaluation of Internal Control Over Financial
Reporting**
 
 Pursuant
to Section 404 of the Sarbanes-Oxley Act of 2002, the Company has included a
report of Management's assessment of the design and effectiveness of its
internal controls as part of this Annual Report on Form 10-K for the fiscal year
ended December 31, 2004. The Company’s independent registered public accounting
firm also attested to, and reported on, Management's assessment of the
effectiveness of internal control over financial reporting. Management's report
and the independent registered public accounting firm's attestation report are
included in the Company’s 2004 financial statements under the captions entitled
"Management's Report on Internal Control Over Financial Reporting" and "Report
of Independent Registered Public Accounting Firm on Internal Control Over
Financial Reporting" and are incorporated herein by reference.
 
 **Changes
in Internal Control Over Financial Reporting**
 
 No
changes in our internal control over financial reporting were identified as
having occurred in the fiscal quarter ended December 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
 
 
 **Item
9B.        Other
Information**
 
 None.
 
 
 35
 
 
 **PART
III**
 
 **Item
10. Directors and
Officers of Registrant***
 
 The
Company has adopted a Code of Ethics for the Chief Executive Officer and Senior
Financial Officers and a Code of Conduct for all employees. These codes are
available on the Company’s website at http://www.theragenics.com . These
codes are also available without charge upon request directed to Investor
Relations, Theragenics Corporation ® , 5203
Bristol Industrial Way, Buford, Georgia 30518. The Company intends to disclose
amendments or waivers of these codes with respect to the Chief Executive
Officer, Senior Financial Officers or Directors required to be disclosed by
posting such information on its website.
 
 The
Company's Chief Executive Officer is required to certify to the New York Stock
Exchange each year that she was not aware of any violation by the Company of the
Exchange's corporate governance listing standards. The Chief Executive Officer
made her annual certification to that effect to the New York Stock Exchange as
of June 3, 2004. The Company's Form 10-K on file with the Securities and
Exchange Commission includes the certifications of the Company's Chief Executive
Officer and Chief Financial Officer required by Rule 13a-14 and Section 302 of
the Sarbanes-Oxley Act of 2002.
 
 
 **Item
11.  Executive
Compensation***
 
 **Item
12.  Security Ownership of
Certain Beneficial Owners and Management***
 
 **Item
13.  Certain Relationships
and Related Transactions***
 
 **Item
14.  Principal Accounting
Fees and Services***
 
 *****
    Except
      as set forth above,****the
      information called for by Items 10, 11, 12, 13 and 14 is omitted from this
      Report and is incorporated by reference to the definitive Proxy Statement
      to be filed by the Company not later than 120 days after December 31,
      2004, the close of its fiscal year.
 
 ****
 **PART
IV**
 ****
 **Item
15.  Exhibits and Financial Statement Schedules**
  **a)**
    **The
      following documents are filed as part of this
    Report.****1.**
    **Financial
      Statements**See
      index to financial statements on page 40.**2.**
    **Financial
      Schedules**See
      index to financial statements on page 40.**3.**
    **Exhibits**See
      index to exhibits on page 73.
 
 36
 
 
 3.1
    Certificate
      of Incorporation as amended through July 29, 1998 (incorporated by
      reference to Exhibit 3.1 of the Company’s report on Form 10-Q for the
      quarterly period ended June 30, 1998)3.2
    By-Laws
      (incorporated by reference to Exhibit 3.4 of the Company’s registration
      statement on Form S-1, File No. 33-7097, and post-effective amendments
      thereto)4.1
    See
      Exhibits 3.1 - 3.2 for provisions in the Company's Certificate of
      Incorporation and By-Laws defining the rights of holders of the Company's
      Common Stock10.1
    License
      Agreement with University of Missouri, as amended (incorporated by
      reference to Exhibit 10.3 of the Company’s registration statement on Form
      S-1, File No. 33-7097, and post-effective amendments
    thereto)10.2
    Reassignment
      and Release Agreement among the Company, John L. Russell, Jr., and Georgia
      Tech Research Institute (incorporated by reference to Exhibit 10.8 of the
      Company’s registration statement on Form S-1, File No. 33-7097, and
      post-effective amendments thereto)10.3
    Agreement
      with Nordion International Inc. (incorporated by reference to the
      Company’s report on Form 8-K dated March 23, 1995)10.4
    Rights
      Agreement dated as of February 17, 1997 between the Company and SunTrust
      Bank, Atlanta (incorporated by reference to Exhibit 99.1 of the Company’s
      registration statement on Form 8-A filed February 27,
  1997)10.5
    Sublease
      dated March 25, 1999 between Theragenics Corporation® and Community Reuse
      Organization of East Tennessee+ (incorporated by reference to Exhibit 10.1
      of the Company’s report on Form 10-Q for the quarterly period ended March
      31, 1999)10.6
    Work
      for Others Agreement dated March 25, 1999 between Theragenics Corporation®
      and Lockheed Martin Energy Research Corporation+ (incorporated by
      reference to Exhibit 10.2 of the Company’s report on Form 10-Q for the
      quarterly period ended March 31, 1999)10.7
    Credit
      Agreement dated October 29, 2003 between Theragenics Corporation® and
      SouthTrust Bank (incorporated by reference to Exhibit 10.1 of the
      Company’s report on Form 10-Q for the quarterly period ended September 30,
      2003)10.8
    1986
      Incentive and Non-Incentive Stock Option Plan* (incorporated by reference
      to Exhibit 10.11 of the Company’s registration statement on Form S-1, File
      No. 33-7097, and post-effective amendments thereto)10.9
    1990
      Incentive and Non-Incentive Stock Option Plan* (incorporated by reference
      to Exhibit 10.10 of the Company’s report on Form 10-K for the year ended
      December 31, 1990)10.10
    Theragenics
      Corporation® 1995 Stock Option Plan* (incorporated by reference to Exhibit
      10.1 of the Company’s common stock registration statement on Form S-8,
      file no. 333-15313)10.11
    1997
      Stock Incentive Plan* (incorporated by reference to appendix B of the
      Company’s Proxy Statement for its 1997 Annual Meeting of Stockholders
      filed on Schedule 14A)10.12
    Theragenics
      Corporation® Employee Stock Purchase Plan* (incorporated by reference to
      appendix A of the Company’s Proxy Statement for its 1998 Annual Meeting of
      Stockholders filed on Schedule 14A)10.13
    Theragenics
      Corporation® 2000 Stock Incentive Plan* (incorporated by reference to
      Exhibit 10.16 of the Company’s report on Form 10-K for the year ended
      December 31, 1999)10.14
    Employment
      Agreement of M. Christine Jacobs* (incorporated by reference to Exhibit
      10.1 of the Company’s report on Form 10-Q for the quarterly period ended
      March 31, 2000)
 
 37
 
 
 10.14A
    First
      Amendment to Executive Employment Agreement for M. Christine Jacobs*
      (incorporated by reference to Exhibit 10.1 of the Company’s report on Form
      10-Q for the quarterly period ended June 30, 2003)10.15
    Employment
      Agreement of Bruce W. Smith* (incorporated by reference to Exhibit 10.22
      of the Company’s report on Form 10-K for the year ended December 31,
      1998)10.15A
    Amendment
      to Executive Employment Agreement for Bruce W. Smith* (incorporated by
      reference to Exhibit 10.18 of the Company’s report on Form 10-K for year
      ended December 31, 2002)10.15B
    Second
      Amendment to Executive Employment Agreement for Bruce W. Smith*
      (incorporated by reference to Exhibit 10.19 of the Company’s report on
      Form 10-K for year ended December 31, 2002)10.15C
    Third
      Amendment to Executive Employment Agreement for Bruce W. Smith*
      (incorporated by reference to Exhibit 10.20 of the Company’s report on
      Form 10-K for year ended December 31, 2002)10.15D
    Fourth
      Amendment to Executive Employment Agreement for Bruce W. Smith*
      (incorporated by reference to Exhibit 10.2 of the Company’s report on Form
      10-Q for the quarterly period ended June 30, 2003)10.16
    Employment
      Agreement of James A. MacLennan* (incorporated by reference to Exhibit
      10.1 of the Company’s report on Form 10-Q for the quarterly period ended
      September 30, 2002)10.17
    Amended
      Employee Employment Agreement for Tracy M. Culver* (incorporated by
      reference to Exhibit 10.25 of the Company's report on Form 10-K for the
      year ended December 31, 2003)10.18
    Employee
      Employment Agreement for Michael O’Bannon* (incorporated by reference to
      Exhibit 10.26 of the Company's report on Form 10-K for the year ended
      December 31, 2003)10.18A
    Amendment
      to Employee Employment Agreement for Michael O’Bannon* (incorporated by
      reference to Exhibit 10.27 of the Company's report on Form 10-K for the
      year ended December 31, 2003)10.19
    Additional
      Compensation Information*10.20
    Short-Term
      Incentives*10.21
    Long-Term
      Incentives*10.22
    Forms
      of Option Award*10.23
    Form
      of Restricted Stock Award*10.24
    Advisor
      to the President Agreement with John Herndon* (incorporated by reference
      to Exhibit 10.1 of the Company's Form 8-K filed February 14,
      2005)10.25
    Form
      of Directors and Officers Indemnification Agreement* (incorporated by
      reference to Exhibit 10.28 of the Company's report on Form 10-K for the
      year ended December 31, 2003)24.1
    Consent
      of Independent Registered Public Accounting Firm for Incorporation by
      Reference of Audit Report into Registration Statements31.1
    Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) and Section 302 of
      the Sarbanes-Oxley Act of 200231.2
    Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) and Section 302 of
      the Sarbanes-Oxley Act of 200232.1
    Certification
      of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title
      18, United States Code,as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
    Certification
      of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title
      18, United States Code, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 *
Management contract or compensatory plan.
 +
Confidential treatment has been requested for portions of this
document.
 
 
 
 38
 
 **SIGNATURES**
 
 Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto
duly authorized.
 
 **THERAGENICS
      CORPORATION**
      (Registrant)By:
    /s/  M. Christine
      JacobsM. Christine Jacobs
      Chief Executive Officer
 Dated:
March 15, 2005
 Buford,
Georgia
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates
indicated.
 
