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, 2008
 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 WayBuford,
      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:
  Name
      of each exchange onTitle
      of each class
              
              
              which
      registeredCommon
      stock, $.01 par value,
              New
      York Stock ExchangeTogether
      with associatedCommon
      Stock Purchase Rights
  Securities
registered pursuant to Section 12(g) of the Act: None
  Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  o No  x
  Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes  oNo  x
  
  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  xNo  o
  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.  x
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.    
Large accelerated filer  o     Accelerated
filer  x     Non-accelerated
filer  o     
Smaller reporting company  o
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  oNo  x
  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 June
29, 2008, the last business day of the registrant’s most recently completed
second fiscal quarter, was $100,918,543.
  As of
March 11, 2009 the number of shares of Common Stock, $.01 par value, outstanding
was 33,449,498.
  Documents
incorporated by reference: Proxy Statement for the registrant’s 2009 Annual
Meeting of Stockholders, to be filed with the Securities and Exchange Commission
not later than 120 days after December 31, 2008 is incorporated by reference in
Part III herein.
 
  THERAGENICS
CORPORATION® AND
SUBSIDIARIES
  TABLE OF
CONTENTS
 
 PART
      I
              PageItem
      1.
              Business
              I-1Item
      1A.
              Risk
      Factors
              I-11Item
      1B.
              Unresolved
      Staff Comments
              I-20Item
      2.
              Properties
              I-21Item
      3.
              Legal
      Proceedings
              I-21Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              I-21PART
      IIItem
      5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              II-1Item
      6.
              Selected
      Financial Data
              II-2Item
      7.
              Management’s
      Discussion and Analysis of Financial Condition and
    Operations
              II-3Item
      7A.
              Quantitative
      and Qualitative Disclosures About Market Risk
              II-17Item
      8.
              Financial
      Statements and Supplementary Data
              II-17Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              II-17Item
      9A.
              Controls
      and Procedures
              II-17Item
      9B.
              Other
      Information
              II-20PART
      IIIItem
      10.
              Directors,
      Executive Officers and Corporate Governance
              III-1Item
      11.
              Executive
      Compensation
              III-1Item
      12.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              III-1Item
      13.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              III-1Item
      14.
              Principal
      Accounting Fees and Services
              III-1PART
      IVItem
      15.
              Exhibits
              IV-1Signatures
              IV-6
 
 
  Part
I
  Item
1. BUSINESS
  Overview
 
 Theragenics
Corporation® is
a medical device company serving the surgical products and cancer treatment
markets, operating in two business segments.  The terms "Company",
"we", "us", or "our" mean Theragenics Corporation and all entities included in
our consolidated financial statements.
  Our
surgical products business consists of wound closure, vascular access and
specialty needle products.  Wound closure products include sutures,
needles and other surgical products. Vascular access includes introducers,
guidewires and related products. Specialty needles include coaxial, biopsy,
spinal and disposable veress needles, access trocars, and other needle-based
products. Our surgical products segment serves a number of markets and
applications, including, among other areas, interventional cardiology,
interventional radiology, vascular surgery, orthopedics, plastic surgery, dental
surgery, urology, veterinary medicine, pain management, endoscopy, and spinal
surgery. Our surgical products business sells its devices and components
primarily to original equipment manufacturers (“OEMs”) and to a network of
distributors.
  In our
brachytherapy seed business, we produce, market and sell TheraSeed®, our
premier palladium-103 prostate cancer treatment device; I-Seed, our iodine-125
based prostate cancer treatment device; and other related products and services.
We are the world’s largest producer of palladium-103, the radioactive isotope
that supplies the therapeutic radiation for our TheraSeed® device.
Physicians, hospitals and other healthcare providers, primarily located in the
United States, utilize the TheraSeed® device.
The majority of our TheraSeed® sales
are channeled through one third-party distributor. We also maintain an in-house
sales force that sells our TheraSeed® and
I-Seed devices directly to physicians.
  We have
substantially diversified our operations and revenues in recent years. Prior to
2003, our sole product was the palladium-103 TheraSeed® prostate
cancer treatment device. In 2003, we began to market I-Seed, our iodine-125
prostate cancer treatment device. In May 2005, we expanded into the surgical
products business with the acquisition of CP Medical Corporation (“CP Medical”).
In August 2005 we restructured our brachytherapy seed business in order to
sharpen our focus on our two business segments and provide a more focused
platform for continued diversification.  In August 2006 we acquired
Galt Medical Corp. (“Galt”) and in July 2008, we acquired NeedleTech Products,
Inc. (“NeedleTech”).  CP Medical, Galt and NeedleTech comprise our
surgical products business, which accounted for 57% of consolidated revenue in
2008. Prior to 2005, the brachytherapy seed business constituted 100% of our
revenue.
  We
acquired CP Medical on May 6, 2005, for approximately $26.7 million, including
$20.6 million in cash and the issuance of 1,840,458 shares of common stock
valued at approximately $6.1 million. Galt was acquired on August 2, 2006, for
$32.7 million (net of $2.3 million of cash acquired), including $29.6 million in
cash and the issuance of 978,065 share of common stock valued at $3.1
million.  On July 28, 2008 we acquired NeedleTech for approximately
$44.1 million (net of cash, cash equivalents, and marketable securities acquired
of approximately $5.8 million).
  Description
of the Business
  Financial
Information about Operating Segments and Geographic Areas
  We
operate in two business segments; the surgical products segment and the
brachytherapy seed segment. Information related to revenue from external
customers, measure of profit and loss by segment, total assets by segment, and
geographic areas, is contained in Note O to the consolidated financial
statements included in Part IV of this report.
 
 Surgical
Products Business
 
 Overview
 
 Our
surgical products segment manufactures and distributes wound closure, vascular
access, and specialty needle products, all of which are considered medical
devices.  Sales are primarily to OEMs and to a network of
distributors.
 
 Wound
closure products include sutures and other surgical products with applications
in urology, veterinary, cardiology, orthopedics, plastic surgery, and other
fields.  The wound closure market is estimated by industry sources to
be a $2.0 billion annual worldwide market, and a $1.2 billion annual market in
the United States.  We believe sutures represent approximately $700
million of the worldwide wound closure market.  Our wound closure
products are used to hold skin, internal organs, blood vessels and other tissue
together, after they have been severed by injury or surgery.  Wound
closure products such as sutures are produced in various dimensions,
configurations, and types of materials, depending on the
application.  We produce and distribute over 800 wound closure line
items, including sterile and non-sterile products.  Sutures represent
the majority of wound closure products we sell.  Approximately 60% of
our suture product sales were in veterinary applications and 40% were in
human applications in 2008 and 2007.  In 2006, approximately 70% of
our suture product sales were in veterinary applications and 30% were in human
applications.
  I-1
  Vascular
access products include a variety of introducer sheaths, guidewires and
accessories used in interventional radiology, interventional cardiology and
vascular surgery.  The interventional radiology and interventional
cardiology markets are estimated by industry sources to be in excess of $12.0
billion.  The market for access devices is estimated to be
approximately 5% of the total market, or $600 million.  Our
introducers are used to create a conduit through which a physician can insert a
device, such as a catheter, into a blood vessel.  Such a device is
introduced into the vasculature by first using a needle to access the vein. A
guidewire is then inserted through the needle and the needle is removed. The
introducer, consisting of a hollow sheath and a dilator, is then inserted over
the guidewire to expand the opening. The guidewire and dilator are then removed,
leaving only the hollow sheath through which the catheter or other device is
inserted. Once the device is in place, the introducer sheath is removed. This is
typically done by splitting the introducer in half when the “tear away” version
of the product is utilized. Introducers and guidewires are produced in various
dimensions, configurations and types of material, depending upon the
application.  We produce and distribute over 200 introducer line
items, many of which are procedure kits that, in addition to introducers and
guidewires, may include needles, scalpels and other components.  These
products are sold sterile to distributors and to OEMs in sterile and bulk,
non-sterile configurations.
 
 Specialty
needle products include coaxial needles, biopsy needles, access trocars,
brachytherapy needles, guidewire introducer needles, spinal needles, disposable
veress needles, and other needle-based products.  End markets served
include the cardiology, orthopedic, pain management, endoscopy, spine, urology,
and veterinary markets.  The United States is the largest market for
specialty purpose needles and was estimated to be approximately $800 million in
2005, with our specialty needle products addressing approximately 10% of this
market.  Our specialty needle products are used for a number of
purposes including: retrieval of samples of tissue or bone (biopsies) that will
be examined for disease; delivery of therapeutic materials such as drugs,
radioactive sources, and bone cement and; providing access to a specific area of
the body to allow passage for other instruments.  Our specialty
needles are typically constructed of stainless steel wire and tubing with
special cutting edges which are ground to
specification.   Specialty needles are produced in various forms
depending upon the application, and we manufacture over 2,500 line items for
sale to OEMs in sterile private label, and bulk, non-sterile
configurations.
 
 Major
product lines in our surgical products business include:
 
 Sutures:
 Sutures
are classified as absorbable or non-absorbable; monofilament, multifilament or
braided; and natural or synthetic. Absorbable or non-absorbable describes the
sutures effective life within tissue. Absorbable sutures lose the majority of
their tensile strength within 60 days after use. Non-absorbable sutures are
resistant to living tissue and do not break down. Monofilament, multifilament
and braided describes the structure or configuration of the suture and is based
on the number of strands used to manufacture the product. Natural or synthetic
describes the origin of the suture. Natural suture materials include surgical
gut, chromic gut, and silk. Synthetic suture materials include nylon, polyester,
stainless steel, polypropylene, polyglycolic acid, polyglycolide-cocaprolactone,
and polydioxanone.
 
 Staples:
 Staples
are made from stainless steel and come in multiple sizes. Staples are a quicker
method of wound closure than suture and are particularly effective in areas of
high skin or tissue tension. Lower infection rates have been experienced with
the use of staples for wound closure due to a lesser degree of tissue
penetration than suture. Staplers are designed for a single use, come preloaded
with staples, and are lightweight and disposable.
 
 Strips
and Tape:
 Strips
and tapes are made of paper, plastic or polyester fabric backed by an adhesive.
Strips and tapes are easy to use and are particularly effective for small wound
closure and for use in conjunction with other wound closure
materials.
 
 Glues and
other surgical sealants:
 Glues and
sealants are easy to use and eliminate some of the difficulties associated with
suture such as variances in absorption rates and tissue reaction. However, they
can cause inflammation and are not effective for use in areas of high tissue
tension.
 
 Needles:
 Needles used in general surgery,
including a line of needles and related products used in brachytherapy surgical
procedures.  Smooth and echogenic introducer needles are also
available as sterile products.
  I-2
 Guidewires:
 Guidewires
function as a mechanical assist for the percutaneous introduction and exchange
of various types of plastic catheters or introducer systems into the
vasculature.  Once the catheter is in place, the guidewire is removed
and serves no other function. Materials commonly used in the production of
guidewires are stainless steel, Nitinol, precoated Teflon
(polytetrafluoroethylene, or “PTFE”) stainless steel wire, tungsten alloys and
platinum alloys.  Guidewires are sold to OEMs on a bulk, non-sterile
basis as well as packaged sterile.  We have the technological and
manufacturing capability to produce diagnostic and interventional guidewires and
currently offer a sterile product line with approximately 40 line
items.
 
 Micro-Introducer
Kits:
 Micro-Introducers
are commonly called coaxial dilators and are utilized when a small entry site
(21 gauge needle) is desirable.  Micro-Introducers are introduced over
a guidewire.  These introducers are packaged in a sterile kit that
includes a Micro-Introducer set, a 21-gauge needle and a .018” diameter
guidewire.  The standard product offerings consist of standard and
stiffen variations.  Various iterations are accomplished by using
three different needle types and four different mandrel type
guidewires.  The current sterile product line consists of
approximately 60 line items.
 
 Tearaway
Introducer Sets and Kits:
 This
product consists of a Teflon sheath and a High Density Polyethylene (“HDPE”)
dilator set that is introduced over a guidewire.  Once that
introduction is made, the guidewire and the dilator are removed leaving the
sheath in place as a vascular access.  Once the definitive device
(catheter) is introduced through the sheath, the sheath is easily split and
removed leaving the desired catheter in place.  These products are
offered sterile as an introducer sheath/dilator set or as a complete introducer
kit that includes a needle and a guidewire.  The sterile product line
consists of approximately 150 line items with lengths from 5cm to
50cm.  Additionally, the components are sold on a bulk, non-sterile
basis to OEMs.
 
 Elite HVTM
Introducer Kits:
 This
product consists of a sheath that incorporates a hemostasis valve and an HDPE
dilator for arterial access.  It is introduced into the vasculature as
a set over a guidewire.  The guidewire and dilator are removed leaving
a “closed” vascular access system.  The product line consists of
standard .035” compatible sheaths, as well as .018” Micro-access kits, which
allows for a less invasive entry.  Recent enhancements include a line
of 24 cm sheaths, as well as the option of a radiopaque band to assist in tip
visibility under fluoroscopy.  The present product line consists of 45
line items and is sold sterile and bulk, non-sterile.
 
 ReDialTM
4cm High Flow Introducer Sheath:
 This product consists of a sheath that
incorporates a hemostasis valve, HDPE dilator, larger bore tubing, side holes,
and color coded clamps for use in de-clotting dialysis shunts. The larger bore
tubing and side holes allow for high flow procedures. The ReDialTM is available
with or without radiopaque band, and consists of 24 line items. A recent
enhancement includes larger bore sizes.  The present product line is
sold sterile and bulk, non sterile.
 
 Radial
Artery Access Kits:
 This product consists of a sheath that
incorporates a hemostasis valve and an HDPE dilator for arterial access via the
radial artery.  Radial artery access reduces trauma and recovery
time.  The radial artery access kits are available in 24 line items to
meet the preference of the physician, and include a needle and guidewire. These
introducer sheaths are typically used during coronary angioplasty
procedures.
 
 Biopsy
Needles:
 These needles consist of a stainless
steel stylet and cannula combination sharpened in such a way as to facilitate
entry into the body to cut and retrieve a sample of tissue for examination or
testing.  This family of needles contains three major types: Core
Biopsy Needles used to obtain a soft tissue sample for Histology in areas such
as the breast or prostate; Aspiration Biopsy Needles used to obtain a sample of
cells for Cytology in areas such as the lung or liver and; Bone Biopsy Needles
that core and retrieve a sample of marrow, generally from the pelvic
area.  They are sold bulk non-sterile to OEMs.
 
 Orthopedic
Needles:
 These needles are large diameter (up to
8 gauge) stainless steel stylet and cannula combinations attached to a large
handle that provides the significant leverage needed to gain access to the
vertebral body of the spine.  This family of devices provides a means
to aspirate, and retrieve tissue samples from the vertebra for examination, and
then delivery cements for repair of fractures or to fill voids.  These
devices are sold bulk non-sterile or sterile with private labeling.
  I-3
 Pain
Management Needles:
 These needles are also referred to as
“denervation needles”.  These devices are manufactured from 18 to
21-gauge stainless steel tubing that have a sharpened distal end and are
insulated along the entire length of the needle except for the most distal
end.  The distal tip of the device is placed into contact with the
nerve responsible for patient pain and then energized, usually with radio
frequency energy, causing the needle distal end to heat.  Heat applied
to the target nerve reduces the pain signal to the brain providing patient
relief.  These products are generally sold sterile with private
labeling.
 
 Access
Needles:
 Access needles are a broad term used to
describe devices that are used for less invasive entry during Laparoscopic type
procedures, vascular access for delivery of guidewires into the circulatory
system and to create a channel by which any other instrument can
pass.
 
 Production
- Surgical Products Business
  We
design, manufacture, assemble, package and distribute our surgical products in
three primary production facilities, each of which manufactures unique
products.  Component raw materials primarily include natural and
synthetic sutures, plastic and stainless steel tubing, wire, plastic resins and
other components, which are generally readily available from third party
suppliers. Suppliers are located in the United States, as well as in Latin
America, Europe, and Asia. A significant portion of our products in the surgical
products segment is produced for OEMs as private labeled products or in a bulk,
non-sterile configuration.
  Marketing
and Major Customers - Surgical Products Business
  Our
surgical products are sold primarily to OEMs and through a network of
distributors in the United States and Europe. A small direct sales force is
maintained for direct sales to healthcare providers (human use and veterinary)
and group purchasing organizations, as well as to service the needs of
distributors. No single customer represented 10% or more of surgical products
revenue for 2008 or 2007.  One customer represented approximately 10%
of surgical products revenue for 2006.
  Competition
- Surgical Products Business
  Our
surgical products business operates primarily in the wound closure,
interventional radiology, interventional cardiology, vascular surgery, and
specialty needle markets, which are dominated by a few large suppliers and a
number of smaller suppliers that can limit the growth opportunities available to
smaller participants. The primary suppliers include Angiodynamics, Angiotech
Pharmaceuticals, Covidien Ltd., Boston Scientific, Cook Medical, Inc., C.R.
Bard, Inc., Greatbatch, Inc., Hart Enterprises, Cordis and Ethicon, Inc.
(subsidiaries of Johnson and Johnson), Merit Medical, Needle Specialty Products,
Terumo Medical and Tegra Medical. Many of our competitors have substantially
greater financial, technical and marketing resources than we do. Our surgical
products business competes in these markets by providing custom labeled
products, high quality, timely and cost effective products, and a high level of
customer service in niche markets that are underserved by the larger suppliers
and for customers that lack expertise or resources for these particular
products. Our surgical products business also has extensive experience and
knowledge of the markets as well as many established relationships with
distributors and providers.
 
 The
current environment of managed care is characterized by economically motivated
buyers, consolidation among healthcare providers, increased competition and
declining reimbursement rates.  In addition, healthcare providers may
attempt to simply the procurement process which may affect, among other things,
the number of suppliers in the supply chain.  As a supplier to OEMs
and distributors, we do not sell directly to the end user and may be affected by
these and other changes in the structure of the business relationships between
the healthcare provider and the OEM or distributor.  We believe our
future competitive success will depend on our ability to integrate ourselves
into the supply chain by providing outstanding value to our
customers.  This may include, among other things, developing new
products (including extensions of current products), offering competitive
pricing, and providing value added services to our customers that will
contribute to their efficiencies and profitability. Also critical to our
continued competitive success is our ability to attract and retain skilled
development personnel, obtain patent or other protection for our products,
obtained required regulatory and reimbursement approvals, successfully market
and manufacture our products and maintain sufficient inventory to meet
demand.
 
 Patents
and Licenses; Trade Secrets - Surgical Products Business
 
 Our
surgical products business holds several U.S. patents related to suture
dispensing systems, suture and needle design, vascular introducer system design,
and bone biopsy and vertebroplasty needles. Our policy is to file patent
applications in the United States and foreign countries where rights are
available and when we believe it is commercially advantageous to do so.  We
consider the ownership of patents important, but not necessarily essential, to
our surgical products business.  A strategy of confidentiality
agreements and trade secret treatment is also utilized to protect non-patented
proprietary information.
  I-4
  Brachytherapy
Seed Business
 
 Overview
 
 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
estimated that there were 186,320 new cases of prostate cancer diagnosed
and an estimated 28,660 deaths associated with the disease in the United States
during 2008.
 
 According
to the American Cancer Society, more than 90% 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). According to the American Cancer
Society, the 5-year survival rate for men with prostate cancers found in the
local and regional stages is nearly 100%.
 
 We
produce TheraSeed®, 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®devices
are implanted throughout the prostate gland in a minimally invasive surgical
technique, assisted by 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 are biocompatible and remain permanently in the
prostate after delivering their radiation dose.
 