 **Name**
    **Title**
    **Date**/s/
      M. Christine Jacobs
      M.
      Christine Jacobs
    Chief
      Executive Officer
      (Principal
      Executive Officer),
      President,
      and Chairman
    3/15/05/s/
      James A.
      MacLennan
      James
      A. MacLennan
    Chief
      Financial Officer (Principal Financial
      and
      Accounting Officer) and Treasurer
    3/15/05/s/
      Otis W. Brawley, M.D.
      Otis
      W. Brawley, M.D.
    Director
    3/15/05/s/
      Orwin L. Carter
      Orwin
      L. Carter
    Director
    3/15/05/s/
      Earnest W. Deavenport, Jr.
      Earnest
      W. Deavenport, Jr.
    Director
    3/15/05/s/
      Patrick L.
      Flinn
      Patrick
      L. Flinn
    Director
    3/15/05/s/
      John V.
      Herndon
      John
      V. Herndon
    Director
    3/15/05/s/
      Philip A. Incarnati
      Philip
      A. Incarnati
    Director
    3/15/05/s/
      Peter A. A. Saunders
      Peter
      A. A. Saunders
    Director
    3/15/05
 
 
 
 39
 
 
 **THERAGENICS
CORPORATION** **®**
 
 **TABLE
OF CONTENTS**
 PageMANAGEMENT'S
      REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
    41REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
      ON
      FINANCIAL STATEMENTS
    42REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS ON
      INTERNAL
      CONTROL OVER FINANCIAL REPORTING
    43FINANCIAL
      STATEMENTSBalance
      Sheets - December 31, 2004 and 2003
    45Statements
      of Operations for each of the three years in
      the
      period ended December 31, 2004
    47Statements
      of Shareholders’ Equity for each of the three
      years
      in the period ended December 31, 2004
    49Statements
      of Cash Flows for each of the three years
      in
      the period ended December 31, 2004
    51NOTES
      TO FINANCIAL STATEMENTS
    53REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS ON SCHEDULE
    71Schedule
      II - Valuation and Qualifying Accounts for each
      of
      the three years in the period ended December 31, 2004
    72
 
 
 40
 
 **Management’s
Report on Internal Control Over Financial Reporting**
 
 The
Management of Theragenics Corporation ® is
responsible for establishing and maintaining adequate internal control over
financial reporting. Internal
control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Securities Exchange Act of 1934, as amended, as a process
designed by, or under the supervision of, a company’s principal executive and
principal financial officers and effected by a company’s board of directors,
management and other personnel, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting
principles and includes those policies and procedures that:
 
 ·
    Pertain
      to the maintenance of records that in reasonable detail accurately and
      fairly reflect the transactions and dispositions of the assets of the
      company;
 
 ·
    Provide
      reasonable assurance that transactions are recorded as necessary to permit
      preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company
      are being made only in accordance with authorizations of management and
      directors of the company; and
 
 ·
    Provide
      reasonable assurance regarding prevention or timely detection of
      unauthorized acquisition, use or disposition of the company’s assets that
      could have a material effect on the financial
  statements.
 
 All
internal control systems, no matter how well designed, have inherent limitations
and can provide only reasonable, not absolute, assurance that the objectives of
the control system are met. Further, the design of a control system must reflect
the fact that there are resource constraints, and the benefits of controls must
be considered relative to their costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within
Theragenics TM have
been detected. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation. ****
  The
Company’s Management assessed the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004. In making this
assessment, Management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal
Control-Integrated Framework. Based on our assessment we believe that, as of
December 31, 2004, our internal control over financial reporting is effective
based on those criteria.
  Our
independent auditors have issued an audit report on Management’s assessment of
the Company's internal control over financial reporting, which follows this
report.
 
 
 
 
 
 
 
 41
 
 Report
of Independent Registered Public Accountants
 
 
 
 
 
 Board of
Directors
 Theragenics
Corporation ®
 
 We have
audited the balance sheets of Theragenics Corporation ® (a
Delaware corporation) as of December 31, 2004 and 2003, and the related
statements of operations, shareholders’ equity, and cash flows for each of the
three years in the period ended December 31, 2004. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Theragenics Corporation ® as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2004, in conformity
with accounting principles generally accepted in the United States of
America.
 
 As
discussed in Note M to the Financial Statements, Theragenics
Corporation ® adopted
Statement of Financial Accounting Standards No. 143, Accounting for Asset
Retirement Obligations, effective January 1, 2003.
 
 We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004, based on the
criteria established in *Internal
Control — Integrated Framework* issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated March 1, 2005, expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
 
 
 /s/
GRANT THORNTON LLP
 GRANT
THORNTON LLP
 
 Atlanta,
Georgia
 March 1,
2005
 
 
 42
 
 Report
of Independent Registered Public Accountants
 
 
 
 
 
 Board of
Directors
 Theragenics
Corporation ®
 
 We have
audited management's assessment included in Management’s Report on Internal
Controls Over Financial Reporting included in Theragenics Corporation® Form 10-K
for 2004, that Theragenics Corporation® (a Delaware Corporation) maintained
effective internal control over financial reporting as of December 31, 2004
based on criteria established in *Internal
Control — Integrated Framework* issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Theragenics Corporation’s® management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express an opinion on management's assessment and an opinion on the
effectiveness of the Company's internal control over financial reporting based
on our audit.
 
 We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
 
 A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company's
assets that could have a material effect on the financial
statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
 
 
 43
 
 
 In our
opinion, management's assessment that Theragenics Corporation® maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on criteria established in *Internal
Control — Integrated Framework* issued
by the COSO. Also in our opinion, Theragenics Corporation® maintained, in all
material respects, effective internal control over financial reporting as of
December 31, 2004, based on criteria established in *Internal
Control — Integrated Framework* issued
by the COSO.
 
 We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of Theragenics Corporation®
as of December 31, 2004 and 2003, and the related statements of operations,
shareholders’ equity, and cash flows for each of the three years in the period
ended December 31, 2004 and our report dated March 1, 2005 expressed an
unqualified opinion on those financial statements.
 
 
 /s/
GRANT THORNTON LLP
 GRANT
THORNTON LLP
 
 Atlanta,
Georgia
 March 1,
2005
 
 
 44
  Theragenics
Corporation ®
 
 BALANCE
SHEETS
 
 December
31,
 
 (Amounts
in thousands, except per share data)
 
 **ASSETS**
 
 
 2004
    
    2003**CURRENT
      ASSETS**Cash
      and short-term investments
    
    $
    28,450
    
    $
    45,104Marketable
      securities
    
    
    33,811
    
    
    21,327Trade
      accounts receivable, less allowance of$177
      in 2004 and $118 in 2003
    
    
    5,787
    
    
    3,831Inventories
    
    
    2,996
    
    
    1,851Deferred
      income tax asset
    
    
    410
    
    
    189Prepaid
      expenses and other current assets
    
    
    4,221
    
    
    4,760Total
      current assets
    
    
    75,675
    
    
    77,062**PROPERTY,
      PLANT AND EQUIPMENT - AT COST**Buildings
      and improvements
    
    
    43,618
    
    
    42,344Machinery
      and equipment
    
    
    61,560
    
    
    56,456Office
      furniture and equipment
    
    
    810
    
    
    773105,988
    
    
    99,573Less
      accumulated depreciation
    
    
    41,226
    
    
    34,41864,762
    
    
    65,155Land
      and improvements
    
    
    822
    
    
    822Construction
      in progress
    
    
    4,631
    
    
    7,39570,215
    
    
    73,372**OTHER
      ASSETS**
    
    
    2,788
    
    
    2,355Total
      Assets
    
    $
    148,678
    
    $
    152,789
 
 
 45
 
 
 Theragenics
      Corporation®
      
      BALANCE
      SHEETS - Continued
      
      December
      31,
      
      (Amounts
      in thousands, except per share data)
      
      
      **LIABILITIES
      AND SHAREHOLDERS’ EQUITY**2004
    
    2003**CURRENT
      LIABILITIES**Accounts
      payable
    
    $
    1,871
    
    $
    2,138Accrued
      salaries, wages and payroll taxes
    
    
    608
    
    
    577Other
      current liabilities
    
    
    607
    
    
    338Total
      current liabilities
    
    
    3,086
    
    
    3,053**LONG
      TERM LIABILITIES**Deferred
      income taxes
    
    
    6,920
    
    
    6,830Decommissioning
      retirement
    
    
    549
    
    
    515Other
      liabilities
    
    
    63
    
    
    65Total
      long term liabilities
    
    
    7,532
    
    
    7,410**SHAREHOLDERS’
      EQUITY**Common
      stock - authorized 100,000 shares of $.01
      par
      value; issued and outstanding, 29,989 in 2004 and
      29,944
      in 2003
    
    
    300
    
    
    299Additional
      paid-in capital
    
    
    61,987
    
    
    61,778Deferred
      compensation
    
    
    (23
    )
    
    -Retained
      earnings
    
    
    75,930
    
    
    80,240Accumulated
      other comprehensive income
    
    
    (134
    )
    
    9Total
      shareholders’ equity
    
    
    138,060
    
    
    142,326$
    148,678
    
    $
    152,789The
      accompanying notes are an integral part of these
    statements.
 
 
 46
 
 Theragenics
Corporation ®
 
 STATEMENTS
OF OPERATIONS
 
 Year
ended December 31,
 
 (Amounts
in thousands, except per share data)
 
 2004
    
    2003
    
    2002RevenueProduct
      sales
    
    $
    33,030
    
    $
    35,393
    
    $
    41,512Licensing
      fees
    
    
    308
    
    
    187
    
    
    35233,338
    
    
    35,580
    
    
    41,864Cost
      of sales
    
    
    14,122
    
    
    15,628
    
    
    14,677Gross
      profit
    
    
    19,216
    
    
    19,952
    
    
    27,187Operating
      expensesSelling,
      general and administrative
    
    
    17,619
    
    
    13,788
    
    
    12,845Research
      and development
    
    
    9,583
    
    
    7,467
    
    
    6,53827,202
    
    
    21,255
    
    
    19,383Earnings/(loss)
      from operations
    
    
    (7,986
    )
    
    (1,303
    )
    
    7,804Other
      income (expense)Interest
      income
    
    
    1,209
    
    
    1,040
    
    
    1,067Interest and financing costs
    
    
    (171
    )
    
    (167
    )
    
    (99
    )Other
    
    
    96
    
    
    21
    
    
    (71
    )1,134
    
    
    894
    
    
    897Earnings/(loss)
      before income tax and
      cumulative
      effect of change in accounting
      principle
    
    
    (6,852
    )
    
    (409
    )
    
    8,701Income
      tax expense/(benefit)
    
    
    (2,542
    )
    
    (319
    )
    
    3,145Earnings/(loss)
      before cumulative effect of
      change
      in accounting principle
    
    
    (4,310
    )
    
    (90
    )
    
    5,556Cumulative
      effect of change in accounting
      principle,
      net of tax of $131
    
    
    -
    
    
    (222
    )
    
    -NET
      EARNINGS/(LOSS)
    
    $
    (4,310
    )
    $
    (312
    )
    $
    5,556
 
 
 47
 Theragenics
Corporation ®
 
 STATEMENTS
OF OPERATIONS - Continued
 
 Year
ended December 31,
 
 (Amounts
in thousands, except per share data)
 
 2004
    
    2003
    
    2002**NET
      EARNINGS/(LOSS) PER COMMON SHARE***Basic:*Earnings/(loss)
      before cumulative effect of change in accounting principle
    
    $
    (0.14
    )
    $
    (0.00
    )
    $
    0.19Cumulative
      effect of change in accounting principle, net of tax
    
    
    -
    
    
    (0.01
    )
    
    -Net
      earnings/(loss) per common share
    
    $
    (0.14
    )
    $
    (0.01
    )
    $
    0.19*Diluted:*Earnings/(loss)
      before cumulative effect of change in accounting principle
    
    $
    (0.14
    )
    $
    (0.00
    )
    $
    0.19Cumulative
      effect of change in accounting principle, net of tax
    
    
    -
    
    
    (0.01
    )
    
    -Net
      earnings/(loss) per common share
    
    $
    (0.14
    )
    $
    (0.01
    )
    $
    0.19****WEIGHTED
      AVERAGE SHARES:Basic
    
    
    29,971
    
    
    29,902
    
    
    29,746Diluted
    
    
    29,971
    
    
    29,902
    
    
    29,994Net
      earnings/(loss)
    
    $
    (4,310
    )
    $
    (312
    )
    $
    5,556Comprehensive
      income/(loss)Unrealized
      gain/(loss) on securitiesavailable
      for sale:
    
    
    (143
    )
    
    (34
    )
    
    43Total
      comprehensive income/(loss)
    
    $
    (4,453
    )
    $
    (346
    )
    $
    5,599
 
 The
accompanying notes are an integral part of these statements.
  
 48
 
 Theragenics
Corporation ®
 
 STATEMENTS
OF SHAREHOLDERS’ EQUITY
 
 For the
three years ended December 31, 2004
 
 (Amounts
in thousands, except per share data)
  Common
      Stock
    
    Additional
    
    
    
    
    
    Accumulated
      otherNumber
      of
      shares
    
    Par
      value
      $0.01
    
    paid-in
      capital
    
    Deferred
      compensation
    
    Retained
      earnings
    
    comprehensivee
      income
    
    TotalBalance,
      December 31, 2001
    
    
    29,690
    
    $
    297
    
    $
    60,714
    
    $
    -
    
    $
    74,996
    
    $
    -
    
    $
    136,007Exercise
      of stock options
    
    
    60
    
    
    1
    
    
    244
    
    
    
    
    
    
    
    
    
    
    
    245Employee
      stock purchase plan
    
    
    10
    
    
    
    
    
    63
    
    
    
    
    
    
    
    
    
    
    
    63Stock-based
      compensation
    
    
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    67Unrealized
      gain on securities available-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    43
    
    
    43Income
      tax effect from stock options and stock
      purchase
      plan
    
    
    
    
    
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    109Net
      earnings for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,556
    
    
    
    
    
    5,556Balance,
      December 31, 2002
    
    
    29,760
    
    $
    298
    
    $
    61,197
    
    $
    -
    
    $
    80,552
    
    $
    43
    
    $
    142,090Exercise
      of stock options
    
    
    162
    
    
    1
    
    
    434
    
    
    
    
    
    
    
    
    
    
    
    435Employee
      stock purchase plan
    
    
    22
    
    
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    70Stock-based
      compensation
    
    
    
    
    
    
    
    
    72
    
    
    
    
    
    
    
    
    
    
    
    72
  49
 
 Theragenics
Corporation ®
  STATEMENTS
OF SHAREHOLDERS’ EQUITY - Continued
  For the
three years ended December 31, 2004
  (Amounts
in thousands, except per share data)
 Unrealized
      loss on securities available-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (34
    )
    
    (34
    )Income
      tax effect from stock options and stock
      purchase
      plan
    
    
    
    
    
    
    
    
    5
    
    
    
    
    
    
    
    
    
    
    
    5Net
      loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (312
    )
    
    
    
    
    (312
    )Balance,
      December 31, 2003
    
    
    29,944
    
    $
    299
    
    $
    61,778
    
    $
    -
    
    $
    80,240
    
    $
    9
    
    $
    142,326Exercise
      of stock options
    
    
    18
    
    
    1
    
    
    29
    
    
    
    
    
    
    
    
    
    
    
    30Employee
      stock purchase plan
    
    
    20
    
    
    
    
    
    78
    
    
    
    
    
    
    
    
    
    
    
    78Stock-based
      compensation
    
    
    7
    
    
    
    
    
    102
    
    
    (23
    )
    
    
    
    
    
    
    
    79Unrealized
      loss on securities available-for-sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (143
    )
    
    (143
    )Net
      loss for the year
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,310
    )
    
    
    
    
    (4,310
    )Balance,
      December 31, 2004
    
    
    29,989
    
    $
    300
    
    $
    61,987
    
    $
    (23
    )
    $
    75,930
    
    $
    (134
    )
    $
    138,060
 
 The
accompanying notes are an integral part of these statements.
 
 50
 
 Theragenics
Corporation ®
 
 STATEMENTS
OF CASH FLOWS
 
 Year
ended December 31,
 
 (Amounts
in thousands)
  2004
    
    2003
    
    2002Cash
      flows from operating activities:Net
      earnings/(loss)
    
    $
    (4,310
    )
    $
    (312
    )
    $
    5,556Adjustments
      to reconcile net earnings/(loss) tonet
      cash provided by operating activities:Cumulative
      effect of change in accounting principle, net of tax
    
    
    -
    
    
    222
    
    
    -Depreciation
      & amortization
    
    
    6,946
    
    
    6,553
    
    
    6,347Deferred
      income taxes
    
    
    (131
    )
    
    547
    
    
    468Income
      tax effect from stock options
    
    
    -
    
    
    5
    
    
    109Stock-based
      compensation
    
    
    79
    
    
    72
    
    
    67Deferred
      rent
    
    
    (2
    )
    
    (3
    )
    
    (4
    )Provision
      for allowances
    
    
    78
    
    
    (1
    )
    
    (153
    )Loss
      on disposal of equipment
    
    
    15
    
    
    3
    
    
    16Changes
      in assets and liabilities:Accounts
      receivable
    
    
    (2,015
    )
    
    987
    
    
    2,583Inventories
    
    
    (1,164
    )
    
    (790
    )
    
    (85
    )Prepaid
      expenses and other current assets
    
    
    539
    
    
    (2,479
    )
    
    (404
    )Other
      assets
    
    
    58
    
    
    (25
    )
    
    (15
    )Trade
      accounts payable
    
    
    (267
    )
    
    584
    
    
    758Accrued
      salaries, wages and payroll taxes
    
    
    31
    
    
    88
    
    
    (212
    )Other
      current liabilities
    
    
    269
    
    
    (3
    )
    
    248Net
      cash provided by operating activities
    
    
    126
    
    
    5,448
    
    
    15,279Cash
      flows from investing activities:Purchases
      and construction of property and equipment
    
    
    (3,263
    )
    
    (2,542
    )
    
    (3,565
    )Proceeds
      from disposal of plant and property
    
    
    2
    
    
    7
    
    
    60Cash
      paid for acquisition
    
    
    (1,000
    )
    
    (5,243
    )
    
    -Purchases
      of marketable securities
    
    
    (27,624
    )
    
    (28,249
    )
    
    (13,445
    )Maturities
      of marketable securities
    
    
    14,997
    
    
    18,834
    
    
    12,335Net
      cash used in investing activities
    
    
    (16,888
    )
    
    (17,193
    )
    
    (4,615
    )Cash
      flows from financing activities:Proceeds
      from exercise of stock options and stock purchase plan
    
    
    108
    
    
    505
    
    
    307Net
      cash provided by financing activities
    
    
    108
    
    
    505
    
    
    307
  51
 
 Theragenics
Corporation ®
 STATEMENTS
OF CASH FLOWS - Continued
 
 Year
ended December 31,
 
 (Amounts
in thousands)
 
 2004
    
    2003
    
    2002Net
      increase/(decrease) in cash and short-term investments
    
    $
    (16,654
    )
    $
    (11,240
    )
    $
    10,971Cash
      and short-term investments at beginning of year
    
    $
    45,104
    
    $
    56,344
    
    $
    45,373Cash
      and short-term investments at end of year
    
    $
    28,450
    
    $
    45,104
    
    $
    56,344Supplementary
      Cash Flow DisclosureInterest
      paid, net of amounts capitalized
    
    $
    101
    
    $
    167
    
    $
    99Income
      taxes paid
    
    $
    21
    
    $
    1,113
    
    $
    2,661
 The
accompanying notes are an integral part of these statements.
 
 52
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 
 NOTE A -
ORGANIZATION AND DESCRIPTION OF BUSINESS
 
 Theragenics
Corporation ® is the
manufacturer of TheraSeed ® , a
rice-sized, FDA-cleared device used to treat solid localized tumors, primarily
pr ostate
cancer, with a one-time, minimally invasive procedure. TheragenicsTM is the
world’s largest producer of palladium-103, the radioactive isotope that supplies
the therapeutic radiation for its TheraSeed ® device.
Physicians, hospitals and other healthcare providers, primarily located in the
United States, utilize the TheraSeed ® device.
The TheraSeed ® device
has also been approved for marketing throughout the member countries of the
European Union by obtaining its CE Mark. Sales of the TheraSeed ® device
in Europe have not been significant. The majority of sales are channeled through
two third-party distributors. The Company also sells its TheraSeed ® devices
directly to physicians.
  