 We
believe the TheraSeed® device
offers significant advantages over other treatment options, including reduced
incidence of side effects such as impotence and incontinence. Recent multi-year
clinical studies indicate that seeding offers success rates for early-stage
prostate cancer that are comparable to or better than alternative treatment
options and is associated with reduced complication rates. In addition,
brachytherapy is a one-time outpatient procedure with a typical two to three day
recovery period. By comparison, other treatment modalities typically require a
lengthy hospital stay and recovery period.
  The
TheraSeed® device
is a radioactive "seed" roughly the size of a grain of rice. Each seed consists
of biocompatible titanium that encapsulates the radioactive isotope
palladium-103 (“Pd-103”). The half-life of Pd-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 number of seeds implanted normally ranges from 50 to 150,
but the number of seeds varies depending on the size of the prostate. The
procedure is usually performed under local anesthesia in an outpatient setting.
An experienced practitioner typically performs the procedure in approximately 45
minutes, with the patient often returning home the same day.
 
 We also
offer the I-Seed device, which is a “seed” device similar to TheraSeed®, except
that it utilizes the radioactive isotope iodine-125 (“I-125”). The half-life of
I-125 is approximately 60 days. The half-life characteristics result in the loss
of almost all radioactivity in approximately 20 months. While we believe that
Pd-103 continues to have certain advantages over I-125, including (i) higher
dose rates without the risk of side effects that may be associated with even
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 offering of our I-Seed
iodine product enables us to compete more effectively for those direct customers
who prefer to buy both seeds from a single source.
 
 Treatment
Options - Brachytherapy Seed Business
 
 In
addition to brachytherapy, there are many treatment options for localized
prostate cancer. Some therapies may be combined to address a specific cancer
stage or patient need. 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 surgical 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.
Alternative forms of radical prostatectomy include laparoscopic radical
prostatectomy (“LRP”) and robotic radical prostatectomy
(“RRP”).  These forms of radical prostatectomy are intended to be less
invasive than a traditional radical prostatectomy and are more complex to
perform.
 
 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. Patients are
usually treated five days per week in an outpatient center over a period of
eight to nine weeks. Side effects include impotence, incontinence and rectal
complications.
  I-5
  Certain
forms of external beam radiation include three-dimensional conformal radiation
therapy (“3DCRT”) and Intensity Modulated Radiation Therapy (“IMRT”). These
treatments generally utilize x-rays, computerized mapping and other techniques
in an attempt to more accurately aim the radiation at the prostate. Conformal
proton radiation is another newer form of radiation therapy that uses a similar
approach, but instead of using x-rays this technique focuses proton beams on the
cancer.
 
 Cryosurgery treats the cancer
by freezing the cells with cold metal probes, destroying the prostate. Patients
usually remain in the hospital for one to two days.  Side effects may
include soreness, swelling, impotence and incontinence.
 
 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.
 
 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.
 
 In
addition to the treatment options described above, other forms of treatment and
prevention, including drugs and other forms of radiation, may be undergoing
development and testing in clinical settings.
 
 Clinical Results - Brachytherapy Seed
Business
 
 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 RP or
EBRT.
 
 A
twelve-year study published in the Volume 4, Issue 1 (2005) edition of the
journal Brachytherapyrevealed that high-risk prostate cancer patients treated with
brachytherapy using Pd-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% were treated with brachytherapy and
20% were treated with surgery. High-risk patients treated with seeding showed an
88% cure rate compared to a 43% cure rate obtained from surgery at 12 years.
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.
 
 An 8-year
study by Dr. Gregory Merrick, Dr. Kent Wallner, et. al, of the
Schiffler Cancer Center and Wheeling Jesuit Hospital,
disputes a common view that men under the age of 60 should be treated with
radical prostatectomy.  The study, published in the British Journal of Urology,
2006, showed that men aged 54 and younger have a high probability of a good
8-year BPFS (biochemical progression-free survival) when treated with permanent
interstitial brachytherapy, with or without supplemental external beam radiation
therapy.  For the entire group, the actuarial BPFS rate was
96%.  For low- (57 men), intermediate- (47 men) and high- (four) risk
patients, the BPFS rates were 96%, 100%, and three of four,
respectively.
 
 Combination
Treatment:Seeding treatment in combination with EBRT has also
recorded impressive results in the treatment of higher risk prostate cancer
patients.
 
 A study
published in June 2007 by Michael Dattoli, M.D. of the Dattoli Cancer Center
& Brachytherapy Research Institute, Kent Wallner, M.D., of the Department of
Radiation Oncology, University of Washington, et al showed that high tumor
control rates are possible with brachytherapy and supplemental conformal
radiation even in patients having intermediate- and high-risk
disease.  The study summarized long-term outcomes from treatment of
prostate cancer among patients with increased risk of extracapsular cancer
extension who had brachytherapy-based treatment.  282 patients were
treated between 1992 and 1996 with external beam radiation followed by treatment
with Pd-103 seeds.  Overall actuarial freedom from biochemical
progression at 14 years was 81%, including the 87% and 72% of patients having
intermediate and high-risk disease, respectively.  The study confirmed
the effectiveness of treatment with the TheraSeed® device
combined with EBRT in patients with aggressive cancer who previously were
considered poor candidates for seeding.
 
 A 15-year
study by John E. Sylvester, M.D., Peter D. Grimm, D.O., John C. Blasko, M.D., et
al, of the Seattle Prostate Institute reported excellent 15-year biochemical
control in patients treated with interstitial permanent brachytherapy combined
with moderate-dose EBRT.  The study, published in the International Journal of Radiation
Oncology Biology Physics, 2007, followed a group of 223 consecutively
treated patients with clinical T1-T3 prostate cancer.  15-year BFRS
(biochemical relapse-free survival) of the group, treated with either Pd-103 or
I-125 brachytherapy, was 74%.  Results for low-, intermediate- and
high-risk patients were 88%, 80%, and 53%, respectively, using the Memorial
Sloan-Kettering risk cohort analysis.
  I-6
  An
eight-year clinical study published in the January 2005 issue ofInternational Journal of Radiation
Oncology Biology 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 Pd-130 or I-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.
 
 Isotope
Selection:The following publications show that isotope
selection has an effect on treatment outcome.
 
 Louis
Potters, M.D., Yijan Cao, Ph.D., et al,
Memorial Sloan Kettering Cancer Center, published a
comprehensive review of CT-based dosimetry parameters and biochemical control in
719 consecutive patients treated with either Pd-103 or I-125 permanent prostate
brachytherapy in the July 2001 International Journal of Radiation
Oncology Biology Physics.  This review showed that there was no
statistically significant difference in treatment outcome when the treatment
dose was optimal.  However, when the dose was less than optimal,
patients achieved much better biochemical control and suffered fewer relapses
with Pd-103 than those treated with I-125.  Freedom from failure was
83.4% with Pd-103 compared to 63.8% with I-125.
 
 A study
conducted between 1992 and 2005 following 1,512 patients treated with Pd-103
seeds and 2,119 patients treated with I-125 brachytherapy seeds identified a
significant benefit in treatment with Pd-103 seeds over I-125
seeds.  The authors of the study, J.S. Cho, C. Morgenstern, B.
Napolitano, L. Richstone, and L. Potters, reported that at a mean follow-up of
58.2 months, the overall 10-year freedom from progression (FFP) was
85.6%.  The FFP for those treated with I-125 seeds was 76.2%, while
those treated with Pd-103 had an 89.5% FFP.  Cox regression identified
isotope selection as significant in predicting FFP, with patients who received
I-125 being 2.26 times more likely to progress when compared to patients
receiving Pd-103.  This study was published as an abstract from the
proceedings of the 50th annual
meeting of the American Society for Therapeutic Radiation and
Oncology.
 
 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
- Brachytherapy Seed Business
 
 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. Rh-103 is relatively expensive but readily available on the open
market.  Our brachytherapy seed production does not require
significant amounts of Rh-103.  In addition, for reasons of quality
assurance, sole source availability or cost effectiveness, certain components
and raw materials are available only from sole suppliers.
 
 We
produce our Pd-103, a radioactive isotope, by proton bombardment of Rh-103 in
cyclotrons. The palladium-103 is then harvested from the cyclotrons and moved
through a number of proprietary production processes until it reaches its final
seed form. There are other methods of producing Pd-103, including by neutron
bombardment of palladium-102 in a nuclear reactor and by proton bombardment of
palladium-104 in a cyclotron.
 
 We have
produced Pd-103 using Company-owned cyclotrons since 1993. We currently have
eight cyclotrons in production, and have no current plans to purchase additional
cyclotrons. Our cyclotrons were designed, built, installed and tested by a
company specializing in the construction of such equipment.
 
 We began
production of the I-Seed product early in 2004. We do not produce the I-125
isotope.  This isotope is relatively inexpensive and is readily
available from multiple suppliers.
 
 Since
1997, our quality control system related to our medical device manufacturing has
been certified as meeting all the requirements of the International Organization
for Standards (ISO) Quality System Standard, and is currently certified to ISO
13485:2003.
  I-7
 Marketing
and Major Customers - Brachytherapy Seed Business
 
 We sell
our TheraSeed® device
directly to health care providers and to third party distributors through two
non-exclusive distribution agreements, and sell our I-Seed device directly to
health care providers. Currently, we have non-exclusive distribution agreements
with two distributors for the distribution of the TheraSeed®
device.   Our primary distribution agreement is in place with C.
R. Bard, Inc. (“Bard”). The terms of the distribution agreement with Bard (the
“Bard Agreement”) provide for automatic one-year extensions of the term, unless
either party gives notice of its intent not to renew at least twelve months
prior to the end of the current term. The current term expires on December 31,
2010 and will be automatically extended for one additional year unless either
party gives notice of its intent not to extend by December 31, 2009. The Bard
Agreement gives Bard the right to distribute the TheraSeed® device
in the U.S., Canada, Puerto Rico and other international locations for the
treatment of prostate cancer and other solid localized cancerous tumors. Sales
to Bard under the Bard Agreement represented approximately 51%, 53% and 60% of
brachytherapy seed revenue in 2008, 2007 and 2006,
respectively.  Sales to Bard under the Bard Agreement represented
approximately 21%, 28% and 38% of consolidated product revenue in 2008, 2007 and
2006, respectively.
 
 We
maintain an internal brachytherapy sales force that sells the TheraSeed® and
I-seed devices directly to hospitals. Direct sales comprised approximately 47%,
46% and 39% of brachytherapy product revenue in 2008, 2007 and 2006,
respectively.  We also expect to continue direct to consumer
advertising and other activities in an attempt to support the brand name and
increase demand for the TheraSeed® device,
including direct to consumer television and print advertising, 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.
 
 Patents
and Licenses; Trade Secrets - Brachytherapy Seed Business
 
 We
hold a number of United States patents directed to radiation delivery
devices for therapeutic uses, as well as certain corresponding international
patents.  Our policy is to file patent applications in the United
States and foreign countries where rights are available and when we believe it
is commercially advantageous to do so.  We consider the ownership of
patents important, but not necessarily essential, to our brachytherapy seed
business. We also use 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.
 
 We also
hold a worldwide exclusive license from the University of Missouri for the use
of technology required for producing the TheraSphere® device;
the underlying patents for this technology have since expired. We continue to
hold the rights to all improvements developed by the University of Missouri on
this technology.  In turn, we sublicense exclusive worldwide rights to this
technology and all improvements, along with trademarks and other intellectual
property owned by us, to Nordion International, Inc.
(“Nordion”).  Pursuant to our licensing agreement with the University
of Missouri, we are obligated to pay the university a small fixed annual amount
for these rights.
 
 In May
2008, we entered into an exclusive license agreement for the rights to certain
intellectual property related to an expandable brachytherapy delivery system
that we developed.  The term of the agreement is through the
expiration of the last of the patents licensed under the agreement, which is
currently November 2024.  The term may be altered if such patents are
found to be invalid.  The agreement provides for a minimal
non-refundable initial license fee and non-refundable continuing royalties based
upon sales subject to certain minimums.   License fee revenue
under this agreement was not material in 2008.  Minimum annual
royalties are based upon the contract year of the agreement, which ends each
May, and are as follows (in thousands):
 
 12
      months ended May
              
              Amount2009
              
              $
              1002010
              
              
              2502011
              
              
              4502012
              
              
              4502013
              
              
              1,000Annually
      thereafter
              
              $
              1,000
  The
minimum royalties are subject to increase under certain
circumstances.  The licensee has the right to terminate the agreement
without penalty until May 2012 if the product is found to be technically or
commercially impracticable, as defined in the agreement.  After May
2012, the licensee can terminate the agreement for any reason upon payment of
the minimum annual royalties due for that contract year, plus a termination fee
of $1 million. In the event the licensee terminates the agreement for any
reason, the initial license fee and all royalties previously paid are
non-refundable and all rights granted by the license terminate.  The
licensee can assign their rights to the agreement upon payment of an assignment
fee.
  I-8
  Competition
- Brachytherapy Seed Business
 
 Our
brachytherapy business 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, which includes
laparoscopic radical prostatectomy and robot-assisted radical prostatectomy, and
external beam radiation therapy which includes intensity modulated radiation
therapy (“IMRT”), as well as competing permanently and temporarily implanted
devices. We believe there has been an industry wide decline in prostate
brachytherapy procedure volume in 2008.  Some newer forms of treatment
have increased their market share, especially those with Medicare reimbursement
levels that are higher than reimbursement levels for
brachytherapy.  These alternative treatment forms include IMRT
and robotic surgery. We believe 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, comparatively improved physician reimbursement versus other
treatment options, lower cost, other quality of life issues and pressure by
health care providers and patients.
  Several
companies produce and distribute Pd-103 and I-125 seeds, which compete directly
with the TheraSeed® and
I-Seed devices. C.R.Bard, Inc., Best Medical and Best Theratronics, Ltd., Core
Oncology, Oncura (a part of GE Healthcare) and others all manufacture and/or
sell Pd-103 and/or I-125 brachytherapy seeds.  We believe that
Theragenics has competitive advantages over these companies including, but not
limited to: (i) our proprietary production processes that have been developed
and patented; (ii) our 21 year history of manufacturing radioactive medical
devices and a record of reliability and safety in our manufacturing operations;
(iii) vertical integration of production and related services, (iv) the time and
resources required for competitors’ production capabilities to ramp up to
commercial production on a scale comparable to ours; (v) maintenance of our
cancer information center, (vi) our direct sales force, (vii) our direct to
consumer advertising programs and (viii) the non-exclusive distribution
agreements that we currently have in place.
 
 Other
isotopes are also utilized in seeding, including cesium-131 (“Cs-131”),
introduced during 2005. Cs-131 has an average energy that is significantly
higher than that of Pd-103 and is similar to that of I-125.  Cs-131’s
half-life is significantly shorter than that of I-125.  The
combination of Cs-131’s higher energy and shorter half-life may cause issues
related to production, handling and side effects associated with its use. We are
not aware of any long-term clinical data demonstrating the effectiveness of
Cs-131 as a therapy for prostate cancer.
 
 In
February 2007, we reduced the transfer price to our two non-exclusive
distributors by 6% in recognition of the competitive environment at that time
and new distributor strategies.  At any point in time, we and/or our
non-exclusive distributors may continue to change their respective pricing
policies for the TheraSeed® device,
and we may change our pricing policies for the I-Seed 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.  Responding to market opportunities and competitive
situations may also 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.
 
 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 either in refining existing treatment protocols (such as
enhancements in surgical techniques) or developing new treatment protocols could
have a material adverse effect on the demand for our products.
 
 Seasonality
  Although
effects from seasonality cannot be identified in relation to a specific quarter
or quarters for either business segment, we believe that holidays, major medical
conventions and vacations taken by physicians, patients and patients’ families,
may have a seasonal impact on sales particularly in the brachytherapy seed
segment.
  I-9
  Research
and Development
  Research
and development (“R&D”) expenses were $1.3 million, $1.4 million and
$805,000 in 2008, 2007 and 2006, respectively.  Substantially all
R&D expenses in 2008 related to our surgical products segment.  We
implemented a R&D program to support new product development in our surgical
products business in the third quarter of 2008.  Looking forward, we
expect our R&D expenses to increase significantly as a result of this
effort, to as much as $3.5 million or more annually. We also expect that the
significant portion of R&D expenses in 2009 will be related to our surgical
products business.  However, the rate of R&D spending in 2009
could change based on the opportunities identified.  The amounts
invested will be dependent upon a number of factors, including our ability to
obtain qualified personnel and the types of activities required for our product
development.  In some cases we will develop extensions of current
products.  In other cases we will develop products that are
complementary to our existing product line and also develop new
products.  These product development activities are focused on
products that can be marketed once they have received 510(k) clearance by the
U.S. Food and Drug Administration, rather than products that would require
costly and lengthy clinical trials.  We expect that this investment
will accelerate our entrance into new markets, expand our offerings to new and
existing customers, and support growth in our surgical products
business.
  In 2007,
approximately one-half of our R&D expenses related to our brachytherapy seed
segment.  We developed a new device to assist with the configuration
of seeds, allowing a physician to perform real time stranding of seeds and
customize the brachytherapy procedure while in the operating room. R&D in
the surgical products segment in 2007 was primarily related to new product
development.
  Government
Regulation
  Our
present and future intended activities in the development, manufacture and sale
of wound closure, vascular access and specialty needle products, and cancer
therapy products, are subject to extensive laws, regulations, regulatory
approvals and guidelines. Within the United States, our medical devices must
comply with the U.S. Federal Food, Drug and Cosmetic Act, which are enforced by
the Food and Drug Administration (FDA). We are also subject to regulation by
other governmental agencies, including the Occupational Safety and Health
Administration (OSHA), the Environmental Protection Agency (EPA), the Nuclear
Regulatory Commission, and other federal and state agencies. We must also comply
with the regulations of the Competent Authorities of the European Union for our
products that have been CE Marked and are sold in the member nations of the
European Union.
  Medicare
covers a substantial percentage of the patients treated for prostate cancer in
the United States, and consequently, the costs for prostate cancer treatment are
subject to Medicare’s prescribed rates of reimbursement.  The
utilization of TheraSeed®, I-Seed
and many of the products in our surgical products business may be influenced by
Medicare’s reimbursement levels, and the policies of other third party payors,
which can change periodically.  See Management’s Discussion and Analysis
of Financial Condition and Results of Operations – Medicare
Developments.
  We are
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.
  We have
obtained required FDA 510(k) clearances for our medical devices in our surgical
products and brachytherapy seed businesses.  New FDA clearances would
be required for any modifications in such products or its labeling that could
significantly affect the safety or effectiveness of the original
product.  However, not all of our products require FDA 510(k)
clearances.
  Our
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.
  We are
required under our radioactive materials license to maintain radiation control
and radiation safety personnel, procedures, equipment and processes, and to
monitor our facilities and our employees and contractors. We are also required
to provide financial assurance that adequate funding will exist for end-of-life
radiological decommissioning of our cyclotrons and other areas of our property
where radioactive materials are handled. Our decommissioning obligations will
increase if production capacity is expanded.
  We
transfer low-level radioactive waste to licensed commercial radioactive waste
treatment or disposal facilities for incineration or land disposal. We provide
training and monitoring of our personnel to facilitate the proper handling of
all materials.
  Employees
  As of
December 31, 2008, we had 511 full time employees.  None of our employees
are represented by a union or a collective bargaining agreement, and we consider
employee relations to be good.
  I-10
  Available
Information
  Our
website address is http://www.theragenics.com.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and all amendments to those reports filed pursuant to Section 13(a)
or 15(c) of the Securities and Exchange Act of 1934 are available free of charge
through our 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. In addition we will provide paper copies of these filings (without
exhibits) free of charge to our shareholders upon request.
 
 Item
1A. Risk Factors
  We
operate in continually changing business environments and new risk factors may
emerge from time to time. We cannot predict such new risk factors, nor can we
assess the impact, if any, of such new risk factors on our business or to the
extent to which any factor or combination of factors may cause actual results to
differ materially from those expressed in any forward looking statement.
Additional risks and uncertainties not currently known to us or that we might
currently deem to be immaterial also may adversely affect our business,
financial condition and/or operating results.
  We
operate multiple businesses. When we refer to “surgical products” or the
“surgical products business”, we are referring to the business that produces,
markets and sells wound closure products, disposable medical devices used for
vascular access, specialty needles, and other surgical related
products.  When we refer to “brachytherapy” or the “brachytherapy
business”, we are referring to the business that produces, markets and sells
TheraSeed®, our
premier palladium-103 prostate cancer treatment device, I-Seed, our iodine-125
based prostate cancer treatment device, and related products and
services.
  Risks
Related to our Business
  There
are risks associated with our acquisitions, potential acquisitions and joint
ventures.
  An
important element of our strategy is to seek acquisition prospects and
diversification opportunities that we believe will complement or diversify our
existing product offerings, augment our market coverage and customer base,
enhance our technological capabilities or offer revenue and profit growth
opportunities. We acquired CP Medical in May 2005, Galt in August 2006 and
NeedleTech in July 2008. Further transactions of this nature could result in
potentially dilutive issuance of equity securities, use of cash and/or the
incurring of debt and the assumption of contingent liabilities.
  Acquisitions
entail numerous costs, challenges and risks, including difficulties in the
assimilation of acquired operations, technologies, personnel and products and
the retention of existing customers and strategic partners, diversion of
management’s attention from other business concerns, risks of entering markets
in which we have limited or no prior experience and potential loss of key
employees of acquired organizations. Other risks include the potential strain on
the combined companies’ financial and managerial controls and reporting systems
and procedures, greater than anticipated costs and expenses related to
integration, and potential unknown liabilities associated with the acquired
entities. No assurance can be given as to our ability to successfully integrate
the businesses, products, technologies or personnel acquired in past
acquisitions or those of other entities that may be acquired in the future or to
successfully develop any products or technologies that might be contemplated by
any future joint venture or similar arrangement. A failure to integrate CP
Medical, Galt, NeedleTech or future potential acquisitions could result in our
failure to achieve our revenue growth or other objectives associated with
acquisitions, or recover costs associated with these acquisitions, which could
affect our profitability or cause the market price of our common stock to
fall.
 
 We
may not realize the benefits of acquisitions.
  The
process of integrating our acquisitions may be complex, time consuming and
expensive and may disrupt our businesses, and could affect our financial
condition, results of operations or future prospects. We will need to overcome
significant challenges in order to realize benefits or synergies from the
acquisitions. These challenges include the timely, efficient and successful
execution of a number of post-acquisition events, including:
  •
              integrating
      the operations and technologies of the acquired
  companies;•
              retaining
      and assimilating the key personnel of each company;•
              retaining
      existing customers of each company and attracting additional
      customers;•
              retaining
      strategic partners of each company and attracting new strategic
      partners; and•
              creating
      uniform standards, controls, procedures, policies and information
      systems.
  I-11
  The
execution of these post-acquisition events will involve considerable risks and
may not be successful. These risks include:
  •
              the
      potential disruption of the combined companies’ ongoing businesses and
      distraction of management;•
              the
      potential strain on the combined companies’ financial and managerial
      controls and reporting systems and procedures; and•
              the
      potential unknown liabilities associated with the acquisition and the
      combined operations.
  We may
not succeed in addressing these risks or any other problems encountered in
connection with the acquisitions. The inability to successfully integrate the
operations, technology and personnel of acquired companies, or any significant
delay in achieving integration, could have a material adverse effect on
us.
  The
cost of acquisitions could harm our financial results.
  If the
benefits of acquisitions do not exceed the associated costs, including costs
related to integrating the companies acquired and dilution to our stockholders
resulting from the issuance of shares in connection with the acquisitions, our
financial results, including earnings per share, could be materially
harmed.
 
 We
are dependent on key personnel.
 
 We are
highly dependent upon our ability to attract and retain qualified management,
scientific and technical personnel. Therefore, our future success is dependent
on our key employees. If the services of our chief executive or other key
employees cease to be available, the loss could adversely affect our business
and financial results. We carry key employee insurance for M. Christine Jacobs,
our Chief Executive Officer, in the amount of $1 million.
 
 Our
stock price has been and may continue to be subject to large
fluctuations.
 
 The
trading price of our Common Stock has been and may continue to be subject to
wide fluctuations in response to quarter-to-quarter variations in operating
results, announcements of technological innovations, new products or
acquisitions by us or our competitors, developments with respect to patents or
proprietary rights, general conditions in the medical device and surgical
products industries, or other events or factors. In addition, the stock market
can experience extreme price and volume fluctuations, which can particularly
affect the market prices of technology companies and which can be unrelated to
the operating performance of such companies. Average daily trading volume in our
Common Stock is not significant and can cause significant price fluctuations.
Specific factors applicable to broad market fluctuations or us may materially
adversely affect the market price of our Common Stock. We have experienced
significant fluctuations in our stock price and share trading volume in the past
and may continue to do so.
 
 We
may be unable to maintain the minimum continued listing standards for the New
York Stock Exchange.
 
 Our common stock is currently listed on
the New York Stock Exchange (NYSE).  The continued listing standards
of the NYSE require, among other things, a listed company to maintain
shareholders’ equity of at least $75 million if the company’s average market
capitalization over a consecutive 30-day trading period is less than $75
million.  The impairment charges and resulting net loss reported for
2008 reduced our shareholders’ equity to $74.1 million as of December 31, 2008,
and our market capitalization has been below $75 million for 30 trading days as
of the date of this report.  Accordingly, we anticipate receiving
notification from the NYSE that we are not in compliance with the NYSE’s
continued listing standards.  Under applicable NYSE procedures, we
will have 45 days from the receipt of such notice to submit a cure plan to the
NYSE.  This plan must demonstrate our ability to achieve compliance
with the continued listing standards within the next 18 months.  If
the NYSE notifies us that we are not in compliance, we plan to submit a cure
plan to return to compliance with the listing standard related to maintaining
shareholders’ equity of at least $75 million within the required
timeframe.
 
 In
addition, the NYSE requires listed companies to maintain an average closing
price of $1.00 per share and a minimum market capitalization of $25
million.  The NYSE has proposed to temporarily suspend the minimum
price criteria and to reduce the market capitalization floor to $15 million
through June 30, 2009, subject to SEC approval.  While SEC approval is
anticipated, we cannot assure you that the SEC will approve the temporary
suspension or that this relief will be extended beyond June 30,
2009.  Upon receipt of a notice that a company’s average per share
closing price does not meet the minimum threshold, a company has six months to
cure the deficiency before the NYSE will initiate suspension and delisting
procedures.  The NYSE may initiate suspension and delisting
proceedings when a company’s 30-trading day market capitalization is less than
$25 million (or $15 million through June 30, 2009) without providing a cure
period.
  I-12
  If we are
unable to maintain compliance with all of the applicable NYSE continued listing
standards, and unable to cure any such defaults within NYSE prescribed cure
periods, our common stock may be delisted from the NYSE.  A delisting
of our common stock on the NYSE will likely reduce the liquidity and market
price of our common stock and the number of investors willing to hold or acquire
our common stock, which would negatively impact our ability to access the public
capital markets.  A delisting would also increase the costs and
burdens associated with issuing securities, including under existing equity
incentive plans.  If we are delisted from the NYSE, we may be unable
to obtain a listing for our common stock on an alternative exchange due to the
minimum listing standards of other exchanges, differing corporate governance or
other regulatory requirements, prohibitive costs, or other
circumstances.  Common stocks of publicly held companies that are not
listed on a stock exchange will likely be traded in the “over the counter” (OTC)
market. Trading of common stock on the OTC market is subject to less regulation
than trading on a stock exchange, and may result in greater volatility in stock
price.  Additionally, securities traded in the OTC market generally
have less liquidity than securities traded on a national securities exchange,
due to factors such as a reduction in the number of investors that may consider
investing in the securities, the number of market makers in the securities,
reduction in news media coverage, and lower market prices than may otherwise be
obtained.  As a result, if our common stock is delisted from the NYSE,
holders of our common stock may find it more difficult to resell their shares
and the trading price of our common stock may be adversely
affected.
 
 We
face production risks.
 
 We
operate four primary production facilities, each of which manufactures unique
products. If an event occurred that resulted in damage to one or more of our
production facilities, we may be unable to produce the relevant products at
previous levels or at all. In addition, for reasons of quality assurance, sole
source availability or cost effectiveness, certain components and raw materials
are available only from a sole supplier. Due to the FDA’s and other stringent
regulations regarding the manufacture of our products, we may not be able to
quickly establish replacement sources for certain component materials. Any
interruption in manufacturing, or in the ability to obtain raw materials and
component supplies, could have a material adverse effect on our
business.
 
 Our
manufacturing process in the brachytherapy business requires, among other
things, the use of cyclotrons, which are used to manufacture Pd-103 for our
brachytherapy seed products. Cyclotron capacity and performance directly affect
our ability to support sales levels. Due to the intricate nature of cyclotrons
and our exacting specifications for their performance, planned downtime for
maintenance and repair is crucial and unexpected downtime may occur. Unexpected
mechanical breakdowns or other production delays could materially adversely
affect our production capacity and our business, financial condition and results
of operations.
 
 Manufacturing
or quality control problems may arise in any of our businesses as we increase
production or as additional manufacturing capacity is required in the future.
These factors may have an adverse impact on our business, financial condition
and results of operations.
 
 Surgical
product components are obtained from suppliers located in the United States, as
well as in Latin America, Europe, and Asia. While we believe there is adequate
access to alternative suppliers, any disruption in supply could have a material
adverse effect on our business, financial condition and results of
operations.
 
 We
are subject to stringent government regulation.
 
 The
manufacture and sale of our medical devices are subject to stringent government
regulation in the United States and other countries. Our medical devices have
required 510(k) clearances by the FDA for commercial distribution in the United
States. FDA and other governmental approvals and clearances are subject to
continual review, and later discovery of previously unknown problems could
result in restrictions on a product’s marketing or withdrawal of the product
from the market. The commercial distribution in the United States of new medical
devices developed by us often will be dependent on obtaining the prior approval
or clearance of the FDA, which can take many years to obtain and entail
significant costs. No assurances can be made that any such approvals or
clearances will be obtained on a timely basis or at all. In countries in which
our medical devices are not approved, the use or sale of such medical devices
will require approvals by government agencies comparable to the FDA. The process
of obtaining such approvals can be lengthy, expensive and uncertain. There can
be no assurance that the necessary approvals for the marketing of our products
in other markets will be obtained on a timely basis or at all. We are also
required to comply with applicable FDA regulations for Quality System Regulation
(“QSR”), including extensive record keeping, reporting and periodic inspections
of our manufacturing facilities. Similar requirements are imposed by
governmental agencies in other countries. A new 510(k) clearance is required for
any modifications to previously approved medical devices or their labeling that
could significantly affect the safety or effectiveness of the original products.
Under the FDA’s regulatory scheme, the decision whether to seek 510(k) clearance
for a modified device is left to the manufacturer in the first instance, and we
have thus far determined that no such clearance has been required. The FDA has
the right to review and revoke 510(k) clearance at any time. The FDA may
determine that a pre-market approval, whereby the FDA conducts a scientific and
regulatory review of a Class III scientific device for safety and effectiveness,
may be required for future products or for future modifications to our existing
medical devices.
  I-13
  Certain
of our medical devices have also been approved for marketing throughout the
member countries of the European Union by obtaining appropriate CE Marks. As a
result of receiving CE Marks, we must also comply with the regulations of the
Competent Authorities of the European Union for any such devices sold in the
member nations of the European Union.
 
 Our
brachytherapy manufacturing operations involve the manufacturing and possession
of radioactive materials, which are subject to stringent regulation. The users
of our brachytherapy seed products are required to possess licenses issued by
the states in which they reside or the U.S. Nuclear Regulatory Commission (the
“NRC”). User licenses are also required by some of the foreign jurisdictions in
which we may seek to market our products. There can be no assurance that current
licenses held by us for our manufacturing operations will remain in force or
that additional licenses required for our operations will be issued. There also
can be no assurance that our customers will receive or retain the radioactive
materials licenses required to possess and use TheraSeed® or
I-Seed or that delays in the granting of such licenses will not hinder our
ability to market our products. Furthermore, regulation of our radioactive
materials manufacturing processes involves the imposition of financial
requirements related to public safety and decommissioning, and there are costs
and regulatory uncertainties associated with the disposal of radioactive waste
generated by our manufacturing operations. There can be no assurance that the
imposition of such requirements and the costs and regulatory restrictions
associated with disposal of waste will not, in the future, adversely affect our
business, financial condition and results of operations.
 
 We are
required under our radioactive materials license to maintain radiation control
and radiation safety personnel, procedures, equipment and processes, and to
monitor our facilities and our employees and contractors.  We are also
required to provide financial assurance that adequate funding will exist for
end-of-life radiological decommissioning of our cyclotrons and other radioactive
areas of our properties that contain radioactive materials. We have provided
this financial assurance through the issuance of letters of credit. We have so
far been successful in explaining to the Georgia Department of Natural Resources
that we will not have to dispose of our cyclotrons, but instead will be able to
sell them for re-use or use for spare parts if we cease to operate them. Thus,
we are only required to estimate and provide financial assurance for the
end-of-life remediation and disposal costs associated with ancillary structures,
such as plumbing, laboratory equipment and chemical processing facilities.
However, if the Georgia Department of Natural Resources was to require that we
include the cost of decommissioning our cyclotrons in our financial assurance
demonstration, the amount of funds required to be set aside by us to cover
decommissioning costs could dramatically increase.
  Failure
to obtain and maintain regulatory approvals, licenses and permits could
significantly delay our marketing efforts. Furthermore, changes in existing
regulations, or interpretations of existing regulations or the adoption of new
restrictive regulations could adversely affect us from obtaining, or affect the
timing of, future regulatory approvals. Failure to comply with applicable
regulatory requirements could result in, among other things, significant fines,
suspension of approvals, seizures or recalls of products, operating restrictions
or criminal prosecution and materially adversely affect our business, financial
condition and results of operations.
  We
face risk related to lack of diversification.
  Through
April 2005, virtually all of our revenues were generated from the brachytherapy
seed market. The growth of our surgical products business has reduced our
dependence on the brachytherapy business. However, there is no assurance that we
can continue to successfully diversify our business, and a lack of
diversification or over reliance on any one of our businesses can be a
risk.
  We
are dependent on new technological development.
  We
compete in markets characterized by technological innovation, extensive research
efforts and significant competition. New developments in technology may have a
material adverse effect on the development or sale of our products and may
render such products noncompetitive or obsolete. Other companies, many of which
have substantially greater capital resources, marketing experience, research and
development staffs and facilities than us, are currently engaged in the
development of products and innovative methods for treating cancer, and for
competing with our wound closure, vascular access and specialty needle products.
Significant developments by any of these companies or advances by medical
researchers at universities, government research facilities or private research
laboratories could eliminate the entire market for any or all of our
products.
  I-14
  We
face significant competition.
  Our
surgical products business competes with other suppliers of wound closure,
vascular access and specialty needle products. The primary suppliers include
Angiodynamics, Angiotech Pharmaceuticals, Covidien Ltd., Boston Scientific, Cook
Medical, Inc., C.R. Bard, Inc., Greatbatch, Inc., Hart Enterprises, Cordis and
Ethicon, Inc. (subsidiaries of Johnson and Johnson), Merit Medical, Needle
Specialty Products, Terumo Medical and Tegra Medical.  Our
brachytherapy business is also subject to intense competition within the
brachytherapy seed market. C.R. Bard, Inc., Best Medical and Best Theratronics,
Ltd., Oncura (a part of GE Healthcare), Core Oncology and others all manufacture
and/or sell Pd-103 and/or I-125 brachytherapy seeds. Many of our competitors
have substantially greater financial, technical, sales, marketing and other
resources, as well as greater name recognition and a larger customer base, than
we do. Additionally, many companies located outside of the United States, in
particular in Asia, produce and supply similar surgical products. These
companies may have access to substantially lower costs of production.
Accordingly, such competitors or future competitors may be able to respond more
quickly to new or emerging technologies and changes in customer requirements or
to devote greater resources to the development, promotion and sale of their
products than us. As a result, we may be at a disadvantage when competing with
these larger companies. If we fail to compete effectively, our business,
financial condition and results of operations may be adversely
affected.
  We
face pricing pressures.
  Our businesses are subject to intense
pressure to lower pricing as our customers are leveraging current economic
conditions to demand reduced pricing or more favorable payment
discounts.  Accordingly, we could find it difficult to offset
discounts with in-house cost savings measures.  Failure to offer
satisfactory savings to our customers or to successfully reduce our costs may
adversely affect our revenue and results of operations.
  We
are highly dependent on our marketing and advertising specialists and our direct
sales organization in the brachytherapy business. Any failure to build and
manage our direct sales organization could negatively affect our
revenues.
  We are
highly dependent on our direct sales organization comprised of brachytherapy
specialists who promote and support our brachytherapy products. There is intense
competition for skilled sales and marketing employees, particularly for people
who have experience in the radiation oncology market. Accordingly, we could find
it difficult to hire or retain skilled individuals to sell our products. Failure
to retain our direct sales force could adversely affect our growth and our
ability to meet our revenue goals. There can be no assurance that our direct
sales and marketing efforts will be successful. If we are not successful in our
direct sales and marketing, our sales revenue and results of operations are
likely to be materially adversely affected.
  We
depend partially on our relationships with distributors and other industry
participants to market our surgical and brachytherapy products, and if these
relationships are discontinued or if we are unable to develop new relationships,
our revenues could decline.
  A
significant portion of our surgical products revenue is derived from our
relationships with OEMs, dealers and distributors. There is no assurance that we
will be able to maintain or develop these relationships with OEMs, agents and
distributors and other industry participants or that these relationships will
continue to be successful. If any of these relationships is terminated, not
renewed or otherwise unsuccessful, or if we are unable to develop additional
relationships, our product sales could decline, and our ability to grow our
product lines could be adversely affected.
  We rely,
and will continue to rely, upon collaborative relationships with agents and
distributors and other industry participants to maintain market access to
potential customers. Some of the entities with which we have relationships to
help market and distribute our products also produce or distribute products that
directly compete with our products.  In particular, C.R. Bard, Inc.
(“Bard”), one of our primary competitors, is also a distributor of our
TheraSeed® product.
Sales to Bard represented 51% of brachytherapy product revenue in 2008. The
terms of our distribution agreement with Bard provide for automatic one-year
extensions of the term, unless either party gives notice of its intent not to
renew at least twelve months prior to the end of the current term. The current
term expires on December 31, 2010, and will be automatically extended for one
additional year unless either party gives notice of its intent not to extend by
December 31, 2009. There is no assurance that this distribution agreement will
be extended and if it is not, how much unit volume being sold through Bard will
be able to be captured by our direct sales force or other distributors that we
may utilize.
  I-15
  Doctors
and hospitals may not adopt our products and technologies at levels sufficient
to sustain our business or to achieve our desired growth rate.
  To date,
we have attained only limited penetration of the total potential market for most
of our products. Our future growth and success depends upon creating broad
awareness and acceptance of our products by doctors, hospitals and freestanding
clinics, as well as patients. This will require substantial marketing and
educational efforts, which will be costly and may not be successful. The target
customers for our products may not adopt these technologies or may adopt them at
a rate that is slower than desired. In addition, potential customers who decide
to utilize any of our devices may later choose to purchase competitors’
products. Important factors that will affect our ability to attain broad market
acceptance of our products include:
  •
              doctor
      and/or patient awareness and acceptance of our
products;•
              the
      real or perceived effectiveness and safety of our
  products;•
              the
      relationship between the cost of our products and the real or perceived
      medical benefits of our products;•
              the
      relationship between the cost of our products and the financial benefits
      to our customers using our products, which will be greatly affected by the
      coverage of, and reimbursement for, our products by governmental and
      private third-party payors; and•
              market
      perception of our ability to continue to grow our business and develop
      enhanced products.
 