 Early in
2003 the Company diversified its product line with the purchase of the U.S.
iodine-125 prostate brachytherapy business of BEBIG Isotopen-und Medizintechnik
GmbH (BEBIG), formerly distributed by Isotope Products Laboratories (both
subsidiaries of a publicly traded German company, Eckert & Ziegler AG). The
purchase gives TheragenicsTM exclusive U.S. manufacturing and distribution rights
to an FDA-cleared iodine-125-based medical device for the treatment of prostate
cancer. TheragenicsTM began distribution of the iodine-125-based medical device
early in 2003, and subsequently began to produce I-Seed (the TheragenicsTM
iodine-125-based medical device) early in 2004, utilizing the automated
production equipment procured in the business acquisition. The Company sells the
I-Seed device directly to physicians, hospitals and other healthcare providers. The
non-exclusive distributors of the TheraSeed ® device have no
distribution rights for the I-Seed device. Non-exclusive
rights to distribute the TheraSeed ® device
in Europe were granted to BEBIG as part of the transaction.
 
 The U.S.
Department of Energy (DOE) has granted TheragenicsTM access to unique DOE
technology, known as plasma separation process or PSP, for use in production of
isotopes, including palladium-102 (the “PSP Operation”). The Company has
constructed a facility in Oak Ridge, Tennessee to house the equipment,
infrastructure and work force necessary to support the production of isotopes,
including palladium-102, using this DOE technology. The building and the PSP
became operational during the latter half of 2002. The Company also has access
to and has made investments in other unique DOE resources. Additional equipment
in the amount of $1.7 million, which is physically located within DOE facilities
in Oak Ridge, has not yet been placed in service and is recorded as
construction-in-progress on the accompanying balance sheets.
 
 In
connection with the Company’s ongoing program targeted at diversifying its
future revenue stream, the Company continues to explore new applications for the
PSP technology. Among other things, the PSP technology enables the Company to
conduct feasibility runs designed to validate isotope usage in various diverse
industries and potential markets. The
Company is active in the Federal budget process, and is working to ensure that
the PSP's capabilities are known to Federal agencies such as the Departments of
Defense and Energy.
 
 In the
first quarter of 2004 the Company’s Oak Ridge operations began to enrich
palladium-102, which can be activated in a nuclear reactor to produce
palladium-103. The enriched palladium-102, along with access to specialized
reactor and related capabilities, could potentially supply the palladium-103
radioisotope to support TheraSeed ® production, if necessary. In addition, the production of palladium-102 allows
the Company to study the PSP and its interaction with palladium-102 in order to
calibrate the PSP and determine predictable yields generated by the PSP.
 
 53
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 
 The
Company’s diversification program also includes the clinical trial that utilizes
a palladium-103 device, called the TheraSource ® Intravascular Brachytherapy System, designed to prevent restenosis or
renarrowing of arteries following treatment of
peripheral vascular disease by percutaneous transluminal angioplasty, and the
TheraSight ® Ocular
Brachytherapy System, a device intended to treat exudative (wet) age-related
macular degeneration (AMD), a disease that leads to loss of eyesight and in some
cases complete blindness.
 
 The
Company has also identified potential opportunities, utilizing its cyclotrons,
for production of radiochemical products, which are typically used in medical
nuclear imaging procedures. During 2004, the Company began regular shipments to
customers of two radiochemicals, produced on the Company’s cyclotrons. The
revenue recognized during the twelve months ended December 31, 2004 was not
material. The Company has received a Drug Master File for these products from
the FDA, which will potentially allow access to a wider range of customers. The
Company also continues to assess the markets for other radiochemicals it is able
to produce using the existing cyclotrons.
 
 The
Company is also searching for, reviewing and evaluating external opportunities
for diversification in the form of joint ventures, partnerships, and/or
acquisitions of technologies, products and companies.
  
 NOTE B -
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 A summary
of the significant accounting policies consistently applied in the preparation
of the accompanying financial statements follows:
 
 1.  Use of
Estimates
 
 In
preparing financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP), Management is
required to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent liabilities, at
the date of the balance sheet, and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
 
 2. Revenue
Recognition
 Product
sales represent orders for the TheraSeed® and I-Seed devices and radiochemical
products. The implantable radiation devices produced according to patient and
procedure requirements are sold to third-party distributors, as well as to
direct customers. Radiochemical products, typically used in medical nuclear
imaging procedures, are sold to direct customers. All revenues from product
sales are recognized upon shipment and are generally not returnable. Licensing
fees are recognized in the periods to which they relate.
 
 3.  Cash
and Short-Term Investments
 
 For
purposes of reporting cash flows, cash and short-term investments include cash
on hand, cash in banks, variable rate demand notes, treasury investments and
U.S. obligations and commercial paper with maturities equal to or less than 90
days from purchase.
 
 54
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 4.  Marketable
Securities
 
 Marketable
securities consist primarily of high-credit quality corporate and municipal
obligations in accordance with the Company's investment policies. Marketable
securities are classified as available-for-sale and are reported at fair value,
based upon quoted market prices at the balance sheet date. The estimated fair
value of marketable securities by contractual maturity at December 31, 2004, is
as follows (amounts in thousands):
 
 Due
      in one year or less
    $
      23,070Due
      after one year through five years
    $
      10,741
 
 5.  Inventories
 
 Inventories
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method. Inventories as of December 31, 2004 and 2003
were comprised of the following (amounts in thousands):
 
 **Inventories**
    
    **December
      31, 2004**
    
    **December
      31, 2003**Raw
      materials
    
    $
    894
    
    $
    1,439Work
      in progress
    
    
    1,813
    
    
    206Finished
      goods
    
    
    8
    
    
    9Shipping
      supplies
    
    
    281
    
    
    197Total
    
    $
    2,996
    
    $
    1,851
 
 
 6.  Property,
Equipment, and Amortization
 
 Property
and equipment are recorded at historical cost. Depreciation and amortization is
provided for in amounts sufficient to relate the cost of depreciable assets to
operations over their estimated service lives on a straight-line basis.
Depreciation and amortization expense related to property and equipment charged
to operations was approximately $6,872,000, $6,545,000 and $6,265,000 for 2004,
2003 and 2002, respectively. Estimated service lives are 30 years for buildings
and improvements, and 3 to 15 years for machinery, equipment and
furniture.
 
 A
significant portion of the Company’s depreciable assets is utilized in the
production of its product. Management periodically evaluates the realizability
of its depreciable assets in light of its current industry environment.
Management believes that no impairment of depreciable assets exists as of
December 31, 2004. It is possible, however, that Management’s estimates
concerning the realizability of the Company’s depreciable assets could change in
the future.
 
 55
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 7.  Goodwill
and Intangible Assets
 
 The
Company accounts for goodwill and other intangible assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 142, *Goodwill
and Other Intangible Assets* (“SFAS
142”). Under SFAS 142, goodwill and intangible assets with indefinite lives are
not amortized to expense and must be reviewed for impairment annually or more
frequently if events or changes in circumstances indicate that the asset might
be impaired. The first step of the impairment test, used to identify potential
impairment, compares the fair value of a reporting unit with its carrying
amount, including goodwill and intangible assets with indefinite lives. The
Company operates as one reporting unit and therefore compares its book value to
market value (market capitalization plus a control premium). If fair value
exceeds book value, goodwill is considered not impaired, and the second step of
the impairment test is unnecessary. If book value exceeds market value, the
second step of the impairment test is preformed to measure the amount of
impairment loss, if any. For this step the implied fair value of the goodwill is
compared with the book value of the goodwill. If the carrying amount of the
goodwill exceeds the implied fair value of the goodwill, an impairment loss
would be recognized in an amount equal to that excess. Any loss recognized
cannot exceed the carrying amount of goodwill. After an impairment loss is
recognized, the adjusted carrying amount of goodwill is its new accounting
basis. Subsequent reversal of a previously recognized impairment loss is
prohibited once the measurement of that loss is completed. The Company completed
its annual goodwill impairment assessment as of November 28, 2004 and determined
that goodwill was not impaired and no impairment charge was
recorded.
 
 Goodwill
and other intangible assets are included in other assets in the accompanying
balance sheets. The Company has recorded goodwill of $2.6 million and $1.6
million at December 31, 2004 and 2003, respectively, which represents the excess
of the aggregate purchase price over the fair value of the tangible assets
acquired as part of the acquisition of the U.S.
iodine-125 prostate brachytherapy business of BEBIG (See Note A, above). Other
intangibles, which include patent costs and other intellectual property, were
$59,000 and $82,000, net of accumulated amortization of $174,000 and $151,000,
at December 31, 2004 and 2003 respectively. Other intangibles are being
amortized over periods of five to nineteen years. The Company recognized
$24,000, $24,000 and $28,000 of amortization expense in the years ended December
31, 2004, 2003 and 2002, respectively.
 
 8.  Income
Taxes
 
 The
Company accounts for income taxes using the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
applied to taxable income. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the
enactment date. A valuation allowance is provided for deferred tax assets when
it is more likely than not that the asset will not be realized.
  
 9.  Research
and Development Costs
 
 Research
and development (R&D) costs are expensed when incurred.
 
 10.  Advertising
 
 The
Company expenses the cost of advertising as incurred. Advertising expense was
approximately $2,833,000 $2,291,000 and $2,956,000 for the years ended December
31, 2004, 2003 and 2002, respectively.
 
 56
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 11.  Earnings
Per Share and Common Stock
 
 Basic net
earnings/(loss) per common share is based upon the weighted average number of
common shares outstanding during the period. Diluted net earnings/(loss) per
common share is based upon the weighted average number of common shares
outstanding plus dilutive potential common shares, including options, rights and
warrants outstanding during the period. Stock options, rights and warrants to
purchase 95,000 and 77,000 common shares for the years ended December 31, 2004
and 2003, respectively, were not included in the computation of diluted
earnings/(loss) per share for those years because their effect would have been
anti-dilutive.
 