 Failure
of our products to gain broad market acceptance could cause our revenues to
decline and our business to suffer.
 
 Evolving
regulation of corporate governance and public disclosure may result in
additional expenses and continuing uncertainty.
  Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and
NYSE rules are creating uncertainty for public companies, and are particularly
burdensome for smaller public companies such as ours. We cannot predict or
estimate the amount of the additional costs we may incur relating to regulatory
developments or the timing of such costs. These new or changed laws, regulations
and standards are subject to varying interpretations, in many cases due to their
lack of specificity, and as a result, their application in practice may evolve
over time as new guidance is provided by regulatory and governing bodies. This
could result in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and governance
practices.
  We are
committed to maintaining high standards of corporate governance and public
disclosure. As a result, we have invested resources to comply with evolving
laws, regulations and standards, and this investment may result in increased
general and administrative expenses and a diversion of management time and
attention from revenue-generating activities to compliance activities. If our
efforts to comply with new or changed laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due to
ambiguities related to practice, regulatory authorities may initiate legal
proceedings against us and our business, financial position and results of
operations may be adversely affected.
  There
are limitations on our ability to protect our intellectual property, and we are
dependent on trade secrets.
  Our
success will depend, in part, on our ability to obtain, assert and defend patent
rights, protect trade secrets and operate without infringing the proprietary
rights of others.  We hold rights to issued United States and foreign
patents. There can be no assurance that rights under patents held by or licensed
to us will provide us with competitive advantages that others will not
independently develop similar products or design around or infringe the patents
or other proprietary rights owned by or licensed to us. In addition, there can
be no assurance that any patent obtained or licensed by us will be held to be
valid and enforceable if challenged by another party.
  I-16
  There can
be no assurance that patents have not been issued or will not be issued in the
future that conflict with our patent rights or prevent us from marketing our
products. Such conflicts could result in a rejection of our or our licensors’
patent applications or the invalidation of patents, which could have a material
adverse effect on our business, financial condition and results of operations.
In the event of such conflicts, or in the event we believe that competitive
products infringe patents to which we hold rights, we may pursue patent
infringement litigation or interference proceedings against, or may be required
to defend against litigation or proceedings involving, holders of such
conflicting patents or competing products. There can be no assurance that we
will be successful in any such litigation or proceeding, and the results and
cost of such litigation or proceeding may materially adversely affect our
business, financial condition and results of operations. In addition, if patents
that contain dominating or conflicting claims have been or are subsequently
issued to others and such claims are ultimately determined to be valid, we may
be required to obtain licenses under patents or other proprietary rights of
others. No assurance can be given that any licenses required under any such
patents or proprietary rights would be made available on terms acceptable to us,
if at all. If we do not obtain such licenses, we could encounter delays or could
find that the development, manufacture or sale of products requiring such
licenses is foreclosed.
 
 We rely
to a significant degree on trade secrets, proprietary know-how and technological
advances that are either not patentable or that we choose not to patent. We seek
to protect non-patented proprietary information, in part, by confidentiality
agreements with suppliers, employees and consultants. There can be no assurance
that these agreements will not be breached, that we would have adequate remedies
for any breach, or that our trade secrets and proprietary know-how will not
otherwise become known or be independently discovered by others. The disclosure
to third parties of proprietary non-patented information could have a material
adverse effect on our business, financial condition and results of
operations.
 
 Domestic
and foreign legislative or administrative reforms resulting in restrictive
reimbursement practices of third-party payors and cost containment measures
could decrease the demand for products purchased by our customers, the prices
that our customers are willing to pay for those products and the number of
procedures using our devices.
 
 Our
products are purchased principally by hospitals or physicians, which typically
bill various third-party payors, such as governmental programs (e.g., Medicare
and Medicaid), private insurance plans and managed care plans, for the
healthcare services provided to their patients. The ability of our customers to
obtain appropriate reimbursement for products and services from third-party
payors is critical to the success of medical device companies because it affects
which products customers purchase and the prices they are willing to pay.
Reimbursement can significantly impact the acceptance of new technology.
Implementation of healthcare reforms in the United States may limit, reduce or
eliminate reimbursement for our products and adversely affect both our pricing
flexibility and the demand for our products. Even when we develop a promising
new product, we may find limited demand for the product unless reimbursement
approval is obtained from private and governmental third-party
payors.
 
 Major
third-party payors for hospital services in the United States and abroad
continue to work to contain healthcare costs through, among other things, the
introduction of cost containment incentives and closer scrutiny of healthcare
expenditures by both private health insurers and employers. For example, in an
effort to decrease costs, certain hospitals and other customers sometimes
resterilize products otherwise intended for a single use or purchase reprocessed
products from third-party reprocessors.
  Further
legislative or administrative reforms to the U.S. reimbursement systems in a
manner that significantly reduces reimbursement for procedures using our medical
devices or denies coverage for these procedures, or adverse decisions relating
to our products by administrators of these systems in coverage or reimbursement
issues, would have an adverse impact on the acceptance of our products and the
prices that our customers are willing to pay for them. These outcomes, along
with cost containment measures, could have a material adverse effect on our
business and results of operations.
  In
addition, Medicare covers a substantial percentage of the patients treated for
prostate cancer in the United States, and consequently, the costs for prostate
cancer treatment are subject to Medicare’s prescribed rates of reimbursement.
The utilization of TheraSeed®, I-Seed
and many of the products in our surgical products business may be influenced by
Medicare’s reimbursement levels, and the policies of other third party payors,
which can change periodically. Unfavorable reimbursement levels and confusion
regarding potential changes in Medicare have adversely affected sales of our
brachytherapy products in the past, and could do so in the future.
  I-17
  We
believe that the brachytherapy industry continues to be affected by competition
from alternate therapies, declining prices for I-125 and Pd-103 seeds,
competitors’ selling tactics and the effects of consolidation in the industry.
Theragenics’ brachytherapy business also continues to be affected by our
non-exclusive distributors. Medicare reimbursement policies have affected the
brachytherapy market and can also continue to affect the brachytherapy market.
On July 15, 2008, the Medicare Improvements for Patients and Providers Act of
2008 (the “2008 Act”) was enacted into law.  The 2008 Act extends
Medicare’s longstanding “pass through” reimbursement policies for brachytherapy
seeds administered in the hospital outpatient setting through December 31, 2009,
ensuring that the Medicare program does not implement potentially restrictive
caps on reimbursement during this period, (see “Medicare Developments”
included in “Management’s
Discussion and Analysis” below).  The potential for fixed
reimbursement rates after the expiration of the 2008 Act on December 31, 2009
and other factors can be expected to lead to continued pricing pressure from
hospitals and other health care providers.  Accordingly, we and/or our
non-exclusive distributors may continue to change our respective pricing
policies for the TheraSeed® device
and we may change our pricing policy with respect to I-Seed 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 average selling prices. Responding to market opportunities and
competitive situations could also have a favorable effect or prevent an
unfavorable effect on market share and volumes. Conversely, we or our
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.
 
 There can
be no assurance (i) that current or future limitations or requirements for
reimbursement by Medicare or other third party payors for prostate cancer
treatment will not materially adversely affect the market for our brachytherapy
or other products, (ii) that health administration authorities outside of the
United States will provide reimbursement at acceptable levels, if at all or
(iii) that any such reimbursement will be continued at rates that will enable us
to maintain prices at levels sufficient to realize an appropriate
return.  Any of these factors could have an adverse effect on
brachytherapy revenue.
 
 We
may be unable to maintain sufficient liability insurance.
 
 Our
business is subject to product liability risks inherent in the testing,
manufacturing and marketing of medical devices. We maintain liability policies
with limits of $25 million per occurrence and in the aggregate. Our product
liability and general liability policies are provided on a claims-made basis and
are subject to annual renewal. There can be no assurance that liability claims
will not exceed the scope of coverage or limits of such policies or that such
insurance will continue to be available on commercially reasonable terms or at
all. If we do not or cannot maintain sufficient liability insurance, our ability
to market our products may be significantly impaired. In addition, product
liability claims, as well as negative publicity arising out of such claims,
could have a material adverse effect on our business, financial condition and
results of operations.
 
 If
we do not comply with laws and regulations relating to our use of hazardous
materials, we may incur substantial liabilities.
  We use
hazardous materials and chemicals in our manufacturing operations. We are
required to comply with increasingly rigorous laws and regulations governing
environmental protection and workplace safety, including requirements governing
the handling, storage and disposal of hazardous substances and the discharge of
materials into the environment generally. Although, we believe that we handle,
store and dispose of these materials in a manner that complies with state and
federal regulations, the risk of accidental contamination or injury exists. In
the event of an accident, we could be held liable for decontamination costs,
other clean-up costs and related damages or liabilities. To help minimize these
risks, we employ a full-time Environmental Health and Safety Officer and, when
appropriate, we utilize outside professional services organizations to help us
evaluate environmental regulations and monitor our compliance with such
regulations. In addition, we procure insurance specifically designed to mitigate
environmental liability exposures.
  Litigation
may harm our business or otherwise distract our management.
  Substantial,
complex or extended litigation could cause us to incur large expenditures and
distract our management, and could result in significant monetary or equitable
judgments against us. For example, lawsuits by employees, patients, customers,
licensors, licensees, suppliers, business partners, distributors, stockholders,
or competitors could be very costly and could substantially disrupt our
business. Disputes from time to time with such companies or individuals are not
uncommon, and we cannot assure that we will always be able to resolve such
disputes out of court or on terms favorable to us.
  I-18
  Defects
in, or misuse of, our products, or any detrimental side effects that result from
the use of our products, could result in serious injury or death and could
require costly recalls or subject us to costly and time-consuming product
liability claims. This could harm future sales and require us to pay substantial
damages.
 
 TheraSeed® and
I-Seed deliver a highly concentrated and confined dose of radiation directly to
the prostate from within the patient’s body. Surrounding tissues and organs are
typically spared excessive radiation exposure. Our wound closure, vascular
access and specialty needle products are also utilized directly on patients. It
is an inherent risk of the industries in which we operate that we might be
sued in a situation where one of our products results in, or is alleged to
result in, a personal injury to a patient, health care provider, or other user.
Although we believe that as of the current date we have adequate insurance to
address anticipated potential liabilities associated with product liability, any
unforeseen product liability exposure in excess of, or outside the scope of,
such insurance coverage could adversely affect our operating results. Any such
claim brought against us, with or without merit, could result in significant
damage to our business.
 
 The FDA’s
medical device reporting regulations require us to report any incident in which
our products may have caused or contributed to a death or serious injury, or in
which our products malfunctioned in a way that would be likely to cause or
contribute to a death or serious injury if the malfunction reoccurred. Any
required filing could result in an investigation of our products and possibly
subsequent regulatory action against us if it is found that one of our products
caused the death or serious injury of a patient.
 
 Because
of the nature of our products, the tolerance for error in the design,
manufacture or use of our products may be small or nonexistent. If a product
designed or manufactured by us is defective, whether due to design or
manufacturing defects, or improper assembly, use or servicing of the product or
other reasons, the product may need to be recalled, possibly at our expense.
Furthermore, the adverse effect of a product recall might not be limited to the
cost of the recall. For example, a product recall could cause applicable
regulatory authorities to investigate us as well as cause our customers to
review and potentially terminate their relationships with us. Recalls,
especially if accompanied by unfavorable publicity or termination of customer
contracts, could cause us to suffer substantial costs, lost revenues and a loss
of reputation, each of which could harm our business. Products as complex as our
planning and dose calculation software systems may also contain undetected
software errors or defects when they are first introduced or as new versions are
released. Our products may not be free from errors or defects even after they
have been tested, which could result in the rejection of our products by our
customers and damage to our reputation, as well as lost revenue, diverted
development resources and increased support costs. We may also be subject to
claims for damages related to any errors in our products.
 
 Although
a number of the surgical products are Class II devices subject to certain
special controls by the FDA, many of the products are Class I devices, meaning
that the FDA considers these products to present minimal potential for harm to
the user. Nonetheless, if there is an error in the design, manufacture or use of
any of these products, there remains a risk of recall, rejection of our product
by our customers, damage to our reputation, lost revenue, diverted development
of resources and increased support costs. We may also be subject to claims for
damages related to any error in such products.
 
 We
may require additional capital in the future and we may be unable to obtain
capital on favorable terms or at all.
 
 Although
we expect our existing capital resources and future operating cash flows to be
sufficient for the foreseeable future, certain events, such as operating losses
or unavailability of credit could significantly reduce our remaining cash, cash
equivalents and investments in marketable securities. Furthermore, we may
require additional capital for research and development, the purchase of other
businesses, technologies or products. Our capital requirements will depend on
numerous factors, including the time and cost involved in expanding production
capacity, the cost involved in protecting our proprietary rights and the time
and expense involved in completing product development programs.
 
 We have a
Credit Agreement with a financial institution that expires October 31, 2009
and provides for revolving borrowings of up to $40.0 million, including a $5.0
million sub-limit for letters of credit. The Credit Agreement is subject to
early termination upon the occurrence of certain events of default. In addition,
the lender may decide to not extend this Credit Agreement at the expiration of
the term. Finally, the Credit Agreement is unsecured and includes a springing
lien on substantially all of the assets of the Company and our subsidiaries
(subject to certain limited 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. In the event the Credit Agreement
terminates early or is not extended, we will not have access to future
borrowings in order to fund our capital requirements unless we can find new
financing. In addition, the terms of our Credit Agreement require us to maintain
a minimum of $20 million of liquid assets, as defined in the Credit
Agreement.  No assurances are made regarding whether such refinancing can
be arranged. Any new or replacement facility will likely be under terms that are
not as favorable as the current credit facility.  The negative impact
of recent and continuing adverse changes in the economy and credit markets
generally or our inability to obtain financing on favorable terms, if at all,
may have a material adverse effect on our results of operations and
business.
  I-19
 If
we are unable to develop new enhancements and new generations, we may be unable
to retain our existing customers or attract new customers.
  Rapid and
significant technological change in products offered as well as enhancements to
existing products and surgical techniques coupled with evolving industry
standards and new product introductions characterize the market for our
brachytherapy, wound closure, vascular access, and specialty needle
products. Many of our brachytherapy and surgical products are technologically
innovative and require significant planning, design, development and testing.
These activities require significant capital commitments and investment. If we
are unable to raise needed capital on favorable terms or at all, we may be
unable to maintain our competitive advantage in the marketplace.
  New
product developments in the healthcare industry are inherently risky and
unpredictable. These risks include:
  •
              failure
      to prove feasibility;•
              time
      required from proof of feasibility to routine
  production;•
              timing
      and cost of product development and regulatory approvals and
      clearances;•
              competitors’
      response to new product developments;•
              development,
      launch, manufacturing, installation, warranty and maintenance cost
      overruns;•
              failure
      to obtain customer acceptance and payment;•
              customer
      demands for retrofits of both old and new products; and•
              excess
      inventory caused by phase-in of new products and phase-out of old
      products.
 
 The high
cost of technological innovation is coupled with rapid and significant change in
the regulations governing the products that compete in both our surgical
products and brachytherapy markets.  We may also be affected by
industry standards that could change on short notice, and by the introduction of
new products and technologies that could render existing products and
technologies uncompetitive. We cannot be sure that we will be able to
successfully develop new products or enhancements to our existing brachytherapy
products and innovative surgical products. Without new product introductions,
our revenues will likely suffer. Even if customers accept new enhanced products,
the costs associated with making these products available to customers, as well
as our ability to obtain capital to finance such costs, could reduce or prevent
us from increasing our operating margins.
 
 Our
cash balances and marketable securities are subject to risks, which may cause
losses and affect the liquidity of these investments.
  At
December 31, 2008, we had $39.1 million in cash and cash equivalents and $1.5
million of investments in marketable securities. Our cash and cash equivalents
represent cash deposits and money market funds, and are invested with five
financial institutions. Our marketable securities primarily represent
investments in high-credit quality corporate and municipal obligations, in
accordance with our investment policies.  All of these cash, cash
equivalents and marketable securities investments are subject to general credit,
liquidity, market, interest rate and counterparty risks, which may be
exacerbated by the disruptions and volatility in the current economic climate,
lack of liquidity in the credit and investment markets, severe economic
difficulties being encountered by many financial institutions and other economic
uncertainties that have affected various sectors of the financial markets and
caused credit and liquidity issues. These market risks associated with our
investment portfolio may have a negative adverse effect on our results of
operations, liquidity and financial condition.
  We
face unknown and unpredictable risks related to the current economic
instability.
  Financial
markets and the economies in the United States and internationally have
experienced extreme disruption and volatility and conditions could worsen. This
has resulted in severely diminished liquidity and credit availability in the
market, which could impair our ability to access capital or adversely affect our
operations. The economic downturn may also, among other things:
  ·
              create
      downward pressure on the pricing of our products;·
              affect
      the collection of accounts receivable;·
              increase
      the sales cycle for certain of our products;·
              slow
      the adoption of new products and technologies;·
              adversely
      affect our customers, causing them to reduce spending;·
              adversely
      affect our suppliers, which could adversely affect our ability to produce
      our products.
  Any of these conditions
could have a material adverse effect on our business, financial position,
liquidity and results of operations.
  Item
1B. Unresolved Staff Comments.
  None.
  I-20
  Item
2. Properties
  The
executive offices of the Company are located in Buford, Georgia, in a facility
that we own. Approximately 144,000 square feet of manufacturing and development
facilities in the brachytherapy seed business are also located in Buford,
Georgia, and are owned by us. Approximately 123,000 square feet of space in
leased facilities in the surgical products business are located in Portland,
Oregon, Garland, Texas and the Boston, Massachusetts area.
  We also
own approximately 32 acres in Buford, Georgia on which our executive
offices and facilities for our brachytherapy seed business are located. 
There is land available for future development adjacent to our current Buford
facility.
  The
surgical products business leases approximately 34,500 square feet of
production, warehouse, and office space from two related entities.  One is
controlled by the former owner and officer of CP Medical, who is currently a
stockholder of Theragenics; and the second is controlled by the former principal
owners of NeedleTech, who are currently officers.  Approximate minimum
lease payments under these leases are as follows: 2009, $260,000; 2010,
$137,000; 2011, $22,000.
  All of
our owned and leased space is well maintained and suitable for the operations
conducted in it.
  Item
3. Legal Proceedings
  From time
to time we may be a party to claims that arise in the ordinary course of
business, none of which, in our view, is expected to have a material adverse
effect on our consolidated financial position or results of
operations.
  Item
4. Submission of Matters to a Vote of Security Holders
  We did
not submit any matter to a vote of our security holders during the fourth
quarter of calendar year 2008.
 