 12.  Stock
Based Compensation
 
 Stock
options, restricted stock and other equity incentives issued to employees are
accounted for under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees,” using the intrinsic value method in
which compensation expense is recognized for the amount, if any, that the fair
value of the underlying common stock exceeds the exercise price at the date of
grant. Stock options and other equity instruments issued in exchange for goods
or services with non-employees are accounted for based on the fair value of the
consideration received or the fair value of the equity instruments issued,
whichever is more readily measurable. See Note H for a more detailed discussion
of stock based compensation plans.
 
 In
December 2002, the Financial Accounting Standards Board (FASB) issued Statement
No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure.”
SFAS 148 amends SFAS 123 “Accounting for Stock-Based Compensation” to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, SFAS
148 amends the disclosure requirement of SFAS 123 to require more prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. The additional disclosure requirements of SFAS 148 are
effective for fiscal years ending after December 15, 2002. The Company elected
the disclosure-only alternative under SFAS No. 123, "Accounting for
Stock-Based Compensation." No stock-based compensation cost related to options
issued to employees is included in net earnings, as all such options granted
have an exercise price equal to the market value of the stock on the date of
grant. Stock-based compensation costs of $26,000 and $5,000 are included in the
results for the years ended December 31, 2004 and 2003, respectively, related to
restricted stock issued to directors. Stock-based compensation costs of $75,000
are included in the results for the year ended December 31, 2004 related to
restricted stock rights granted to executive management. In accordance with SFAS
No. 148, "Accounting for Stock Based Compensation-Transition and
Disclosure," the following table presents the effect on net earnings and net
earnings per share had compensation cost for the Company's stock plans been
determined consistent with SFAS No. 123 (in thousands, except per share
data):
 
 57
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 2004
    
    2003
    
    2002Net
      earnings/(loss)
    
    
    As
      reported
    
    $
    (4,310
    )
    $
    (312
    )
    $
    5,556Pro
      forma
    
    
    (4,799
    )
    
    (1,190
    )
    
    4,455Basic
      net earnings/(loss) per common share
    
    
    As
      reported
    
    $
    (0.14
    )
    $
    (0.01
    )
    $
    0.19Pro
      forma
    
    
    (0.16
    )
    
    (0.04
    )
    
    0.15Diluted
      net earnings/(loss) per common share
    
    
    As
      reported
    
    $
    (0.14
    )
    $
    (0.01
    )
    $
    0.19Pro
      forma
    
    
    (0.16
    )
    
    (0.04
    )
    
    0.15
 
 
 The
weighted average fair value of the options granted during 2004, 2003, and 2002
was $2.77, $2.79 and $3.55, respectively. The fair values were estimated using
the Black-Scholes options-pricing model with the following weighted average
assumptions:
 
 2004
    
    2003
    
    2002Expected
      dividend yield
    
    
    0.0
    %
    
    0.0
    %
    
    0.0
    %Expected
      stock price volatility
    
    
    64.1
    %
    
    72.7
    %
    
    71.0
    %Risk-free
      interest rate
    
    
    3.2
    %
    
    3.4
    %
    
    3.0
    %Expected
      life of option (years)
    
    
    5.4
    
    
    5.5
    
    
    5.0
 
 13.  Fair
Value of Financial Instruments
 
 The
Company’s financial instruments include cash, cash equivalents and marketable
securities. The carrying value of cash and cash equivalents approximates fair
value due to the relatively short period to maturity of the instruments.
Marketable securities are classified as available-for-sale and are reported at
fair value, with unrealized gains or losses excluded from earnings and included
in other comprehensive income, net of applicable taxes.
 
 Available-for-sale
securities consist of:
 
 2004(in
      thousands)
    
    
    Amortized
      Cost
    
    
    Gross
      Unrealized
      Loss
    
    
    Estimated
      Fair
      ValueState
      and municipal securities
    
    $
    4,726
    
    $
    (8
    )
    $
    4,718U.S.
      government and agency securities
    
    
    6,994
    
    
    (46
    )
    
    6,948Corporate
      and other securities
    
    
    22,225
    
    
    (80
    )
    
    22,145Total
    
    $
    33,945
    
    $
    (134
    )
    $
    33,811
 
 14.  Segment
Information
 
 Operating
segments are defined by Statement of Financial Accounting Standards No. 131, *Disclosures
about Segments of an Enterprise and Related Information,* as
components of an enterprise about which separate financial information is
available that is evaluated regularly by the Company’s chief operating decision
maker, or decision making group, in deciding how to allocate resources and in
assessing performance. The Company reports as a single segment. All of the
Company’s assets are located within the United States and revenue outside the
United States is not material for any year in the three years ended December 31,
2004. Information related to major customers is discussed in Note D, Marketing
and Sales Agreements and Major Customers.
 
 15.
    Reclassifications
 
 Certain
amounts included in the 2003 and 2002 financial statements have been
reclassified to conform to the 2004 presentation.
 
 58
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 NOTE C -
CONSTRUCTION IN PROGRESS AND PURCHASE COMMITMENTS
 
 The U.S.
Department of Energy (DOE) has granted TheragenicsTM access to unique DOE
technology (plasma separation process or “PSP”) for use in production of
isotopes, including palladium-103. The Company has constructed a facility in Oak
Ridge, Tennessee to house the equipment, infrastructure and work force necessary
to support the production of isotopes, including palladium-103, using this DOE
technology. The building and the PSP became operational during the latter half
of 2002. Additional equipment in the amount of $1.7 million has not yet been
placed in service and is recorded as construction-in-progress on the
accompanying balance sheets.
 
 In June
2004 the Company entered into an asset purchase agreement with a contractor for
the design and manufacture of certain equipment. The capital asset purchase
agreement in the amount of $570,000 should be completed in early 2005. At
year-end 2004, progress payments in the amount of approximately $114,000 had
been paid in relation to the purchase agreement.
 
 NOTE D -
MARKETING AND SALES AGREEMENTS AND MAJOR CUSTOMERS
 
 The
Company sells its TheraSeed® device directly to health care providers and to
third party distributors. TheragenicsTM also manufactures and distributes I-Seed,
an iodine-125 based medical device, directly to health care providers. At the
beginning of 2003, the Company had non-exclusive distribution agreements in
place with four companies. During the first quarter of 2003, the distribution
agreement with one distributor was discontinued upon notification of the
acquisition of the distributor by another TheraSeed® distributor. In addition,
during the second quarter of 2003, TheragenicsTM was notified that this same
distributor acquired another TheraSeed® distributor. Currently, the Company has
non-exclusive distribution agreements in place with two companies for the
distribution of the TheraSeed® device, C. R. Bard and Medi-Physics, Inc.
(formerly d/b/a Nycomed Amersham and now part of Oncura, a company formed by a
merger of the brachytherapy business of Amersham plc and Galil Medical Ltd. and
referred to herein as “Oncura”). The non-exclusive distribution agreements for
the distribution of the TheraSeed® device give each distributor the right to
distribute the TheraSeed® device in the U.S., Canada and Puerto Rico for the
treatment of prostate cancer and other solid localized cancerous tumors. These
non-exclusive agreements give the distributors the option to distribute the
TheraSeed® device internationally. The
domestic and international distribution agreements with Oncura allow each party
the right to give notice of non-renewal of the agreements at the end of December
2004, which would be effective December 31, 2005. During December 2004, the
Company was notified by Oncura that it would not be renewing the distribution
agreements, effective December 31, 2005. C. R.
Bard has exercised its option to extend its distribution agreement with the
Company through December 2006.
 
 Total
sales to the two existing and the two previous non-exclusive distributors
represented approximately 81%, 81% and 83% of product revenue for the years
ended December 31, 2004, 2003 and 2002, respectively, with sales to two of the
four non-exclusive distributors each exceeding 10% of total revenue for each
year.
 
 Accounts
receivable from the two non-exclusive distributors represented approximately 74%
and 74% of accounts receivable at December 31, 2004 and 2003, respectively, with
each of the two non-exclusive distributors noted above each exceeding 10% of
total accounts receivable.
 
 59
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 NOTE E -
INCOME TAXES
 
 The
income tax provision consisted of the following (in thousands):
 
 2004
    
    2003
    
    2002CurrentFederal
    
    $
    (2,248
    )
    $
    (804
    )
    $
    2,442State
    
    
    (163
    )
    
    (62
    )
    
    235(2,411
    )
    
    (866
    )
    
    2,677DeferredFederal
    
    
    (148
    )
    
    500
    
    
    126State
    
    
    17
    
    
    47
    
    
    342(131
    )
    
    547
    
    
    468$
    (2,542
    )
    $
    (319
    )
    $
    3,145
 
 The
Company’s temporary differences result in a deferred income tax liability at
December 31, 2004 and 2003, summarized as follows (in thousands):
 
 December
      31,2004
    
    2003Deferred
      tax assets:Non-deductible
      accruals and allowances
    
    $
    127
    
    $
    74Inventories
    
    
    172
    
    
    115Stock
      compensation
    
    
    338
    
    
    314Asset
      retirement obligation
    
    
    202
    
    
    191Credits
    
    
    343
    
    
    -Other
    
    
    83
    
    
    29Gross
      deferred tax assets
    
    
    1,265
    
    
    723Deferred
      tax liabilities:Property
      and equipment
    
    
    (7,671
    )
    
    (7,324
    )Other
    
    
    (104
    )
    
    (40
    )Gross
      deferred tax liabilities
    
    
    (7,775
    )
    
    (7,364
    )Net
      deferred tax liability
    
    $
    (6,510
    )
    $
    (6,641
    )
 The net
deferred tax liability is classified in the accompanying balance sheets as
follows (in thousands):
 
 December
      31,2004
    
    2003Current
      deferred tax asset
    
    $
    410
    
    $
    189Long-term
      deferred tax liability
    
    
    (6,920
    )
    
    (6,830
    )Net
      deferred tax liability
    
    $
    (6,510
    )
    $
    (6,641
    )
 
 A
reconciliation of the statutory federal income tax rate and the effective tax
rate follows:
 
 60
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 
 2004
    
    2003
    
    2002Tax
      at applicable federal rates
    
    
    (35.0
    )%
    
    (35.0
    )%
    
    35.0
    %State
      tax, net of federal income tax
    
    
    (2.0
    )
    
    (2.0
    )
    
    2.0Tax
      exempt interest
    
    
    (1.7
    )
    
    (52.0
    )
    
    (1.5
    )Other
    
    
    1.6
    
    
    11.0
    
    
    0.6(37.1
    )%
    
    (78.0
    )%
    
    36.1
    %
 
 The
Company has research and development tax credit carryforwards of approximately
$203,000 which expire by 2024 and alternative minimum tax credit carryforwards
of approximately $140,000.
 
 NOTE F -
CREDIT AGREEMENT
 
 The
Company executed a Credit Agreement with a financial institution on October 29,
2003. The Credit Agreement, which expires October 29, 2006 (subject to earlier
termination by the lender upon the occurrence of certain events of default),
provides for revolving borrowings of up to $40.0 million at any time
outstanding, including a $5.0 million sub-limit for letters of credit. Interest
on outstanding borrowings is payable at the rate of interest periodically
designated by the financial institution as its base rate, or, at the option of
the Company, interest may accrue at a LIBOR based rate, plus an applicable
margin which is subject to quarterly adjustment. Interest on base rate loans is
payable monthly, while interest on LIBOR loans is payable on the last day of the
applicable one, two or three month interest period.
 
 The
Credit Agreement is unsecured, but provides for a “springing lien” to be
established on certain assets of the Company (subject to certain exceptions) in
the event certain events of default occur under the Credit Agreement. The Credit
Agreement contains representations and warranties, as well as affirmative,
reporting and negative covenants, customary for financings of this type. Among
other things, certain provisions of the Credit Agreement limit the incurrence of
additional debt and require the maintenance of certain financial ratios. The
Company was in compliance with these debt covenants at December 31,
2004.
 
 The
Company has letters of credit outstanding under the Credit Agreement as of
December 31, 2004 for approximately $933,000. These letters of credit are
related to asset retirement liabilities of long-lived assets, as well as a
utility deposit to the City of Oak Ridge, Tennessee. The letters of credit are
subject to terms identical to those of borrowings under the Credit
Agreement.
 
 NOTE G -
COMMITMENTS AND CONTINGENCIES
 
 Licensing
Agreement
 
 The
Company holds a worldwide exclusive license from the University of Missouri for
the use of technology, patented by the University, used in the Company’s
TheraSphere ® product.
The licensing agreement provides for the payment of royalties based on the level
of sales and on lump sum payments received pursuant to a licensing agreement
with Nordion International, Inc. (see below).
 
 The
Company has granted certain of its geographical rights under the licensing
agreement with the University of Missouri to Nordion International, Inc., a
Canadian company that is a producer, marketer and supplier of radioisotope
products and related equipment. Under the Nordion agreement, the Company is
entitled to licensing fees for each geographic area in which Nordion receives
new drug approval. The Company will also be entitled to a percentage of revenues
earned by Nordion as royalties under the agreement. Royalties from this
agreement are recorded as “Licensing fees” in the accompanying statements of
operations.
 
 61
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 Lease
Commitments
 
 The
Company leases land, space and equipment under non-cancelable leases that expire
at various dates through April 2029. Approximate minimum lease payments under
the leases are as follows: 2005, $341,000; 2006, $332,000; 2007, $319,000; 2008,
$317,000; 2009, $257,000 and $2,639,000 thereafter.
 
 Rent
expense was approximately $366,000, $289,000 and $345,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
 
 Contingencies
 ****
 In
January 1999, the Company and certain of its officers and directors were named
as defendants in certain securities actions alleging violations of the federal
securities laws, including Sections 10(b), 20(a) and Rule 10b-5 of the
Securities and Exchange Act of 1934, as amended. These actions were consolidated
into a single action in the U.S. District Court for the Northern District of
Georgia. The complaint, as amended, purported to represent a class of investors
who purchased or sold securities during the time period from January 29, 1998 to
January 11, 1999. The amended complaint generally alleged that the defendants
made certain misrepresentations and omissions in connection with the performance
of the Company during the class period and sought unspecified damages. On May
14, 1999 a stockholder of the Company filed a derivative complaint in the
Delaware Court of Chancery purportedly on behalf of the Company, alleging that
certain directors breached their fiduciary duties by engaging in the conduct
that was alleged in the consolidated federal class action complaint. The
derivative action was stayed by the agreement of the parties. On July 19, 2000,
the Court granted the Company’s motion to dismiss the consolidated federal class
action complaint for failure to state a claim against the Company, and granted
the plaintiffs leave to amend their complaint. On August 21, 2000, the
plaintiffs filed a second amended complaint and on March 30, 2001, the Court
denied the defendant’s motion to dismiss the plaintiffs’ second amended
complaint. The Court also denied the Company’s motion for reconsideration.
Subsequently, the Court certified the class and the parties commenced discovery.
Discovery was completed, and the Company filed a motion for summary judgment on
September 30, 2003.
 
 On July
1, 2004, while the summary judgment motion was pending, the Company, the
Company’s directors and officers’ liability insurance carrier, and the
plaintiffs’ counsel reached an agreement to settle the consolidated federal
class action for an amount within the remaining limits of the Company’s
directors and officers’ liability insurance. The plaintiffs dismissed their
lawsuit against the defendants and, on behalf of the settling class, released
defendants from any and all liability arising from the incidents alleged in the
second amended complaint. The Company was not required to make any financial
contribution toward the settlement. On September 29, 2004, the Court gave final
approval to the settlement, with no objectors and no requests for exclusion. The
final approval allowed the right to appeal the final order until November 1,
2004. No appeals were made to the final order and the case was officially over
as of that date. The derivative lawsuit is still pending. Its status is
currently being reevaluated in light of the settlement of the securities class
action lawsuit.
 
 62
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 
 The
Company and one of its distributors, Oncura, are currently arbitrating claims
arising in connection with the Company’s non-exclusive distribution agreement
with Oncura. Oncura claims that the Company has not addressed Oncura’s concerns
about pricing by renegotiating pricing in good faith. Oncura is seeking a change
in the pricing terms of the distribution agreement through the arbitration
proceeding, and has indicated that it will seek to recover a portion of payments
previously made. The Company filed a counterclaim against Oncura alleging that
Oncura breached its obligations under the distribution agreement concerning
marketing brachytherapy products and the use of the Company’s trademarks. The
arbitrators have been appointed and the parties are conducting discovery.
Management believes that Oncura’s claims are without merit and is opposing them
vigorously. Management believes the Company has meritorious counter-claims
against Oncura.
 
 From time
to time the Company may be a party to claims that arise in the ordinary course
of business, none of which, in the view of Management, is expected to have a
material adverse effect on the consolidated financial position or results of
operations of the Company.
 
 NOTE H -
STOCK BASED COMPENSATION
 
 The
Company provides stock-based compensation under equity incentive plans approved
by stockholders. The plans collectively provide for the granting of stock
options, restricted stock and other equity incentives. As of December 31, 2004
there were 2,500,133 options and 94,500 restricted stock rights (representing
from 61,950 to 141,000 shares depending on performance as described below)
outstanding and 277,429 shares of Common Stock remaining available for
issuance under the Company’s equity incentive plans (based on assumed vesting of
outstanding rights at target performance level).
 
 Stock
Options
 
 Stock
option grants to date have required the exercise price of the options granted to
be at least equal to 100% of market value on the date granted. Stock options
granted to date provide for the expiration of options ten years from the date of
grant and become exercisable over a three to five-year vesting period. At the
May 11, 2004 meeting of the Board of Directors, the Board approved the vesting
of all underwater options (defined as those options with exercise prices greater
than the closing price for the Company’s stock on May 11, 2004) as of May 11,
2004. The acceleration was approved in anticipation of the issuance of Statement
of Financial Accounting Standards No. 123R, discussed in Note N, Recently Issued
Accounting Standards. This approval resulted in 352,000 of previously unvested
options immediately becoming vested on May 11, 2004. Each of these options had
exercise prices greater than $4.73, the closing price of the Company’s stock on
May 11, 2004. This acceleration of vesting did not result in any charge to the
Company’s results of operations.
 
 Stock
option transactions for each of the three years in the period ended December 31,
2004, are summarized below (shares in thousands):
 
 63
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 
 2004
    
    2003
    
    2002Shares
    
    Weighted
      average
      exercise
      price
    
    Shares
    
    Weighted
      average
      exercise
      price
    
    Shares
    
    Weighted
      average
      exercise
      priceOutstanding,
      beginning of year
    
    
    2,535
    
    $
    9.54
    
    
    2,778
    
    $
    9.53
    
    
    2,324
    
    $
    10.21Granted
    
    
    33
    
    
    4.81
    
    
    30
    
    
    4.34
    
    
    514
    
    
    5.83Exercised
    
    
    (18
    )
    
    1.63
    
    
    (155
    )
    
    2.80
    
    
    (60
    )
    
    4.10Forfeited
    
    
    (50
    )
    
    2.69
    
    
    (118
    )
    
    16.73
    
    
    -
    
    
    -Outstanding,
      end of year
    
    
    2,500
    
    $
    9.67
    
    
    2,535
    
    $
    9.54
    
    
    2,778
    
    $
    9.53
 
 
 The
following table summarizes information about stock options outstanding at
December 31, 2004 (shares in thousands):
 
 Options
      Outstanding
    
    Options
      ExercisableRange
      of
      exercise
      prices
    
    Number
      outstanding
    
    Weighted-
      average
      remaining
      contractual
      life
    
    Weighted-
      average
      exercise
      price
    
    Number
      exercisable
    
    Weighted-average
      exercise
      price$
      1.63 - $ 5.61
    
    
    576
    
    
    6.3
    
    $
    4.29
    
    
    450
    
    $
    4.26$
      6.88 -$11.75
    
    
    1,407
    
    
    3.9
    
    
    8.45
    
    
    1,407
    
    
    8.45$16.56
      - $26.63
    
    
    517
    
    
    3.3
    
    
    18.98
    
    
    517
    
    
    18.982,500
    
    
    4.3
    
    $
    9.67
    
    
    2,374
    
    $
    9.95
 
 The
Company follows the practice of recording amounts received upon the exercise of
certain options by crediting common stock and additional paid-in capital. No
charges are reflected in the statements of operations as a result of the grant
or exercise of options to or by employees. The Company realizes an income tax
benefit from the exercise of certain stock options and the exercise and early
disposition of the shares acquired via certain other stock options. This benefit
results in a reduction to income taxes payable and an increase to additional
paid-in capital.
 