 I-21
  PART
II
  Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
  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 for each quarterly period in 2008 and 2007 are as
follows:
  
 High
              
              
              Low2008First
      Quarter
              
              $
              4.00
              
              
              $
              3.23Second
      Quarter
              
              
              4.25
              
              
              
              3.20Third
      Quarter
              
              
              3.76
              
              
              
              2.69Fourth
      Quarter
              
              
              3.25
              
              
              
              0.962007First
      Quarter
              
              $
              6.32
              
              
              $
              3.00Second
      Quarter
              
              
              6.95
              
              
              
              4.00Third
      Quarter
              
              
              4.58
              
              
              
              3.40Fourth
      Quarter
              
              
              4.74
              
              
              
              3.37
  As of
March 11, 2009, the closing price of the Company’s Common Stock was $1.00
per share. Also, as of that date, there were approximately 426
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 2017, and do not become
exercisable unless certain events occur including the acquisition of, or
commencement of a tender offer for, 20% 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 Computershare Investor Services LLC, 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 not previously 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 the Company’s strategy of continued diversification and
expansion. Consequently, the Board of Directors does not anticipate declaring or
paying cash dividends on the Common Stock in the foreseeable
future.
  II-1
  Item
6. Selected Financial Data
  The
following selected financial data are derived from the consolidated financial
statements of the Company. The selected financial data set forth below should be
read in conjunction with the consolidated 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.
  (Amounts
      in thousands, except per share data)
              
              Year
      ended December 31,2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Statement
      of Earnings Data:Product
      sales
              
              $
              66,447
              
              
              $
              61,286
              
              
              $
              53,076
              
              
              $
              43,693
              
              
              $
              33,030License
      and fee income
              
              
              911
              
              
              
              924
              
              
              
              1,020
              
              
              
              577
              
              
              
              308Total
      revenue
              
              
              67,358
              
              
              
              62,210
              
              
              
              54,096
              
              
              
              44,270
              
              
              
              33,338Cost
      of sales
              
              
              36,264
              
              
              
              31,994
              
              
              
              27,752
              
              
              
              23,763
              
              
              
              14,122Gross
      profit
              
              
              31,094
              
              
              
              30,216
              
              
              
              26,344
              
              
              
              20,507
              
              
              
              19,216Selling,
      general and administrative
              
              
              20,500
              
              
              
              19,131
              
              
              
              19,951
              
              
              
              19,652
              
              
              
              17,619Amortization
      of purchased intangibles
              
              
              2,410
              
              
              
              1,875
              
              
              
              1,371
              
              
              
              500
              
              
              
              -Research
      and development
              
              
              1,300
              
              
              
              1,365
              
              
              
              805
              
              
              
              3,632
              
              
              
              9,583Impairment
      of goodwill and tradenames
              
              
              70,376
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Change
      in estimated value of asset held for sale
              
              
              (142
              )
              
              
              500
              
              
              
              -
              
              
              
              -
              
              
              
              -Restructuring
      expenses
              
              
              -
              
              
              
              -
              
              
              
              369
              
              
              
              33,390
              
              
              
              -(Gain)
      loss on sale of assets
              
              
              (5
              )
              
              
              -
              
              
              
              (201
              )
              
              
              14
              
              
              
              15Total
      operating expenses
              
              
              94,439
              
              
              
              22,871
              
              
              
              22,295
              
              
              
              57,188
              
              
              
              27,217Earnings
      (loss) from operations
              
              
              (63,345
              )
              
              
              7,345
              
              
              
              4,049
              
              
              
              (36,681
              )
              
              
              (8,001
              )Other,
      net
              
              
              277
              
              
              
              1,502
              
              
              
              1,104
              
              
              
              1,281
              
              
              
              1,149Earnings
      (loss) before income taxes
              
              
              (63,068
              )
              
              
              8,847
              
              
              
              5,153
              
              
              
              (35,400
              )
              
              
              (6,852
              )Income
      tax expense (benefit)
              
              
              (4,528
              )
              
              
              3,212
              
              
              
              (1,712
              )
              
              
              (6,394
              )
              
              
              (2,542
              )Net
      earnings (loss)
              
              $
              (58,540
              )
              
              $
              5,635
              
              
              $
              6,865
              
              
              $
              (29,006
              )
              
              $
              (4,310
              )Net
      earnings (loss) per shareBasic
              
              $
              (1.77
              )
              
              $
              0.17
              
              
              $
              0.21
              
              
              $
              (0.93
              )
              
              $
              (0.14
              )Diluted
              
              $
              (1.77
              )
              
              $
              0.17
              
              
              $
              0.21
              
              
              $
              (0.93
              )
              
              $
              (0.14
              )Weighted
      average common sharesBasic
              
              
              33,066
              
              
              
              33,103
              
              
              
              32,452
              
              
              
              31,273
              
              
              
              29,971Diluted
              
              
              33,066
              
              
              
              33,299
              
              
              
              32,540
              
              
              
              31,273
              
              
              
              29,971
  December
      31,(In
      thousands)
              
              2008
              
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004Balance
      Sheet Data:Cash
      and cash equivalents
              
              $
              39,088
              
              
              $
              28,666
              
              
              $
              18,258
              
              
              $
              10,073
              
              
              $
              28,450Marketable
      securities
              
              
              1,507
              
              
              
              20,123
              
              
              
              14,722
              
              
              
              35,535
              
              
              
              33,811Property
      and equipment, net
              
              
              30,035
              
              
              
              27,972
              
              
              
              30,901
              
              
              
              32,766
              
              
              
              70,215Total
      assets
              
              
              114,419
              
              
              
              148,821
              
              
              
              146,244
              
              
              
              122,064
              
              
              
              148,678Short-term
      borrowings
              
              
              32,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Long-term
      borrowings
              
              
              -
              
              
              
              7,500
              
              
              
              7,500
              
              
              
              -
              
              
              
              -Shareholders’
      equity
              
              $
              74,110
              
              
              $
              132,619
              
              
              $
              126,141
              
              
              $
              115,683
              
              
              $
              138,060
  II-2
  THERAGENICS
CORPORATION
  Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
  Overview
  Theragenics
Corporation is a medical device company serving the surgical products and cancer
treatment markets, operating in two business segments. The
terms "Company", "we", "us", or "our" mean Theragenics Corporation and all
entities included in our consolidated financial statements.
 
 Our surgical
products business consists of wound closure, vascular access, and specialty
needle products.  Wound closure includes sutures, needles and other
surgical products. Vascular access includes introducers, guidewires, and related
products.  Specialty needles include coaxial, biopsy, spinal and
disposable veress needles, access trocars, and other needle based
products.  This segment serves a number of markets and applications,
including among other areas, interventional cardiology, interventional
radiology, vascular surgery, orthopedics, plastic surgery, dental surgery,
urology, veterinary medicine, pain management, endoscopy, and spinal surgery.
Our surgical products business sells its devices and components primarily to
original equipment manufacturers (“OEMs”) and to a network of
distributors.
 
 In our
brachytherapy seed business, we produce, market and sell TheraSeed®, our
premier palladium-103 prostate cancer treatment device; I-Seed, our iodine-125
based prostate cancer treatment device; and other related products and services.
We are the world’s largest producer of palladium-103, the radioactive isotope
that supplies the therapeutic radiation for our TheraSeed® device.
Physicians, hospitals and other healthcare providers, primarily located in the
United States, utilize the TheraSeed® device.
The majority of TheraSeed® sales
are channeled through third-party distributors. We also maintain an in-house
sales force that sells our TheraSeed® and
I-Seed devices directly to physicians.
 
 We have
substantially diversified our operations and revenues in recent years. Prior to
2003, we operated one business segment, our brachytherapy seed
business.  Our sole product was the palladium-103 TheraSeed® prostate
cancer treatment device. In 2003, we began to market I-Seed, our iodine-125
based I-Seed prostate cancer treatment product. In May 2005, we expanded into
the surgical products business with the acquisition of CP Medical Corporation
(“CP Medical”).  In August 2005 we restructured our brachytherapy seed
business in order to sharpen our focus on our two business segments and provide
a more focused platform for continued diversification.  In August 2006
we acquired Galt Medical Corp. (“Galt”); and in July 2008, we acquired
NeedleTech Products, Inc. (“NeedleTech”).  CP Medical, Galt, and
NeedleTech comprise our surgical products business, which accounted for 57% of
consolidated revenue in 2008.  Prior to May 2005, the brachytherapy
seed business constituted 100% of our revenue.
 
 We
acquired CP Medical on May 6, 2005, for approximately $26.7 million, including
$20.6 million in cash and the issuance of 1,840,458 shares of common stock
valued at approximately $6.1 million. Galt was acquired on August 2, 2006, for
$32.7 million (net of $2.3 million of cash acquired), including $29.6 million in
cash and the issuance of 978,065 share of common stock valued at $3.1
million.
 
 Acquisition of
NeedleTech Productsin
2008
  We
acquired all of the outstanding common stock of NeedleTech on July 28,
2008.  The total purchase price, including transaction costs, was
approximately $44.1 million (net of cash, cash equivalents, and marketable
securities acquired of approximately $5.8 million).  We paid the
purchase price in cash, including $24.5 million from borrowings under our $40
million credit facility.
  NeedleTech
is a manufacturer of specialty needles and related medical
devices.  Their current products include coaxial needles, biopsy
needles, access trocars, brachytherapy needles, guidewire introducer needles,
spinal needles, disposable veress needles, and other needle-based
products.  End markets served include the cardiology, orthopedics,
pain management, endoscopy, spinal surgery, urology, and veterinary medicine
markets.  We believe the acquisition of NeedleTech will forward our
stated strategy of becoming a diversified medical device manufacturer, will
increase our breadth of offerings to our existing customers and will expand our
customer base of large leading-edge OEMs. The results of NeedleTech’s operations
were included in our consolidated results subsequent to
acquisition.
  II-3
 
 Results
of Operations
  Year
Ended December 31, 2008, Compared to Year Ended December 31, 2007
  Revenue
  Following
is a summary of revenue by segment for each of the three years in the period
ended December 31, 2008 (in thousands):
  Year
      ended December 31,2008
              
              
              2007
              
              
              2006Surgical
      products
              
              $
              38,779
              
              
              $
              28,896
              
              
              $
              19,372Brachytherapy
      seedProduct
      sales
              
              
              27,910
              
              
              
              32,596
              
              
              
              33,860Licensing
      fees
              
              
              877
              
              
              
              924
              
              
              
              1,020Total
      brachytherapy seed
              
              
              28,787
              
              
              
              33,520
              
              
              
              34,880Intersegment
      eliminations
              
              
              (208
              )
              
              
              (206
              )
              
              
              (156
              )Consolidated
              
              $
              67,358
              
              
              $
              62,210
              
              
              $
              54,096
  Revenue
in our surgical products segment increased 34% over 2007 as a result of the
acquisition of NeedleTech, organic growth, and expanded programs for existing
customers. On a pro forma basis, as if the NeedleTech acquisition had occurred
on January 1, 2007, revenue in our surgical products segment would have
increased 7% over 2007. A significant portion of the products in our surgical
business is sold to OEMs and a network of distributors. Ordering patterns of
these customers vary and are difficult to predict. Accordingly, surgical
products revenue is subject to fluctuation, especially on a quarter-to-quarter
basis.  In addition, the volatility and disruptions in the U.S. and
global economies and credit markets, and other uncertainties due to the economic
slowdown in the U.S. and around the world, have had a negative effect on our
surgical product revenue, especially as general economic conditions worsened in
the fourth quarter of 2008.  Scheduled shipping dates for orders were
farther out than we have typically experienced.  We believe the
lengthening lead times have been, at least in part, our customers’ response to
hospitals’ efforts to reduce inventories and conserve cash.  We
believe this has affected all companies in the supply chain, including
ours.  Looking forward, we expect that the difficult economic climate
and macroeconomic uncertainties generally will continue to affect our surgical
products business at least through 2009, and perhaps make the fluctuations in
our results even more volatile from period to period.
  Brachytherapy
product sales decreased 14% in 2008 compared to 2007. The decrease in product
sales included a decline in sales to our main distributor of 18%. We believe
there has been an industry wide decline in prostate brachytherapy procedure
volume in 2008.  Some newer forms of treatment have increased their
market share, especially those with Medicare reimbursement levels that are
higher than reimbursement levels for brachytherapy.  These newer forms
of alternative treatments include Intensity Modulated Radiation Therapy (“IMRT”)
and robotic surgery.   Our revenues also continue to be affected
by the disappointing performance of our main distributor.  We also
maintain our own internal brachytherapy sales force that sells TheraSeed®and
I-Seed directly to hospitals and physicians. Revenue from direct sales was 47%
of total brachytherapy segment revenue in 2008 and 46% in 2007.  In
addition to treatment options that enjoy favorable reimbursement rates, we
believe brachytherapy seed revenue is also affected by disruptive pricing from
other brachytherapy providers and uncertainties surrounding
reimbursement.  The average selling price of the TheraSeed® device
sold directly to hospitals and physicians was down slightly in 2008 compared to
2007.
  We have
two non-exclusive distribution agreements in place for the distribution of the
TheraSeed® device.
The primary distribution agreement is with C. R. Bard, Inc. (“Bard”), which is
effective through December 31, 2010 (the “Bard Agreement”). Sales to Bard
represented 51% and 53% of brachytherapy product revenue in 2008 and 2007,
respectively, and 21% and 28% of consolidated product revenue in 2008 and 2007,
respectively. Revenue generated from the second non-exclusive distributor was
not material in 2008 and is not expected to be material in 2009. The terms of
the Bard Agreement provide for automatic one-year extensions of the term, unless
either party gives notice of its intent not to renew at least twelve months
prior to the end of the current term. The current term expires on December 31,
2010, and will be automatically extended for one additional year unless either
party gives notice by December 31, 2009 of its intent not to extend the
agreement.
  In May
2008, we entered into an exclusive license agreement whereby we licensed to
another party the rights to certain intellectual property related to an
expandable brachytherapy delivery system that we developed.  The term
of the agreement is through the expiration of the last of the patents licensed
under the agreement, which is currently November 2024.  The agreement
provides for a minimal non-refundable initial license fee and non-refundable
continuing royalties based upon sales subject to certain
minimums.  License fee revenue under this agreement was not material
in 2008 and is not expected to be material in 2009.
  II-4
  We
believe that Medicare reimbursement policies have affected the brachytherapy
market and will continue to affect the brachytherapy market.  During
2007 Medicare continued to reimburse for brachytherapy seeds under the “charges
adjusted to costs” methodology, which is based on the actual invoiced cost of
the seeds and which we sometimes refer to as a “pass-through”
methodology.  In December 2007, Congress enacted the Medicare,
Medicaid and SCHIP Extension Act of 2007, which extended the existing cost-based
reimbursement methodology through June 30, 2008.  On July 15, 2008,
the Medicare Improvements for Patients and Providers Act of 2008 (the “2008
Act”) was enacted into law.  The 2008 Act extends Medicare’s long
standing cost-based reimbursement methodology for brachytherapy seeds
administered in the hospital outpatient setting through December 31, 2009,
ensuring that the Medicare program does not implement potentially restrictive
caps on reimbursement during this period.  The 2008 Act was
retroactive to July 1, 2008.  The potential for fixed Medicare
reimbursement rates after the expiration of the 2008 Act and other factors can
be expected to lead to continued pricing pressure from hospitals and other
health care providers.  Any of these factors could have an adverse
effect on brachytherapy revenue.
  Operating
income (loss) and costs and expenses
  Following
is a summary of operating income (loss) by segment for each of the three years
in the period ended December 31, 2008 (in thousands):
  
 Year
      ended December 31,2008
              
              
              2007
              
              
              2006Surgical
      productsOperating
      income (loss)
              
              $
              (63,538
              )
              
              $
              3,977
              
              
              $
              1,955Impairment
      of goodwill and tradenames
              
              
              67,798
              
              
              
              -
              
              
              
              -Surgical
      products excluding special items
              
              
              4,260
              
              
              
              3,977
              
              
              
              1,955Brachytherapy
      seedOperating
      income
              
              
              176
              
              
              
              3,403
              
              
              
              2,122Impairment
      of goodwill and tradenames
              
              
              2,578
              
              
              
              -
              
              
              
              -One-time
      license fees
              
              
              -
              
              
              
              -
              
              
              
              (400
              )Change
      in estimated value of asset held for sale
              
              
              (142
              )
              
              
              500
              
              
              
              -Restructuring
      related items, net
              
              
              -
              
              
              
              -
              
              
              
              170Brachytherapy
      seed excluding special items
              
              
              2,612
              
              
              
              3,903
              
              
              
              1,892Intersegment
      eliminations
              
              
              17
              
              
              
              (35
              )
              
              
              (28
              )Operating
      income (loss)Consolidated
              
              $
              (63,345
              )
              
              $
              7,345
              
              
              $
              4,049Excluding
      special items
              
              $
              6,889
              
              
              $
              7,845
              
              
              $
              3,819
  Operating
income excluding special items is a non-GAAP financial measure we use to make
operational decisions, evaluate performance, prepare internal forecasts and
allocate resources. We believe presentation of these non-GAAP financial measures
provides supplemental information that is helpful to an understanding of the
operating results of our businesses and period-to-period comparisons of
performance. Non-GAAP financial measures should be considered in addition to,
but not as a substitute for, the comparable measure calculated and presented in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”).
  On a
consolidated basis we had an operating loss of $63.3 million in
2008.  This included a non-cash impairment charge of $70.4 million,
related primarily to the impairment of all of our previously recorded
goodwill.  See Impairment of goodwill and
tradenamesbelow.
  II-5
  Operating
income in the surgical products segment includes the results of NeedleTech
subsequent to acquisition on July 28, 2008.   Surgical products
operating income excluding special items was $4.3 million in 2008 compared to
$4.0 million in 2007.  Gross margins in our surgical products segment
were 41% in 2008 compared to 43% in 2007. Our gross margins in 2008 were
negatively affected by $885,000 of non-cash acquisition related charges related
to the NeedleTech acquisition. These non-cash charges were related primarily to
the fair value adjustments to NeedleTech inventory at acquisition and will not
recur in 2009.  Gross margins are also dependent on sales channel and
product mix.  Selling, general, and administrative (SG&A) expenses
in our surgical products business were 21% of revenue in both 2008 and
2007.  In 2008 we incurred higher recruiting, relocation, and
information technology infrastructure costs as compared to 2007.  We
also implemented a new research and development (R&D) program in our
surgical products business in the fourth quarter of 2008.  This
R&D program is intended to focus on product extensions, next generation
products and new products that are complementary to our current product
lines.  R&D expenses in our surgical products segment were $1.2
million in 2008 compared to $639,000 in 2007.  Looking forward, we
expect R&D expenses to increase to as high as $3.5 million in 2009,
depending on our opportunities.  We also expect to continue to make
investments in staffing, and other infrastructure, including our corporate wide
investment in standardization of our information technology systems, in our
surgical products segment in 2009. Accordingly, operating income may fluctuate
solely as a result of investments made in operations in future
periods.
  Operating
income excluding special items in the brachytherapy seed segment was $2.6
million in 2008 compared to $3.9 million in 2007.  In December 2007 we
increased the estimated service lives of our cyclotron equipment from 10 years
to 15 years. This change reduced manufacturing related depreciation expense by
approximately $1.4 million in 2008 from what would have otherwise been reported.
Despite the lower depreciation expense, our operating income declined in 2008
primarily as a result of lower revenue.  Manufacturing related
expenses in our brachytherapy business tend to be fixed in
nature.  Accordingly, even modest declines in revenue have a negative
impact on operating income.  Gross margins and operating income in our
brachytherapy seed business are expected to continue to be highly dependent on
sales levels, due to this high fixed cost component.  Partially
offsetting the lower revenue was a $700,000 decrease in SG&A expenses
compared to 2007 primarily as a result of lower compensation related expenses
and the elimination of maintenance expenses and carrying costs related to our
Oak Ridge facility, which we sold in July 2008.  Looking forward, the
elimination of our Oak Ridge carrying costs will reduce future annual operating
expenses by approximately $264,000 as compared to 2008.  R&D
expenses in the brachytherapy seed segment also declined in 2008.  We
do not expect R&D expenses in this segment to be material in future periods,
although we may incur R&D expenses for appropriate opportunities in process
improvements.
  Asset
held for sale
  We completed the sale of our Oak Ridge
facility in July 2008.   This facility was previously classified
as a long-term asset held for sale in our consolidated balance
sheet.  As part of this transaction, the facility was sold and the
underlying land sublease was terminated.   The significant
portion of the present value of the future payments due under that sublease was
previously classified as a long-term contract termination liability in our
consolidated balance sheet.  The $142,000 gain realized from the
completion of the sale in July, including the termination of the sublease, was
recognized as an adjustment to the carrying value of the asset held for sale in
2008.   During 2007 we recorded a $500,000 write down of the
carrying value of the Oak Ridge facility based on the general deterioration of
the commercial real estate markets and in the overall economy at the
time.
  Impairment
of goodwill and tradenames
 
 In
accordance with the provisions of Statement of Financial Accounting Standards
(“SFAS”) No. 142, Goodwill and
Other Intangible Assets, we perform an assessment of goodwill impairment
annually, or more frequently if events or changes in circumstances indicate that
impairment in the value of goodwill recorded on our balance sheet may
exist.  We perform our impairment testing at the reporting unit
level.  A reporting unit is the same as, or one level below, an
operating segment.  We typically perform our annual assessment during
the fourth quarter of each year, which coincides with the timing of our annual
budgeting and forecasting process. In order to estimate the fair value of
goodwill, we typically make various assumptions about the future prospects for
the reporting unit that the goodwill relates to, consider market factors
specific to that reporting unit, and estimate future cash flows to be generated
by that reporting unit.  Assumptions used in these assessments are
consistent with our internal planning. We also consider external economic and
market conditions that could impact the fair value of our reporting
units.
  Our
common stock is listed and traded on the New York Stock Exchange
(“NYSE”).  The trading prices of many companies, including our own,
declined significantly during the fourth quarter of 2008, along with significant
declines in the overall market value of the composite of all shares traded on
the stock exchanges.  These overall stock market declines have
continued into early 2009.  We believe that events in the U.S. and
global credit markets, banking and financial markets, the current economic
instability, and negative economic news in general, have caused the significant
volatility in the prices of common stocks listed on the U.S. and global stock
exchanges.  This decline in stock market valuations coincided with our
annual impairment testing.
  II-6
  The
extended decline in our share price and market capitalization, and the overall
deterioration in general macroeconomic conditions as discussed above, had a
material effect on our impairment testing in the fourth quarter.  Our
assumptions and judgments reflected the deteriorating macroeconomic environment
and resulted in the use of discount rates and comparable company market
multiples that reflected the significantly increased risk prevalent in the
markets. In addition, our cash flow, discount rate and market multiple
assumptions were severely restricted due to our market capitalization, which is
determined by our share price as quoted by the NYSE.
  As a
result of these circumstances, the first step of our impairment testing under
SFAS No. 142 indicated that goodwill was impaired at each of our reporting
units. We then performed the second step of the goodwill impairment test which
involves calculating the implied fair value of goodwill by allocating the fair
value of the reporting unit to all of its assets and liabilities other than
goodwill (including both recognized and unrecognized intangible assets) and
comparing the residual amount to the carrying value of goodwill.  The
fair value of our reporting units was determined using discounted cash flow and
market multiple approaches.  As we noted above, our estimates of fair
value of our reporting units were severely limited by our market
capitalization.  The results of this second step of impairment testing
indicated that all goodwill at each of our reporting units was
impaired.  Total impairment of goodwill was $65.3 million in our
surgical products segment and $2.6 million in our brachytherapy seed
segment.   These impairment charges are not expected to affect
our liquidity, cash flows from operating activities, or future
operations.  These charges also had no effect on our $40 million
credit facility or our compliance with the financial covenants under the credit
facility.
 
 Our
tradenames were intangible assets with indefinite lives and accordingly were not
subject to amortization.  Pursuant to SFAS No. 142 the recorded value
of our tradenames intangible asset is tested for impairment annually or more
frequently if changes in circumstances indicate that impairment may
exist.  The determination of fair value used in the impairment
evaluation is based on discounted estimates of future sales projections
attributable to ownership of the tradenames. Significant judgments inherent in
this analysis include assumptions about appropriate sales growth rates, royalty
rates, discount rates and the amount of expected future cash flows. The
judgments and assumptions used in the estimate of fair value are consistent with
the projections and assumptions that are used in our internal budgeting and
forecasting process. They are also consistent with the judgments and assumptions
used in our goodwill impairment testing.  The determination of fair
value is highly sensitive to changes in the related discount rate used to
evaluate the fair value of our tradenames. We estimated the current fair value
of our tradenames, as determined using discount rates reflective of current
economic conditions and our market capitalization.  We compared these
estimated fair values to the recorded amounts of our tradenames and determined
that there was impairment of $2.5 million, all related to reporting units in our
surgical products segment.  In connection with our review of tradename
impairment, we determined that current facts and circumstances no longer
supported an indefinite life.  We estimated that the remaining useful
life of our tradenames was 10 years.  Accordingly, we will amortize
our tradenames over 10 years beginning in 2009; and amortization expense in 2009
is expected to be $324,000 higher than it would be if tradenames were not
subject to amortization.
 
 Pursuant
to SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, we also review
long-lived assets, including our intangible assets subject to amortization, for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. We group these assets at
the lowest level that we could reasonably estimate the identifiable cash
flows.  Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of long-lived assets to the future
undiscounted net cash flows expected to be generated by these assets. If the
carrying amounts exceed the future undiscounted cash flows, then the impairment
recognized is the amount by which the carrying amount of the assets exceeds
their fair value.  As a result of the impairment indicators related to
goodwill, we tested our long-lived assets for impairment and determined that
there was no impairment.
  Other
income/expense
  Interest
income was $1.1 million in 2008 compared with $2.2 million in 2007. The 2007
amount included $309,000 of one-time interest income related to $1.9 million of
refunded federal income taxes. Interest income also decreased in 2008 as a
result of cash used for the NeedleTech acquisition and lower yields due to a
more conservative investment mix and declining market interest rates. Our
current investments consist primarily of money market funds and U.S. Treasury
securities.  Our investments can include short-term cash investments
and high-credit quality corporate and municipal obligations, in accordance with
our investment policies. See Liquidity – Marketable Securitiesand Critical Accounting
Policiesbelow.  Funds available for investment have and will
continue to be utilized for our current and future expansion programs 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, we expect interest income to fluctuate accordingly.
  II-7
  Interest
expense increased to $841,000 in 2008 from $691,000 in 2007. The increase was
due to an additional $24.5 million of borrowings under our credit facility for
the NeedleTech acquisition.  Interest on outstanding borrowings is
payable at LIBOR plus 1% with an effective rate of 2.9% at December 31, 2008 and
6.2% at December 31, 2007. Our interest expense in 2008 would have been higher
had our effective interest rate not declined during the course of the year in
2008.  Future levels of interest expense will be dependent on the
level of outstanding borrowings and on changes in the underlying LIBOR
rate.  Such changes are impossible for us to predict, especially in
the current economic environment.  To date we have not hedged the
interest costs related to our credit facility.  We may hedge our
interest rate risk in the future, depending on, among other things, the
intermediate and long-term outlook for interest rates and the risks and costs
associated with hedging such items.
  Our
current credit facility expires in October 2009.  Should we be
successful in renewing or replacing our current credit facility, future interest
expense will also be impacted by any new terms, increases or decreases in the
effective interest rate on borrowings, and any future borrowings to support
expansion programs and strategic opportunities for growth and
diversification.  Due to the current economic environment and severe
difficulties in the credit markets, any new or replacement credit facility is
likely to be on less favorable terms than our current credit
facility.
  Other
non-operating income in 2008 totaled $53,000.  This amount consisted
of gains from the sale of scrap metal from one of our operating facilities of
$457,000. Looking forward, we do not expect to continue to realize similar gains
in the near future.  Offsetting this gain in 2008 was $347,000 in
losses in our marketable securities, which included a $93,000 impairment charge
related to a decline in market value to one of our investments that we
considered to be a permanent decline. For more information on the risks related
to our investments, see Critical Accounting Policies,
Liquidity and Capital Resources – Marketable Securities,and Item 7A, Quantitative and
Qualitative Disclosures About Market Risk,all of which are included in
this report.
  Income
tax expense
  Our
effective income tax rate for 2008 was a benefit of 7%.  In 2007 our
effective income tax rate was 36%. Our effective income tax rate in 2008 was
significantly affected by our non-cash impairment charges of goodwill and
tradenames. The majority of these impairment charges were not deductible for
income tax purposes and, accordingly, no tax benefit was recorded related to the
non-deductible charges. This had the effect of reducing our tax benefit by
approximately 27% in 2008.  Excluding the effect of the non-cash
impairment charges, our income tax rate was 34% in 2008.  Future tax
rates can be affected by, among other things, changes in tax regulations,
changes in statutory tax rates, changes in the tax jurisdictions in which we
must file income tax returns, and many other items that affect the taxability
and deductibility of our revenue and expenses and for which we cannot currently
predict.
 
 During
2007, the IRS completed an examination of our 2004 and 2005 federal income tax
returns with no significant adjustments. Upon settlement of the 2004 audit,
during 2007 we received a refund of federal income tax previously paid of $1.9
million. This refund resulted from the carryback of tax losses that were
reported in our 2004 federal income tax return. We also received $309,000 of
interest income related to this refund, which was recognized upon settlement of
the IRS examination in 2007.
  Year
Ended December 31, 2007, Compared to Year Ended December 31, 2006
  Revenue
  Consolidated
revenue in 2007 increased 15.0% over 2006 as a result of the increase in revenue
in the surgical products segment. Results for 2007 include the results of Galt
for the entire year. Galt, which was acquired in August 2006, was included for
approximately five months in 2006.
  Brachytherapy
product sales decreased 4% in 2007 compared to 2006. This decrease was due to a
15% decline in sales to our main distributor, partially offset by an increase in
direct sales. The sales decline to this main distributor was attributable to a
6% reduction in transfer price, which was effective February 1, 2007, with the
remaining decrease due to lower unit volumes. We reduced the transfer price in
recognition of competitive marketplace pressures and new distributor
strategies.   Direct sales totaled 46% of brachytherapy product
revenue in 2007 compared to 39% in 2006. The increase in direct sales resulted
from programs implemented by the direct sales force and direct to consumer
advertising programs. The average selling price of the TheraSeed® device
sold directly to hospitals and physicians in 2007 was comparable to
2006.
  Our
primary distribution agreement in 2007 was with C.R. Bard, Inc. (“Bard”). Sales
to Bard represented approximately 53% and 60% of brachytherapy product revenue
in 2007 and 2006, respectively, and 28% and 38% of consolidated product revenue
in 2007 and 2006, respectively. Revenue generated from a second non-exclusive
distributor was not material in 2007 or 2006.
  Revenue
in the 2006 period included $400,000 of one-time license fee revenue in the
brachytherapy segment related to the licensee’s receipt of the CE Mark and
European registration for TheraSphere®in
certain European countries. During 2007, license fees represented only the
continuing royalties from continuing license fees from European and U.S. product
sales of TheraSphere®.
  II-8
  Operating
income and costs and expenses
  Operating
income in the surgical products segment includes the results of Galt for the
entire year in 2007 and for five months in 2006. Gross margins in the surgical
products segment were 43% in 2007 and 41% in 2006 and were affected by product
and sales channel mix. In addition to the inclusion of Galt for a full year in
2007, operating income improved over the 2006 periods due to reductions in
professional fees and bad debt expense partially offset by severance costs.
Efficiencies were also realized because of the larger scale of the surgical
products business in 2007. Overall SG&A expenses as a percent of sales in
the surgical products segment decreased to 21% in 2007 from 22% in
2006.
  Operating
income excluding special items in the brachytherapy segment increased to $3.9
million in 2007, more than double the $1.9 million in 2006. This increase in
profitability was a result of reductions in operating expenses in 2007,
partially offsetting the effect of lower revenue. Cost reductions were a result
of operating efficiencies and other savings programs implemented in the last
half of 2006. In 2007, selling, general and administrative (SG&A) expenses
in the brachytherapy segment decreased by $2.6 million compared to 2006. These
SG&A reductions were primarily a result of decreases in advertising and
professional fees.
  Research
and development (“R&D”) expenses increased to $1.4 million in 2007 compared
to $805,000 in 2006. The brachytherapy segment developed a new device to assist
with the configuration of seeds. R&D in the surgical products segment was
primarily related to new product development.
  Asset
held for sale
  During 2007 we recorded a $500,000
write down of the carrying value of our Oak Ridge facility, which was held for
sale.  This write down was based on the general deterioration of the
commercial real estate markets and in the overall economy at the
time.  We completed the sale of the Oak Ridge facility in July
2008.
  Other
income/expense
  Interest
income was $2.2 million in 2007 compared to $1.5 million in 2006. The 2007
amount included $309,000 of one-time interest income related to $1.9 million of
refunded federal income taxes. This interest income was recognized in the second
quarter of 2007 upon settlement of the IRS’ examination of our 2004 federal
income tax return. Other increases in interest income were a result of higher
interest rates in 2007. Interest expense increased from $419,000 in 2006 to
$691,000 in 2007, as the $7.5 million in borrowings under our credit facility
was outstanding for all of 2007. In 2006, these borrowings were outstanding for
approximately five months.
  Income
tax expense
  Our
effective income tax rate for 2007 was 36%. In 2006, we recognized an income tax
benefit of $1.7 million. This net benefit was a result of recognizing income tax
expense of $1.9 million, offset by a benefit resulting from the release of $3.6
million of the deferred tax asset valuation allowance. The valuation allowance
was released in 2006 as it became more likely than not that our deferred income
tax assets would be realized. Excluding the release of the allowance, the
effective tax rate for 2006 would have been 37%.
  Critical
Accounting Policies and Estimates
  The
preparation of financial statements requires us to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The SEC defines “critical accounting policies” as those that
require application of our most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods. The following is
not intended to be a comprehensive list of our accounting policies. Our
significant accounting policies are more fully described in the notes to our
consolidated financial statements. In many cases, the accounting treatment of a
particular transaction is specifically dictated by GAAP, with no need for our
judgment in their application. The accounting policies described below are those
which we believe are most critical to aid in fully understanding and evaluating
our reported financial results, and are areas in which our judgment in selecting
an available alternative might produce a materially different
result.
 
 Marketable
securities.We review our investments in marketable securities
for impairment based on both quantitative and qualitative criteria that include
the extent to which cost exceeds market value, the duration of any market
decline, our intent and ability to hold to maturity or expected recovery, and
the creditworthiness of the issuer.  We perform research and analysis,
and monitor market conditions to identify potential impairments.
 
 II-9
  Due to
the severe volatility and disruptions related to the U.S. and global investment
and credit markets, we are exposed to the risk of changes in fair value of our
marketable securities in future periods, which may cause us to take impairment
charges that we do not currently anticipate.  While we will continue to
research, analyze and monitor our investments, we cannot predict what the effect
of current investment and credit market circumstances might have on our
portfolio going forward.  You can find more information related to the
valuation of our marketable securities in Note E in the accompanying
consolidated financial statements, Liquidity and Capital Resourcesin Management’s
Discussion and Analysis, and Item 7A,Quantitative and Qualitative
Disclosures AboutMarket Risk, all of which are included in this
report.
  Property and equipment.
Property and equipment are recorded at cost and depreciated on a
straight-line basis over the estimated useful lives of such assets. Our
estimates can result in differences from the actual useful lives of certain
assets. The significant portion of equipment is comprised of cyclotrons, which
are utilized in the brachytherapy business. As of December 31, 2008, we owned
and operated eight cyclotrons, the first of which entered service in 1998. In
December 2007 we changed the estimated service lives of certain depreciable
assets, mainly the cyclotron equipment. The estimated service life of the
cyclotron equipment was increased from 10 years to 15 years, and was based on,
among other things, an assessment of the equipment’s operating and maintenance
history and expected future performance. We accounted for this change as a
change in estimate in accordance with SFAS No. 154, Accounting Changes and Error
Corrections. Accordingly, this change was accounted for in the period of
the change and will be accounted for in future periods. In 2008, this change
reduced depreciation expense by approximately $1.4 million compared to what it
would have been using the former estimated useful life. The effect of this
change was not significant in 2007.
  We will
continue to periodically examine estimates used for depreciation for
reasonableness. If we determine that the useful life of property or equipment
should be shortened or lengthened, depreciation expense would be adjusted
accordingly for the remaining useful lives of the identified
assets.
  Under
SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets,we assess the impairment
of our depreciable assets (including property, equipment, and intangible assets
subject to amortization) 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. The estimation of fair value, whether in conjunction with an
asset to be held and used or with an asset held for sale, also involves
judgment. It is possible that our estimates of fair value may change and impact
our financial condition and results of operations. As a result of the impairment
indicators related to goodwill in the fourth quarter of 2008, we performed an
assessment of our long-lived assets under SFAS No. 144 and determined that there
was no impairment. See Impairment of goodwill and
tradenames above under Results of
Operations.
  Goodwill and other intangible
assets. We account for goodwill and other intangible assets in accordance
with the provisions of SFAS No. 142. Under SFAS No. 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 such assets 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. 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 fair value, the second step of the impairment
test is performed 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.
  We
perform our annual goodwill impairment assessment during the fourth quarter. We
also make judgments about goodwill whenever events or changes in circumstances
indicate that impairment in the value of goodwill recorded on our balance sheet
may exist. The timing of an impairment test may result in charges to our
statements of income in future reporting periods that could not have been
reasonably foreseen in prior periods. In order to estimate the fair value of
goodwill, we typically make various judgments and assumptions, including, among
other things, the identification of the reporting units, the assignment of
assets and liabilities to reporting units, the future prospects for the
reporting unit that the asset relates to, the market factors specific to that
reporting unit, the future cash flows to be generated by that reporting unit,
and the weighted average cost of capital for purposes of establishing a discount
rate. Assumptions used in these assessments are consistent with our internal
planning.
  The most
recent assessment under SFAS No 142 was performed in the fourth quarter of
2008.   We determined that all of our goodwill was impaired and
that a portion of our tradenames intangible asset was impaired. See Impairment of goodwill and
tradenamesabove under Results of
Operations.
  II-10
 