 Restricted
Stock
 
 Beginning
in 2003, each non-officer director began receiving 1,000 shares of restricted
stock per year, with one year vesting, as one component of director
compensation. The Company issued 7,000 shares of restricted stock to the
non-officer directors in November, 2003 which vested in November, 2004. The
total compensation cost associated with these restricted shares, $30,740, was
recognized over the vesting period and is included in selling, general and
administrative expense in the accompanying statements of operations for the
years ended December 31, 2004 and 2003. The Company issued an additional 7,000
restricted shares to non-officer directors in November, 2004 which will vest in
November, 2005. The total compensation cost related to these restricted shares,
$27,370 will be recognized over the vesting period and is included in selling,
general and administrative expense in the accompanying statements of operations
for the year ended December 31, 2004.
 
 64
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 Restricted
Stock Rights
 
 In August
2004, the Board of Directors granted restricted stock rights to the Company’s
Executive Officers. Specifically, the Company granted an aggregate of 48,000
restricted stock rights on August 10, 2004, to the Executive Officers. Each
right represents one share of common stock to be issued upon vesting, provided
that the Executive Officer remains in the Company’s employ until the vesting
date of December 31, 2005. The Company recognized $55,000 of stock-based
compensation related to these restricted stock rights in the year ended December
31, 2004. In June 2004, the Company also granted performance restricted stock
rights to the Executive Officers as part of a long-term incentive program. Under
the long-term incentive program, the number of shares issuable upon vesting of
each performance restricted stock right will depend on the company’s stock price
appreciation plus dividends paid (total shareholder return, or “TSR”) relative
to an industry peer group based on a fixed schedule. Each performance restricted
stock right represents the right to a minimum of 0.30 of a share of common stock
provided that the Executive Officer remains in the Company’s employ as of the
vesting date, and a maximum of two shares of common stock depending on the
Company’s TSR. TSR will be measured for the period from January 1, 2004 through
December 31, 2006, and rights will vest under the program as of December 31,
2006. The performance restricted rights will vest at the target achievement
level upon a change of control. The number of shares that could be earned in
respect of the performance restricted stock rights ranges from 13,950 shares to
93,000 shares based on TSR performance. The Company recognized $20,000 of
stock-based compensation related to the 13,950 share minimum in the year ended
December 31, 2004. Management will monitor the TSR of the Company, compared to
the industry peer group, during the vesting period for the June 2004 grants and
recognize additional, or adjust previously recorded compensation expense, as
appropriate. As of December 31, 2004, no additional stock-based compensation
expense was recorded based on TSR during the year ended December 31,
2004.
 
 Stock
Options Issued to Non-Employees
 
 During
1998, the Company issued 100,000 stock options to an individual for medical and
cancer consulting services. The Company recorded consulting expenses based on
the estimated fair value of the options at the grant date over the consulting
term of five years. Consulting expenses related to this agreement were
approximately $42,000 and $67,000 during 2003 and 2002, respectively. The
Company did not recognize any consulting expense related to these options during
2004.
 
 
 NOTE I -
EARNINGS/(LOSS) PER SHARE
 
 Earnings/(loss)
per common share was computed as follows (in thousands, except per share
data):
 
 Year
      ended December 31,2004
    
    2003
    
    2002Numerator
      for basic and diluted earnings/(loss)
      Per
      share - income available to common
      shareholders
    
    $
    (4,310
    )
    $
    (312
    )
    $
    5,556Denominator
      for basic earnings/(loss) per share
    
    
    29,971
    
    
    29,902
    
    
    29,746Adjusted
      weighted average sharesEffect
      of dilutive stock options and warrants
    
    
    -
    
    
    -
    
    
    248Denominator
      for diluted earnings/(loss) per share
      Adjusted
      weighted average shares
    
    
    29,971
    
    
    29,902
    
    
    29,994Basic
      earnings/(loss) per share
    
    $
    (0.14
    )
    $
    (0.01
    )
    $
    0.19Diluted
      earnings/(loss) per share
    
    $
    (0.14
    )
    $
    (0.01
    )
    $
    0.19
 
 
 65
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 The
diluted loss per share for the years ended December 31, 2004 and 2003 does not
include the effect of stock options, rights and warrants as their impact would
be anti-dilutive. Stock options, rights and warrants to purchase 95,000 and
77,000 common shares for the years ended December 31, 2004 and 2003,
respectively, were not included in the computation of diluted earnings/(loss)
per share for those years.
 
 NOTE J -
EMPLOYEE BENEFIT PLAN
 
 401(k)
Savings Plan
 
 The
Company has a 401(k) savings plan providing retirement benefits to all employees
at least 21 years of age. The Company makes matching contributions of 20%-60% of
each participant’s contribution, up to 6% of salary. The percentage of matching
contributions is discretionary, based on Company results and is made in the form
of Company common stock. Matching contributions are charged to operating
expenses and totaled approximately $168,000, $49,000 and $90,000 in 2004, 2003
and 2002, respectively.
 
 Employee
Stock Purchase Plan
 
 The
Theragenics Corporation ® Employee
Stock Purchase Plan (the 2 ESPP 2 ) allows
eligible employees the right to purchase common stock on a quarterly basis at
the lower of 85% of the market price at the beginning or end of each quarterly
offering period. As of December 31, 2004 and 2003, there were 111,000 and
131,000 shares of common stock reserved and un-issued for the ESPP,
respectively, and 89,000 and 69,000 shares had been issued under the plan,
respectively.
 
 NOTE K -
RELATED PARTY TRANSACTIONS
 
 An
officer and director of the Company was a director of a vendor that provides
radiation measurement services to TheragenicsTM until May 2004. TheragenicsTM paid
this vendor approximately $32,000, $37,000 and $29,000 during 2004, 2003 and
2002, respectively, for these services. The same officer and director of the
Company was a director of the American Cardiovascular Research Institute (ACRI)
for a portion of 2003. ACRI performed animal studies related to the Company’s
research initiatives. TheragenicsTM paid ACRI approximately $51,000, $60,000 and
$117,000 during 2004, 2003, and 2002, respectively, for these animal
studies.
 
 The same
officer is related to the principal of an outside consultant, Medical Equities,
which provides real estate advisory services. TheragenicsTM paid this consultant
approximately $5,000 in 2003 for these services.
 
 66
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 NOTE L -
QUARTERLY FINANCIAL DATA (UNAUDITED)
 
 The
following summarizes certain quarterly results of operations ( *in
thousands, except per share data* ) *:*
 Year
      ended December 31, 2004
    
    Quarter
      endedApril
      4
    
    July
      4
    
    October
      3
    
    December
      31Net
      revenue
    
    $
    7,953
    
    $
    8,646
    
    $
    8,283
    
    $
    8,456Gross
      profit
    
    
    4,555
    
    
    5,179
    
    
    5,001
    
    
    4,481Net
      loss
    
    
    (966
    )
    
    (934
    )
    
    (1,122
    )
    
    (1,289
    )Net
      loss per common share*Basic:*Loss
      per common share (basic)
    
    $
    (0.03
    )
    $
    (0.03
    )
    $
    (0.04
    )
    $
    (0.04
    )*Diluted:*Loss
      per common share (diluted)
    
    $
    (0.03
    )
    $
    (0.03
    )
    $
    (0.04
    )
    $
    (0.04
    )
 Year
      ended December 31, 2003:
    
    
    April
      6
    
    
    July
      6
    
    
    October
      5
    
    
    December
      31Net
      revenue
    
    $
    11,102
    
    $
    8,949
    
    $
    8,519
    
    $
    7,010Gross
      profit
    
    
    6,565
    
    
    4,990
    
    
    4,905
    
    
    3,492Earnings/(loss)
      before cumulative effect of change in accounting principle
    
    
    1,219
    
    
    266
    
    
    (388
    )
    
    (1,187
    )Cumulative
      effect of change in accounting principle
    
    
    (222
    )
    
    -
    
    
    -
    
    
    -Net
      earnings/(loss)
    
    
    997
    
    
    266
    
    
    (388
    )
    
    (1,187
    )Net
      earnings/(loss) per common share*Basic:*Earnings/(loss)
      before cumulative effect of change in accounting principle
    
    $
    0.04
    
    $
    0.01
    
    $
    (0.01
    )
    $
    (0.04
    )Cumulative
      effect of change in accounting principle
    
    
    (0.01
    )
    
    -
    
    
    -
    
    
    -Net
      earnings/(loss) per common share (basic)
    
    $
    0.03
    
    $
    0.01
    
    $
    (0.01
    )
    $
    (0.04
    )*Diluted:*Earnings/(loss)
      before cumulative effect of change in accounting principle
    
    $
    0.04
    
    $
    0.01
    
    $
    (0.01
    )
    $
    (0.04
    )Cumulative
      effect of change in accounting principle
    
    
    (0.01
    )
    
    -
    
    
    -
    
    
    -Net
      earnings/(loss) per common share (diluted)
    
    $
    0.03
    
    $
    0.01
    
    $
    (0.01
    )
    $
    (0.04
    )
 
 67
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
 
 NOTE M -
ASSET RETIREMENT OBLIGATIONS
 
 In
September 2001, the FASB issued Statement of Financial Accounting Standards No.
143, *Accounting
for Asset Retirement Obligations* , which
was effective for the Company’s 2003 fiscal year. Under Statement 143, a future
retirement obligation relating to future decommissioning costs of the Company’s
equipment and buildings is recorded at present value by discounting the
Company’s estimated future asset retirement obligation using the Company’s
estimated credit-adjusted borrowing rate. The offset to the liability is
capitalized as part of the carrying amount of the related long-lived asset. The
asset retirement obligation (ARO) has been recorded in the accompanying balance
sheets and will be adjusted to fair value over the estimated useful lives of the
assets as an accretion expense.
 
 At
January 1, 2003 the Company adopted Statement 143 and recognized an initial ARO
of approximately $478,000 and net capitalized costs of $126,000. The impact of
adopting the Statement was recognized as a cumulative effect of change in
accounting principle in the amount of $353,000 ($222,000 after income taxes).
The Company has recognized an increase in the ARO of approximately $34,000 and
$36,000 for the years ended December 31, 2004 and 2003, respectively,
representing the accretion expense. Approximately $13,000 and $30,000 in
amortization expense was recognized related to the capitalized cost for the
years ended December 31, 2004 and 2003, respectively.
 