  Other
intangible assets determined to have finite lives are amortized over their
useful lives using a method that is expected to reflect the pattern of its
economic benefit. When a pattern of economic benefit cannot be determined, or if
the straight-line method results in greater amortization, then the straight-line
method is used. To date, all finite lived intangible assets have been amortized
using the straight-line method. We also review finite lived intangible assets
for impairment to ensure they are appropriately valued if conditions exist that
indicate the carrying value may not be recoverable.
  Allowance for doubtful accounts and
returns. We make estimates and use our judgments in connection with
establishing an allowance for the possibility that portions of our accounts
receivable balances may become uncollectible or subject to return. Accounts
receivable are reduced by this allowance. Specifically, we analyze accounts
receivable in relation to customer creditworthiness, current economic trends,
changes in our customer payment history, and changes in sales returns history in
establishing this allowance. It is possible that these or other underlying
factors could change and impact our financial position and results of
operations.
  Asset retirement obligation.
SFAS No. 143, Accounting for
Asset Retirement Obligations,requires us to estimate the future cost of
asset retirement obligations, to discount that cost to its present value, and to
record a corresponding asset and liability in our consolidated balance sheet.
The values ultimately derived are based on many significant estimates, including
future decommissioning costs, inflation, cost of capital, and market risk
premiums. The nature of these estimates requires us to make judgments based on
historical experience and future expectations. Revisions to the estimates may be
required based on such things as changes to cost estimates or the timing of
future cash outlays. Any such changes that result in upward or downward
revisions in the estimated obligation will result in an adjustment to the
related capitalized asset and corresponding liability on a prospective
basis.
  Share-based
compensation. We account for share-based compensation in accordance
with SFAS No. 123R, Share-Based Payment,as
interpreted by SEC Staff Accounting Bulletin No. 107. Under the fair value
recognition provisions of this statement, share-based compensation cost is
measured at the grant date based on the value of the award and is recognized as
expense over the vesting period. In order to determine the fair value of stock
options on the date of grant, we utilize the Black Scholes model. Inherent in
this model are assumptions related to expected stock-price volatility, option
life, risk-free interest rate and dividend yield. The risk-free interest rate
and dividend yield are based on factual data derived from public sources. The
expected stock-price volatility and option life assumptions require significant
judgment, which makes them critical accounting estimates. Our expected
volatility is based upon weightings of the historical volatility of our stock.
With respect to the weighted-average option life assumption, we consider the
exercise behavior of past grants and model the pattern of aggregate
exercises.
  The grant
date fair value of Restricted Stock Units and Performance Restricted Stock
Units (collectively, the “Stock Units”) are based on the fair value of the
underlying common stock and is recognized over the requisite service period. For
Stock Units containing performance conditions, the grant date fair value is
adjusted each period for the number of shares ultimately expected to be issued.
For Stock Units subject to discretionary performance conditions, the grant date
has not been established and accordingly, the fair value of the award is updated
each period for changes in the fair value of the underlying common stock. To the
extent that the underlying fair value of our common stock varies significantly,
and/or the number of shares issuable is determined, we may record additional
compensation expense or adjust previously recognized compensation
expense.
  Accounting for income taxes.
Our judgments, assumptions and estimates relative to the provision for income
taxes take into account current tax laws and our interpretation of current tax
laws. We must make assumptions, judgments and estimates to determine our tax
provision and our deferred income tax assets and liabilities, including the
valuation allowance to be recorded against a deferred tax asset. Actual
operating results and the underlying amount and category of income
in future years could differ materially from our current assumptions,
judgments and estimates of recoverable net deferred taxes.
  We
periodically evaluate the recoverability of our deferred tax assets and
recognize the tax benefit only as reassessment demonstrates that they are
realizable. At such time, if it is determined that it is more likely than not
that the deferred tax assets are realizable, the valuation allowance is
adjusted.  In 2005, we had a $6.8 million net deferred tax asset
primarily as a result of our 2005 Restructuring. At that time, a valuation
allowance for the entire amount of the net deferred tax asset was established
due to uncertainties surrounding its realizability. In 2006, we released most of
the valuation allowance when we determined that it was more likely than not that
a significant portion of these deferred tax assets would be realized. Factors
considered by us in determining that the significant portion of the deferred tax
assets would be realized included, among other things, our performance for the
year which included four consecutive quarters of profitability, a full fiscal
year of realization of the cost savings associated with the 2005 restructuring
which exceeded the expected cost savings, certain changes in federal laws and
policies occurring in December 2006 related to Medicare reimbursement of
brachytherapy seeds, and the continued successful diversification of the our
business through its surgical products segment.
  We
evaluate the realizability of the deferred tax assets and assess the need for
the valuation allowance each reporting period. In the future if, based on
the facts and circumstances surrounding our ability to generate adequate future
taxable income, it becomes more likely than not that some or all of the deferred
tax asset will not be realized, the valuation allowance may be required to be
increased.
  II-11
  Commitments
and Other Contractual Obligations
  Contractual
Obligations
  We lease
equipment and production, warehouse, office and other space under non-cancelable
leases that expire at various dates through June 2013. We also have $32 million
of borrowings outstanding under our credit facility. Approximate minimum
payments of these obligations are as follows (amounts in
thousands):
  
 Obligation
              
              Total
              
              
              Less
      than
                1
      year
              
              
              1-3
      years
              
              
              3-5
      years
              
              
              More
      than
                5
      yearsOperating
      lease obligationsRental
      space and equipment
              
              $
              1,152
              
              
              $
              460
              
              
              $
              414
              
              
              $
              278
              
              
              $
              -Production,
      office and warehouse space - related parties (1)
              
              
              419
              
              
              
              260
              
              
              
              159
              
              
              
              -
              
              
              
              -Total
      operating lease obligations
              
              
              1,571
              
              
              
              720
              
              
              
              573
              
              
              
              278
              
              
              
              -Short-term
      borrowings (2)
              
              
              32,000
              
              
              
              32,000
              
              
              
              -
              
              
              
              -
              
              
              
              -Interest
      on short-term borrowings (3)
              
              
              773
              
              
              
              773
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
      short-term borrowings
              
              
              32,773
              
              
              
              32,773
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      long-term obligations
              
              
              147
              
              
              
              -
              
              
              
              147
              
              
              
              -
              
              
              
              -Total
              
              $
              34,491
              
              
              $
              33,493
              
              
              $
              720
              
              
              $
              278
              
              
              $
              -
 
 (1)
              The
      surgical products business leases approximately 34,500 square feet of
      production, warehouse, and office space from two related entities. 
      One is controlled by the former owner and officer of CP Medical, who is
      currently a stockholder of Theragenics; and the second is controlled by
      the former principal owners of NeedleTech, who are currently
      officers.  Approximate minimum lease payments under these leases are
      as follows: 2009, $260,000; 2010, $137,000; 2011,
  $22,000.(2)
              Outstanding
      borrowings under the Company’s $40.0 million credit facility are due
      October 31, 2009.(3)
              Interest
      on outstanding borrowings under credit facility at the December 31, 2008
      effective rate of 2.9%.
  Letter of
Credit
  We have a
letter of credit outstanding under the credit facility as of December 31, 2008
totaling $876,000. This letter of credit is related to asset retirement
liabilities of long-lived assets.
  Liquidity
and Capital Resources
  We assess
our liquidity in terms of our ability to generate cash to fund our operating,
investing and financing activities. Significant factors affecting the management
of liquidity are: cash flows generated from operating activities, capital
expenditures, operational investments to support growth (such as research and
development programs), and acquisitions of businesses and
technologies.
  We have
cash, cash equivalents and marketable securities of $40.6 million at December
31, 2008 compared to $48.8 million at December 31, 2007. Marketable securities
consist primarily of high-credit quality corporate and municipal obligations, in
accordance with our investment policies.  See Marketable Securities below
for more information.
  We
acquired all of the outstanding common stock of NeedleTech Products, Inc.
(“NeedleTech”) on July 28, 2008 for $49.8 million in cash including transaction
costs.  We retained the cash, cash equivalents and marketable
securities held by NeedleTech, which had an estimated fair value of
approximately $5.8 million at the acquisition date.  We financed $24.5
million of the purchase price with borrowings on our existing $40.0 million
credit facility and paid the remainder from our current cash and investment
balances.
  Working
capital was $28.1 million and $62.3 million at December 31, 2008 and 2007,
respectively. The decline in working capital is primarily due to the
classification of $32.0 million of borrowings under our credit facility as a
short-term liability at December 31, 2008, thus reducing working
capital.  Our credit facility expires on October 31,
2009.  At December 31, 2007 all outstanding borrowings under our
credit facility were classified as long-term and, accordingly, were not a part
of working capital.
  II-12
  We have a
credit facility with a financial institution that provides for borrowings of up
to $40.0 million, including a $5.0 million sub-limit for letters of credit.
Borrowings of $32.0 million were outstanding under the credit facility at
December 31, 2008. Interest is payable quarterly at LIBOR plus 1% (effective
rate of 2.9% at December 31, 2008) for outstanding borrowings. We also
have a letter of credit totaling $876,000 outstanding under the credit
facility, representing decommission funding required by the Georgia Department
of Natural Resources. The credit facility is unsecured, but provides for a lien
to be established on substantially all of our assets (subject to certain
exceptions) in the event certain events of default occur under the credit
facility. The credit facility, as amended, 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 facility limit the incurrence of additional debt and require the
maintenance of certain financial ratios. In addition, the terms of our
credit facility require us to maintain a minimum of $20 million of liquid
assets, as defined in the credit facility.  As of December 31, 2008, we
were in compliance with the terms of the credit facility. Our credit facility
expires on October 31, 2009.  See Credit Facility below for
more information.
  Cash
provided by operations was $12.3 million for the year ended December 31, 2008,
compared to $17.1 million in 2007. Cash provided by operations consists of net
earnings, plus non-cash expenses such as depreciation, amortization, deferred
income taxes, and changes in balance sheet items such as accounts receivable,
inventories, prepaid expenses and payables. The decline in 2008 was primarily a
result of income tax payments during the year.  In 2007, a substantial
portion of our 2007 taxable income was reduced by net operating loss
carryforwards, resulting in no significant income tax payments made in
2007.    In addition, during 2007 we also received a $2.2
million refund of income taxes paid in prior periods including interest. We had
no remaining net operating loss carryforward as of December 31,
2007.  Accordingly, in 2008 we began making income tax payments based
on taxable income and paid a total of $2.3 million.  During 2008, as a
result of the completion of the sale of our Oak Ridge facility, we generated
another tax loss.  We expect that this tax loss will allow us to
recover approximately $1.5 million of income taxes paid during 2008 and to
reduce a portion of income taxes payable in 2009.
  Capital
expenditures totaled $1.5 million during 2008 and 2007. The expenditures were
primarily to support continued growth and capacity in the surgical products
business.  Capital expenditures are expected to increase in 2009 as we
continue our investments to support growth in the surgical products segment and
maintain the brachytherapy segment.  In our surgical products business
we expect to move one of our manufacturing operations to a larger leased
facility during 2009.  We also expect to invest in upgrades to our
information technology systems.  These programs, along with our
capital expenditures in the normal course, could increase our capital
expenditure level to as much as $5.0 million in 2009.
  Cash
provided by financing activities was $23.8 million in 2008 consisting primarily
of the $24.5 million proceeds from our credit facility, which was used in our
NeedleTech acquisition, offset by $695,000 for the payment of certain expenses
for which we were indemnified and reimbursed by receipt of 202,000 shares of our
common stock.  Cash provided by financing activities was
$94,000 in 2007 consisting of cash proceeds from the exercise of stock
options and the Company’s Employee Stock Purchase Plan.
  Research
and development (R&D) expenses were $1.3 million in 2008.  We
expect to continue to use cash in 2009 to support growth in the surgical
products segment, especially for the R&D program implemented in late
2008.  This new R&D effort may increase our R&D expenses to as
much as $3.5 million in 2009, depending on the opportunities.
  We may
also continue to use cash for increased marketing and TheraSeed®support
activities, and in the pursuit of additional diversification efforts such as
product development and the purchase of technologies, products or
companies.  We believe that current cash and investment balances and
cash from future operations will be sufficient to meet our current short-term
anticipated working capital and capital expenditure requirements. However,
continued disruption and instability in the U.S. and global financial markets
and worldwide economies may hinder our ability to take advantage of
opportunities for long-term growth in our businesses.  In the event
additional financing becomes necessary, we may choose to raise those funds
through other means of financing as appropriate.
  Credit
Facility
  Our $40
million credit agreement expires on October 31, 2009.  We intend to
seek renewal or replacement of this credit agreement during
2009.  However, U.S. and global market and economic conditions
continue to be disrupted and volatile.  The disruption has been
particularly acute in the financial sector and has continued to deteriorate in
early 2009. Financial institutions in particular have encountered severe
difficulties, political influences and other pressures in the current economic
environment.  Although we believe we have not suffered any material
liquidity issues as a result of these recent events, the cost and availability
of funds may be adversely affected by, among other things, illiquid credit
markets, political influences and other pressures.  Continued
disruption in U.S. and global markets could adversely affect our ability to
renew or replace this credit facility.  Any new or replacement
facility will likely be under terms that are not as favorable as the current
credit facility.  The negative impact of recent and continuing adverse
changes in the economy and credit markets generally or our inability to obtain
financing on favorable terms, if at all, may have a material adverse effect on
our results of operations and business.
  II-13
  Marketable
Securities
  We held $1.5 million of marketable
securities at December 31, 2008.  This amount consisted primarily of a
$1.0 million of A+ rated bond fund and a $500,000 municipal auction-rated
security (“ARS”).  The ARS was liquidated at par in January
2009.  Our cash equivalents include $39.1 million of bank deposits,
money market funds, and U.S. Treasury securities.  We review our
investments in marketable securities and cash equivalents for impairment based
on both quantitative and qualitative criteria that include the extent to which
cost exceeds market value, the duration of any market decline, our intent and
ability to hold to maturity or expected recovery, and the creditworthiness of
the issuer.  We perform research and analysis, and monitor market
conditions to identify potential impairments.  As of December 31, 2008
we recognized $93,000 of other than temporary impairment charges related to our
current investments in marketable securities.  Due to the disruptions,
volatility and uncertainties related to the U.S. and global investment and
credit markets we are exposed to the risk of further changes in fair value of
our cash equivalents and marketable securities in future periods, which may
cause us to take impairment charges that are not currently
anticipated.  While we will continue to research, analyze and monitor
our investments, we cannot predict what the effect of current investment and
credit market circumstances might have on our portfolio going
forward.
  Medicare
Developments
  The
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “2003
Act”), which went into effect on January 1, 2004, contained brachytherapy
provisions requiring Medicare to reimburse hospital outpatient
departments 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). The 2003 Act also directed the U.S. Government
Accountability Office (“GAO”) to conduct a study examining future payment
policies for brachytherapy seeds. The GAO published its report on July 25, 2006,
concluding that the Centers for Medicare & Medicaid Services (“CMS”), the
regulatory body that sets Medicare reimbursement policies, could establish
separate prospective payment rates effective in 2007 for palladium-103
brachytherapy seeds/sources (such as TheraSeed®) and
iodine-125 seeds/sources using Medicare’s hospital outpatient data.
  Although
subsequently superceded by Congress, CMS posted a final rule on November 1, 2006
with fixed prospective payment rates for brachytherapy seeds for Medicare’s
hospital outpatient prospective payment system (“OPPS”) that would have applied
to calendar year 2007. The use of prospective payment rates would have fixed the
per seed rate at which Medicare would have reimbursed hospitals in 2007. We
believed that CMS’ approach to determining the fixed prospective reimbursement
rate for brachytherapy seeds was fundamentally flawed. For example, CMS did not
stratify cost data on differing seed configurations, such as loose versus
“stranded” seeds. Accordingly, we continued to work with policy makers in an
effort to rectify the shortcomings we believed to be contained in the new CMS
rule.
  In
December 2006, Congress enacted the Tax Relief and Health Care Act of 2006 (the
“2006 Act”), which extended and refined the Medicare safeguards initially
enacted by Congress in 2003 for brachytherapy seeds administered in the hospital
outpatient setting. The 2006 Act’s provisions on brachytherapy superceded the
final rule published by CMS on November 1, 2006 by extending the existing
“charges adjusted to cost” reimbursement policies (which we sometimes refer to
as a “pass-through” methodology) for brachytherapy seeds through the end of
2007, ensuring that the Medicare program would not implement potentially
restrictive caps on reimbursement during that period. In addition, the
legislation recognized that prostate cancer patients must have meaningful access
to stranded brachytherapy seeds, which increasingly are used in clinical
practice to further enhance the safety and efficacy of treatment. The 2006 Act
also established a permanent requirement for Medicare to use separate codes for
the reimbursement of stranded brachytherapy devices. Stranded seeds are becoming
a larger portion of our brachytherapy business.
  Effective
July 2007, CMS issued new reimbursement codes for brachytherapy sources. The
codes are isotope specific and recognize the distinction between non-stranded
versus stranded seeds, as mandated by the 2006 Act. In early November 2007, CMS
again posted a final OPPS rule for calendar year 2008 with fixed prospective
reimbursement rates for all brachytherapy source codes, including the new codes
established in July 2007.
  In
December 2007, Congress passed the Medicare, Medicaid and SCHIP Extension Act of
2007 (the “2007 Act”), which once again superseded another CMS final OPPS rule
by extending the existing “pass-through” reimbursement policies for
brachytherapy seeds through June 30, 2008. Fixed reimbursement rates would have
become effective on January 1, 2008 without the enactment of the 2007 Act. As a
result of the 2007 Act, fixed reimbursement rates for seeds were delayed until
July 1, 2008.
  On July
15, 2008, the Medicare Improvements for Patients and Providers Act of 2008 (the
“2008 Act”) was enacted into law.  The 2008 Act extends Medicare’s
longstanding “pass through” reimbursement policies for brachytherapy seeds
administered in the hospital outpatient setting through December 31, 2009,
ensuring that the Medicare program does not implement potentially restrictive
caps on reimbursement during this period.  The 2008 Act was
retroactive to July 1, 2008.  We expect to continue to support efforts
to extend the “pass-through” reimbursement policies beyond 2009.  The
potential for fixed reimbursement rates after the expiration of the 2008 Act on
December 31, 2009 and other factors can be expected to lead to continued pricing
pressure from hospitals and other health care providers. Any of these factors
could have an adverse effect on brachytherapy revenue.
  II-14
  Forward
Looking and Cautionary Statements
  This document contains certain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, the accuracy of which is necessarily subject to
risks and uncertainties, including, without limitation, statements regarding
sales, marketing and distribution efforts, ordering patterns of customers, our
direct sales organization and 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, anticipated growth in the surgical products business segment,
future cost of sales and gross margins, R&D efforts and expenses (including
our centralized, corporate-wide R&D initiative), investment in additional
personnel, infrastructure and capital assets, SG&A expenses, other income,
potential new products and opportunities, the potential effect of the NeedleTech
acquisition on our surgical products business and on our consolidated results
generally, expected reductions in operating expenses from the sale of our Oak
Ridge facility, expected changes in interest income and interest expenses, the
effect on our results and cash flows from accounting for the income tax effect
of the sale of our Oak Ridge facility, results in general, plans and strategies
for continuing diversification, valuation of auction rate securities and other
marketable securities, and the sufficiency of our liquidity and capital
resources. From time to time, we may also make other forward-looking statements
relating to such matters as well as statements relating to anticipated financial
performance, business prospects, technological developments 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 new product development cycles,
effectiveness and execution of marketing and sales programs of our business
segments and their distributors, competitive conditions and selling tactics of
our competitors, potential changes in third-party reimbursement (including CMS),
changes in product pricing by our brachytherapy business segment, changes in
cost of materials used in production processes, continued acceptance of our
products by the market, potential changes in demand for the products
manufactured and sold by our brachytherapy and surgical products segments,
integration of acquired companies into the Theragenics organization,
capitalization on opportunities for growth within our surgical products business
segment, competition within the medical device industry, development and growth
of new applications within our markets, competition from other methods of
treatment, ability to execute on acquisition opportunities on favorable terms
and successfully integrate any acquisitions, the ability to realize our estimate
of fair value upon sale or other liquidation of auction rate securities and
other marketable securities that we hold, volatility in U.S. and global stock
markets, economic conditions generally, potential changes in tax rates and
market interest rates, the effect of current difficulties in the credit markets
on our business, our ability to renew or replace our current credit facility and
the current expectation that a renewed or replacement credit facility would be
on less favorable terms than the current facility in view of current market
conditions, the impact of future events and conditions on our assessment of
goodwill that could result in recording impairment charges, our ability to
maintain the NYSE’s continued listing standards, and the risks identified
elsewhere in this report.  All forward looking statements and
cautionary statements included in this document are made as of the date hereof
based on information available to us, and we assume no obligation to update any
forward looking statement or cautionary statement.
  Recent
Accounting Pronouncements
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value in GAAP, and expands disclosures about fair value
measurements.  SFAS No. 157 was effective for us on January 1,
2008.  However, in February 2008 the FASB released FASB Staff Position
(“FSP”) No. FAS 157-2, Effective Date of FASB Statement
No. 157, which delayed the effective date of SFAS No. 157 for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least
annually.  Accordingly, we have adopted the provisions of SFAS No. 157
only with respect to our financial assets and liabilities as of January 1, 2008.
We will not apply the provisions of SFAS No. 157 until January 1, 2009 for our
non-financial assets and liabilities, which includes our retirement obligation
related to future decommissioning costs (See Note H).  On October 10,
2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value of a
Financial Assets When the Market for That Asset is Not Active(which was
effective upon issuance),to clarify the application of SFAS No. 157 in a market that is not
active.  The adoption of SFAS No. 157 for our financial assets and
liabilities did not have a material impact on our consolidated financial
statements.  We are currently assessing the potential effect on our
consolidated financial statements of the adoption of SFAS No. 157 for our
non-financial assets and liabilities.
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115.  SFAS No. 159
permits entities to choose to measure eligible items at fair value at specified
election dates and report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date.  SFAS No. 159, which we adopted on January 1, 2008, did not have
a material impact on our consolidated financial statements. As permitted under
SFAS No. 159, we havecurrently chosen not to
elect the fair value option for any items that are not already required to be
measured at fair value in accordance with GAAP.
  II-15
  In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS
141R”). SFAS 141R requires an acquirer to measure the identifiable assets
acquired, the liabilities assumed and any noncontrolling interest in the
acquiree at their fair value on the acquisition date, with goodwill being the
excess value of consideration paid over the fair value of the net identifiable
assets acquired. Among the new requirements, SFAS 141R requires that acquired
in-process research and development be capitalized and recorded as an intangible
asset at the acquisition date, that contingent consideration be recorded at fair
value on the acquisition date, and that transaction costs are to be
expensed.  Generally, the effects of SFAS No. 141R on our
consolidated financial statements will depend on acquisitions occurring in 2009
and thereafter. We followed SFAS No. 141, Business Combinations, as
originally issued for our NeedleTech acquisition in July 2008. SFAS No.141R does
not require retroactive restatement of accounting for business combinations
prior to January 1, 2009.
 