 NOTE N -
RECENTLY ISSUED ACCOUNTING STANDARDS
  In June
2001, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standards No. 142, *Goodwill
and Other Intangible Assets* (“SFAS
142”). Under SFAS 142, companies are no longer required to amortize goodwill and
other intangible assets with indefinite lives but will be required to test these
assets periodically for impairment. SFAS 142 is effective for fiscal years
beginning after December 15, 2001. The Company adopted SFAS 142 effective
January 1, 2002.
  In June
2001, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 143, *Accounting
for Asset Retirement Obligations* , which
was effective for the Company’s 2003 fiscal year ( *see
“Note M” above* ).
  The FASB
issued Statement of Financial Accounting Standards No. 144, *Accounting
for the Impairment or Disposal of Long-Lived Assets* (“SFAS
144”), in August 2001. SFAS 144 establishes a single accounting model for the
impairment or disposal of long-lived assets and new standards for reporting
discontinued operations. SFAS 144 superseded Statement of Financial Accounting
Standards No. 121, *Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of,* and APB
Opinion No. 30, *Reporting
the Results of Operations—Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions* . The
provisions of SFAS 144 are effective in fiscal years beginning after December
15, 2001 and, in general, are to be applied prospectively. The Company adopted
SFAS 144 effective January 1, 2002 and such adoption had no material impact on
the financial statements.
  
 68
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
    In June
2002, the FASB issued Statement of Financial Accounting Standards No. 146, *Accounting
for Costs Associated with Exit or Disposal Activities* (“SFAS
146”), which addresses financial accounting and reporting for costs associated
with exit or disposal activities and supersedes Emerging Issues Task Force
(“EITF”) Issue 94-3, *Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)* . SFAS
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF Issue 94-3, a
liability for an exit cost as defined in EITF Issue 94-3 was recognized at the
date of an entity’s commitment to an exit plan. SFAS 146 also establishes that
the liability should initially be measured and recorded at fair value. SFAS 146
is effective for exit and disposal activities initiated after December 31, 2002.
The adoption of this pronouncement did not have a material impact on the
Company’s financial statements.
  In
November 2002, the FASB issued FASB Interpretation No. 45, *Guarantor’s
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees and Indebtedness of Others* (“FIN
45”) *.* FIN 45
elaborates on the disclosures to be made by the guarantor in its interim and
annual financial statements about its obligations under certain guarantees that
it has issued. It also requires that a guarantor recognize, at the inception of
a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and measurement provisions of
this interpretation are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002; while the provisions of the disclosure
requirements are effective for financial statements of interim or annual reports
ending after December 15, 2002. The Company adopted the disclosure provisions of
FIN 45 during the fourth quarter of fiscal 2002 and such adoption had no
material impact on its financial statements.
  In
December 2002, the FASB issued Statement of Financial Accounting Standards No.
148, *Accounting
for Stock-Based Compensation - Transition and Disclosure (“SFAS
148”)* . SFAS
148 amends Statement No. 123, *Accounting
for Stock-Based Compensation* (“SFAS
123”), to provide alternative methods for voluntary transition to SFAS 123’s
fair value method of accounting for stock-based employee compensation. SFAS 148
also requires disclosure of the effects of an entity’s accounting policy with
respect to stock-based employee compensation on reported net earnings (loss) and
earnings (loss) per share in annual and interim financial statements. The
provisions of SFAS 148 are effective in fiscal years beginning after December
15, 2002. The Company has adopted the disclosure option of this pronouncement
and will continue to account for stock options under the intrinsic method.
  In
January 2003, the FASB issued FASB Interpretation No. 46, *Consolidation
of Variable Interest Entities* (“FIN
46”). In general, a variable interest entity is a corporation, partnership,
trust, or any other legal structure used for business purposes that either (a)
does not have equity investors with voting rights or (b) has equity investors
that do not provide sufficient financial resources for the entity to support its
activities. FIN 46 requires certain variable interest entities to be
consolidated by the primary beneficiary of the entity if the investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The Company
expects that the provisions of FIN 46 will not have a material impact on its
financial statements upon adoption since the Company currently has no variable
interest entities.
  
 69
 
 Theragenics
Corporation ®
 NOTES TO
FINANCIAL STATEMENTS
 December
31, 2004 and 2003
  
   In
December 2003, the SEC issued Staff Accounting Bulletin No. 104, *Revenue
Recognition* ("SAB
104"), which supersedes Staff Accounting Bulletin No. 101, *Revenue
Recognition in Financial Statements* ("SAB
101"). The primary purpose of SAB 104 is to rescind accounting guidance
contained in SAB 101 related to multiple element revenue arrangements, which was
superseded as a result of the issuance of Emerging Issues Task Force 00-21, *Accounting
for Revenue Arrangements with Multiple Deliverables* ("EITF
00-21"). SAB 104 also incorporated certain sections of the SEC's "Revenue
Recognition in Financial Statements—Frequently Asked Questions and Answers"
document. While the wording of SAB 104 has changed to reflect the issuance of
EITF 00-21, the revenue recognition principles of SAB 101 remain largely
unchanged by the issuance of SAB 104. Management believes that the Company’s
revenue recognition policy is in compliance with SAB 104.
  In
November 2004, the FASB issued Statement of Financial Accounting Standards No.
151, *Inventory
Costs, an amendment of ARB No. 43, Chapter 4* (“SFAS
151”). SFAS 151 clarifies the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted materials and requires that such
items be recognized as current-period charges regardless of whether they meet
the “so abnormal” criterion outlined in ARB No. 43. In addition, SFAS 151
requires that allocation of fixed production overhead to the cost of conversion
be based on normal capacity of the production facilities. SFAS 151 is effective
for inventory costs incurred during fiscal years beginning after June 15, 2005.
While the Company is still evaluating the impact of this statement, it does not
currently believe it will have a material impact on its financial statements.
  In
December 2004, the FASB issued Statement of Financial Accounting Standards No.
123 (revised 2004), *Share-based
Payments* (“SFAS
123R”), which replaces the prior SFAS No. 123, “Accounting for Stock-based
Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued
to Employees.” SFAS 123R requires compensation costs related to share-based
payment transactions to be recognized in the financial statements based on the
grant date fair value of the award. Compensation cost will be recognized over
the period during which an employee is required to provide services in exchange
for the award, usually the vesting period. SFAS 123R will also require companies
to measure the cost of employee services received in exchange for Employee Stock
Purchase Plan (“ESPP”) awards. SFAS 123R is effective for interim or annual
periods beginning after June 15, 2005, which would be the Company’s third fiscal
quarter of 2005. The Company is in the process of determining the impact SFAS
123R will have on its financial statements.
  In
December 2004, the FASB issued Statement of Financial Account Standards No. 153 *Exchanges
of Nonmonetary Assets, an amendment of APB Opinion No. 29* (“SFAS
153”). SFAS 153 is effective for nonmonetary exchanges occurring in fiscal
periods beginning after June 15, 2005, with earlier application permitted. The
Company is currently evaluating SFAS 153, but does not believe it will have a
material impact on its financial statements.
 
 
 70
 
 **Report
of Independent Registered Public Accountants on
Schedule**
 
 
 
 
 Board of
Directors
 Theragenics
Corporation ®
 
 In
connection with our audit of the financial statements of Theragenics
Corporation ® referred
to in our report dated March 1, 2005, which is included in the annual report to
security holders and incorporated by reference in Part II of this form, we have
also audited Schedule II for each of the three years in the period ended
December 31, 2004. In our opinion, the schedule presents fairly, in all material
respects, the information required to be set forth therein.
 
 
 
 /s/
GRANT THORNTON LLP
 GRANT
THORNTON LLP
 
 Atlanta,
Georgia
 March 1,
2005
 
 
 
 
 71
 
 
 Theragenics
Corporation ®
 
 SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
 
 For each
of the three years in the period ended December 31, 2004
 (Amounts
in thousands)
 
 Column
      A - Description
    
    Column
      B
    
    Column
      C - Additions
    
    Column
      D
    
    Column
      EBalance
      at beginning of period
    
    (1)
      Charged
      to costs and expenses
    
    (2)
      Charged
      to
      other
      accounts
    
    Deductions
    
    Balance
      at end of periodYear
      ended December 31, 2004Allowance
      for doubtful
      accounts
      receivable
    
    $
    118
    
    $
    59
    
    $
    0
    
    $
    0
    
    $
    177Allowance
      for doubtful
      inventory
    
    $
    94
    
    $
    19
    
    $
    0
    
    $
    0
    
    $
    113Year
      ended December 31, 2003Allowance
      for doubtful
      accounts
      receivable
    
    $
    147
    
    $
    106
    
    $
    0
    
    $
    135
      (a
    )
    $
    118Allowance
      for doubtful
      inventory
    
    $
    65
    
    $
    29
    
    $
    0
    
    $
    0
    
    $
    94Year
      ended December 31, 2002Allowance
      for doubtful
      accounts
      receivable
    
    $
    300
    
    $
    (153
    )
    $
    0
    
    $
    0
    
    $
    147Allowance
      for doubtful
      inventory
    
    $
    548
    
    $
    0
    
    $
    0
    
    $
    483
      (b
    )
    $
    65
 
 (a)
    -
      write-off of uncollectible amounts
 (b)
    -
      disposal of inventory
 
 
 
 
 
 72
 
 
 **THERAGENICS
CORPORATION**
 
 **INDEX
TO EXHIBITS**
 
 10.19
    Additional
      Compensation Information10.20
    Short-Term
      Incentives10.21
    Long-Term
      Incentives10.22
    Forms
      of Option Award10.23
    Form
      of Restricted Stock Award24.1
    Consent
      of Independent Registered Public Accounting Firm for Incorporation by
      Reference of Audit Report into Registration Statements31.1
    Certification
      of Chief Executive Officer pursuant to Rule 13a-14(a) and Section 302 of
      the Sarbanes-Oxley Act of 200231.2
    Certification
      of Chief Financial Officer pursuant to Rule 13a-14(a) and Section 302 of
      the Sarbanes-Oxley Act of 200232.1
    Certification
      of Chief Executive Officer pursuant to Section 1350, Chapter 63 of Title
      18, United States Code,as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
    Certification
      of Chief Financial Officer pursuant to Section 1350, Chapter 63 of Title
      18, United States Code, as adopted pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002
 
   73