 In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3 (‘FSP FAS 142-3 “),
Determination of the
UsefulLife of
Intangible Assets.  The intent of the FSP FAS 142-3 is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS No. 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS No. 141R and other GAAP.  FSP FAS
142-3 is effective beginning January 1, 2009.  While we are still
evaluating the impact of FSP FAS 142-3 on our consolidated financial statements,
we do not currently believe that it will have a material impact on our financial
statements.
  Quarterly
Results
  The
following table sets forth certain statement of operations data for each of the
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 our opinion, necessary for a fair presentation of the
information for the periods covered and should be read in conjunction with the
consolidated 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.
  
 2008
              
              
              2007First
                Qtr
              
              
              Second
                Qtr
              
              
              Third
                Qtr
              
              
              Fourth
                Qtr
              
              
              First
                Qtr
              
              
              Second
                Qtr
              
              
              Third
                Qtr
              
              
              Fourth
                Qtr(Amounts in thousands, except
      per share data)Total
      revenue
              
              $
              15,235
              
              
              $
              15,914
              
              
              $
              18,106
              
              
              $
              18,103
              
              
              $
              15,451
              
              
              $
              15,575
              
              
              $
              16,001
              
              
              $
              15,183Cost
      of sales
              
              
              7,578
              
              
              
              7,664
              
              
              
              10,292
              
              
              
              10,730
              
              
              
              8,109
              
              
              
              7,864
              
              
              
              8,207
              
              
              
              7,814Gross
      profit
              
              
              7,657
              
              
              
              8,250
              
              
              
              7,814
              
              
              
              7,373
              
              
              
              7,342
              
              
              
              7,711
              
              
              
              7,794
              
              
              
              7,369Selling,
      general and administrative
              
              
              4,803
              
              
              
              5,167
              
              
              
              5,608
              
              
              
              4,922
              
              
              
              4,856
              
              
              
              4,898
              
              
              
              4,498
              
              
              
              4,879Amortization
      of purchased intangibles
              
              
              469
              
              
              
              468
              
              
              
              683
              
              
              
              790
              
              
              
              469
              
              
              
              468
              
              
              
              469
              
              
              
              469Research
      and development
              
              
              133
              
              
              
              161
              
              
              
              373
              
              
              
              633
              
              
              
              291
              
              
              
              379
              
              
              
              430
              
              
              
              265Change
      in estimated value of asset held for sale
              
              
              -
              
              
              
              (142
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              500Impairment
      charges of goodwill and tradenames
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              70,376
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -(Gain)
      loss on sale of assets
              
              
              2
              
              
              
              1
              
              
              
              (8
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Other
      income (expense)
              
              
              317
              
              
              
              98
              
              
              
              141
              
              
              
              (279
              )
              
              
              207
              
              
              
              567
              
              
              
              352
              
              
              
              376Earnings
      (loss) before income taxes
              
              
              2,567
              
              
              
              2,693
              
              
              
              1,299
              
              
              
              (69,627
              )
              
              
              1,933
              
              
              
              2,533
              
              
              
              2,749
              
              
              
              1,632Income
      tax expense (benefit)
              
              
              931
              
              
              
              1,055
              
              
              
              658
              
              
              
              (7,172
              )
              
              
              765
              
              
              
              989
              
              
              
              986
              
              
              
              472Net
      earnings (loss)
              
              $
              1,636
              
              
              $
              1,638
              
              
              $
              641
              
              
              $
              (62,455
              )
              
              $
              1,168
              
              
              $
              1,544
              
              
              $
              1,763
              
              
              $
              1,160Earnings
      per share:Basic
              
              $
              0.05
              
              
              $
              0.05
              
              
              $
              0.02
              
              
              $
              (1.89
              )
              
              $
              0.04
              
              
              $
              0.05
              
              
              $
              0.05
              
              
              $
              0.04Diluted
              
              $
              0.05
              
              
              $
              0.05
              
              
              $
              0.02
              
              
              $
              (1.89
              )
              
              $
              0.04
              
              
              $
              0.05
              
              
              $
              0.05
              
              
              $
              0.03Weighted
      average shares outstanding:Basic
              
              
              33,162
              
              
              
              33,106
              
              
              
              33,000
              
              
              
              33,002
              
              
              
              33,074
              
              
              
              33,112
              
              
              
              33,118
              
              
              
              33,108Diluted
              
              
              33,286
              
              
              
              33,246
              
              
              
              33,139
              
              
              
              33,002
              
              
              
              33,170
              
              
              
              33,264
              
              
              
              33,237
              
              
              
              33,262
  II-16
 
 Inflation
  We do not
believe that the relatively moderate levels of inflation, which have been
experienced in the United States in recent years, have had a significant effect
on our results of operations.
  Item 7A. Quantitative and Qualitative
Disclosure about Market Risk
  We have
borrowings of $32.0 million and letters of credit totaling approximately
$876,000 outstanding under our $40.0 million credit facility as of December 31,
2008. Interest on outstanding borrowings is payable monthly at LIBOR plus 1%
(effective rate of 2.9% as of December 31, 2008). Accordingly, we are exposed to
changes in interest rates on these borrowings.  A hypothetical 1%
change in the interest rate applicable to our credit facility would result in an
increase or decrease in interest expense of $320,000 per year before income
taxes, assuming the same level of borrowings under the facility.
  At
December 31, 2008 our marketable securities consisted of $1.0 million of an A+
rated bond fund and a $500,000 auction-rated security (“ARS”).  The
ARS was liquidated at par in January 2009.  Our cash equivalents
include $39.1 million of bank deposits, money market funds, and U.S. Treasury
securities.  We review our investments in marketable securities and
cash equivalents for impairment based on both quantitative and qualitative
criteria that include the extent to which cost exceeds market value, the
duration of any market decline, our intent and ability to hold to maturity or
expected recovery, and the creditworthiness of the issuer.  We perform
research and analysis, and monitor market conditions to identify potential
impairments.  During 2008 we recognized $93,000 of other than
temporary impairment charges related to our current investments in marketable
securities.  Due to the uncertainties related to the U.S. and global
investment and credit markets we are exposed to the risk of further changes in
fair value of our cash equivalents and marketable securities in future periods,
which may cause us to take impairment charges that are not currently
anticipated.  While we will continue to research, analyze and monitor
our investments, we cannot predict what the effect of current investment and
credit market circumstances might have on our portfolio going
forward.
 
 U.S. and
global market and economic conditions continue to be disrupted and volatile and
the disruption has been particularly acute in the financial sector. General
economic and credit conditions have continued to deteriorate in early
2009.  Although we believe we have not suffered any material liquidity
issues as a result of these recent events, the cost and availability of funds
may be adversely affected by, among other things, illiquid credit
markets.  Our $40 million credit facility expires on October 31,
2009.  Continued disruption in U.S. and global markets could adversely
affect our ability to renew or replace this credit facility and any new or
replacement facility will likely be under terms that are not as favorable as the
current credit facility.  The negative impact of recent and continuing
adverse changes in the economy and credit markets generally or our inability to
obtain financing on favorable terms, if at all, may have a material adverse
effect on our results of operations and business.
  Item
8. Financial Statements and Supplementary Data
  See index
to Financial Statements (Page F-1) and following pages.
  Item
9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure.
  As previously
disclosed on our Current Report on Form 8-K filed March 19, 2007, and in our
Annual Report on Form 10-K for the year ended December 31, 2007, our Audit
Committee dismissed Grant Thornton LLP as our independent registered public
accountants and appointed Dixon Hughes PLLC as our independent registered public
accountants on March 13, 2007.
  Item 9A. Controls and
Procedures
  Evaluation
of Disclosure Controls and Procedures
  Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”). Based on this evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that our disclosure controls and procedures were effective as
of December 31, 2008, the end of the period covered by this annual
report.
  II-17
  Management’s
Report on Internal Control over Financial Reporting
  We are
responsible for preparing our annual consolidated financial statements and 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 the Company have
been detected. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
  As
permitted by guidance provided by the staff of the U.S. Securities and Exchange
Commission, the scope of management’s assessment of internal control over
financial reporting as of December 31, 2008 has excluded NeedleTech Products,
Inc. (“NeedleTech”).  We acquired NeedleTech in July
2008.  NeedleTech constituted 10.2% of consolidated revenue for the
year ended December 31, 2008 and 16.7% of consolidated assets as of December 31,
2008.
  Management
assessed the effectiveness of our internal control over financial reporting as
of December 31, 2008. In making its 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 that assessment,
management believes that, as of December 31, 2008, our internal control over
financial reporting is effective based on those criteria.
  Dixon
Hughes PLLC, an independent registered public accounting firm, has audited the
effectiveness of our internal control over financial reporting as of
December 31, 2008, as stated in their report, which is included
below.
  Changes
in Internal Control over Financial Reporting
  We
acquired NeedleTech Products, Inc. (“NeedleTech”) on July 28,
2008.  Since the date of acquisition, we have been focusing on
analyzing, evaluating, and implementing changes in NeedleTech’s procedures and
controls to determine their effectiveness and to make them consistent with our
disclosure controls and procedures.  Prior to our acquisition of
NeedleTech, they were not required to maintain disclosure controls and
procedures or maintain, document and assess internal control over financial
reporting, in each case as required under the rules and regulation of the U.S.
Securities and Exchange Commission.  Accordingly, we expect that it
will take several months to continue to analyze NeedleTech’s procedures and
controls and expect to make additional changes to those controls in the
future.  As permitted by guidance issued by the staff of the U.S.
Securities and Exchange Commission, NeedleTech has been excluded from the scope
of our quarterly discussion of material changes in internal control over
financial reporting below. We have performed additional procedures to
review accounting records and substantiate the financial information of
NeedleTech included in this report.
  No
changes in our internal control over financial reporting were identified as
having occurred during the quarter ended December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting, except as described above with respect to NeedleTech.
Changes to processes, information technology systems, and other components of
internal control over financial reporting resulting from the acquisition of
NeedleTech are expected as the integration proceeds.
  II-18
  Report of Independent
Registered Public Accounting Firm – Internal Controls Over Financial
Reporting
  
  To the
Board of Directors and
 Shareholders
of Theragenics Corporation
  We have
audited Theragenics Corporation and subsidiaries’ (the “Company”) internal
control overfinancial reporting as
of December 31, 2008, based on criteria established inInternal Control—Integrated
Frameworkissued by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”). The Company’s management is responsible for
maintaining effective internal control overfinancial reporting and
for its assessment of the effectiveness of internal control overfinancial reporting,
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the
Company’s internal control overfinancial 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, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
  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 accounting principles generally accepted in the United States of America
(“GAAP”). 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 GAAP, 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.
  As
described in Management’s Report on Internal Controls Over Financial Reporting,
management has excluded NeedleTech Products, Inc. (“NeedleTech”) from its
assessment of internal controls over financial reporting as of December 31, 2008
because it was acquired by the Company in July 2008.  We have also
excluded NeedleTech from the scope of our audit of internal control over
financial reporting.  NeedleTech is a wholly-owned subsidiary which
constituted 10.2% of consolidated revenue for the year ended December 31, 2008
and 16.7% of consolidated assets as of December 31, 2008.
  In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2008, based on criteria
established in Internal
Control—Integrated Framework issued by COSO.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of the Company
as of December 31, 2008 and 2007, and the related consolidated statements of
operations and comprehensive earnings (loss), shareholders’ equity, and cash
flows for the years then ended and our report dated March 12, 2009,
expressed an unqualified opinion on those consolidated financial
statements.
  /s/ DIXON
HUGHES PLLC
  Atlanta,
Georgia
 March 12,
2009
  II-19
  Item 9B. Other Information
  None.
 
 II-20
  PART
III
  Item
10. Directors, Executive Officers and Corporate Governance*
  We have
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
our 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. We intend 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 our website.
  Our 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. Our Chief Executive Officer made her
annual certification to that effect to the New York Stock Exchange on May 29,
2008. Our Form 10-K on file with the Securities and Exchange Commission includes
the certifications of our 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 and Related
Stockholder Matters*
  Item
13. Certain Relationships and Related Transactions, Director
Independence*
  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 us
not later than 120 days after December 31, 2008, the close of
our  fiscal year.
 
 III-1
  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 F-1.2.
                    Financial
      Schedules.See financial
      statement schedule on page
S-2.
  IV-1
  Exhibits3.1
              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
              Amended
      and Restated By-Laws (incorporated by reference to Exhibit 3.1 of the
      Company’s Current Report on Form 8-K filed August 17,
  2007)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 Stock4.2
              See
      Exhibit 10.3010.1
              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
              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)10.4A
              Borrower
      Party Joinder Agreement dated May 6, 2005 among CP Medical Corporation,
      the Company, and Wachovia Bank, National Association, successor by merger
      to SouthTrust Bank, amending the Credit Agreement dated as of August 12,
      2005 between the Company and SouthTrust Bank (incorporated by reference to
      Exhibit 10.4 of the Company’s report on Form 10-Q for the quarterly period
      ended July 3, 2005)10.4B
              Amendment
      to Credit Agreement dated August 11, 2005 among CP Medical Corporation,
      the Company, and Wachovia Bank, National Association, successor by merger
      to SouthTrust Bank, amending the Credit Agreement dated October 29, 2003
      between the Company and SouthTrust Bank (incorporated by reference to
      Exhibit 10.6 of the Company’s report on Form 10-Q for the quarterly period
      ended July 3, 2005)10.4C
              Third
      Amendment to Credit Agreement by and among Theragenics Corporation, CP
      Medical Corporation and Wachovia Bank, National Association, successor by
      merger to SouthTrust Bank, dated June 29, 2006 (incorporated by reference
      to Exhibit 10.1 of the Company’s Form 8-K filed July 3,
    2006)10.4D
              Fourth
      Amendment to Credit Agreement by and among Theragenics Corporation, CP
      Medical Corporation, Galt Medical Corp. and Wachovia Bank, National
      Association, successor by merger to SouthTrust Bank, dated July 1, 2008.
      (incorporated by reference to Exhibit 10.1 of the Company’s
      Form  8-K filed on July 3, 2008)10.5
              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)10.6
              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)10.7
              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)10.8
              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)10.9
              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)10.10
              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)
  IV-2
  10.11
              Employment
      Agreement dated April 13, 2000 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)10.11A
              First
      Amendment dated July 8, 2003 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)
 10.11B
              Amendment
      to Employment Agreement dated August 8, 2006, between Theragenics
      Corporation and M. Christine Jacobs* (incorporated by reference to Exhibit
      10.3 of the Company’s report on Form 10-Q for the quarterly period ended
      July 2, 2006)10.11C
              Amendment
      to Employment Agreement dated December 31, 2008, between Theragenics
      Corporation and M. Christine Jacobs*10.12
              Employment
      Agreement dated January 1, 1999 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)10.12A
              Amendment
      to Executive Employment Agreement dated June 29, 1999 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)10.12B
              Second
      Amendment dated June 15, 2001 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)10.12C
              Third
      Amendment dated September 3, 2002 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)10.12D
              Fourth
      Amendment dated May 28, 2003 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)10.12E
              Fifth
      Amendment to Executive Employment Agreement for Bruce W. Smith*
      (incorporated by reference to Exhibit 10.15E of the Company’s report on
      Form 10-K for the year ended December 31, 2005)10.12F
              Amendment
      to Employment Agreement dated December 31, 2008, between Theragenics
      Corporation and Bruce W. Smith*10.13
              Employee
      Employment Agreement dated January 1, 2000 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)10.13A
              Amendment
      to Employee Employment Agreement dated October 25, 2001 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)10.13B
              Amendment
      to Employee Employment Agreement for Michael O’Bannon* (incorporated by
      reference to Exhibit 10.16B of the Company’s report on Form 10-K for the
      year ended December 31, 2005)10.13C
              Amendment
      to Employment Agreement dated December 31, 2008, between Theragenics
      Corporation and Michael O’Bannon*10.14
              Forms
      of Option Award for grants prior to 2007* (incorporated by reference to
      Exhibit 10.22 of the Company’s report on Form 10-K for the year ended
      December 31, 2004)10.15
              Advisor
      to the Chief Executive Officer Agreement dated February 18, 2008 with John
      Herndon* (incorporated by reference to Exhibit 10.15 of the Company's
      report on Form 10-K for the year ended December 31,
  2007)10.16
              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)10.17
              Form
      of Restricted Stock Agreement for directors as of May 2005* (incorporated
      by reference to Exhibit 10.1 of the Company’s report on Form 10-Q for the
      quarterly period ended July 3, 2005)10.18
              Form
      of Performance Restricted Stock Rights Agreement used in 2004 and 2005*
      (incorporated by reference to Exhibit 10.2 of the Company’s report on Form
      10-Q for the quarterly period ended July 3,
  2005)
  IV-3
  10.18A
              Form
      of Amendment to Performance Restricted Stock Rights Agreement *
      (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed
      January 5, 2006)10.19
              Form
      of Restricted Stock Rights Agreement* for 2004 grants (incorporated by
      reference to Exhibit 10.3 of the Company’s report on Form 10-Q for the
      quarterly period ended July 3, 2005)10.20
              Employment
      Agreement between the Company and Francis J. Tarallo dated August 10,
      2005* (incorporated by reference to Exhibit 10.5 of the Company’s report
      on Form 10-Q for the quarterly period ended July 3,
  2005)10.20A
              Amendment
      to Employment Agreement dated December 31, 2008, between Theragenics
      Corporation and Francis J. Tarallo*10.21
              Form
      of Performance Restricted Stock Rights Agreement for 2006 grants*
      (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K filed
      February 22, 2006)10.21A
              Form
      of Amendment to Performance Restricted Stock Rights Agreement for
      2006 grants*10.22
              Theragenics
      Corporation Incentive Stock Option Award for 2007 grants* (incorporated by
      reference to Exhibit 10.1 of the Company’s Form 8-K dated February 20,
      2007)10.23
              Restricted
      Stock Award Pursuant to the Theragenics Corporation 2006 Stock Incentive
      Plan for 2007 grants* (incorporated by reference to Exhibit 10.2 of the
      Company’s Form 8-K dated February 20, 2007)
 10.24
              Theragenics
      Corporation Amended and Restated 2007 Long-Term Cash Incentive Plan*
      (incorporated by reference to Exhibit 10.24 of the Company's Form 10-K for
      the year ended December 31, 2007)10.25
              Employment
      Agreement dated May 6, 2005 by and between the Company and Patrick
      Ferguson* (incorporated by reference to Exhibit 10.1 of the Company’s Form
      8-K filed May 12, 2005)10.26
              Theragenics
      Corporation 2006 Stock Incentive Plan* (incorporated by reference to
      Appendix A to the Company’s definitive proxy statement for its May 9, 2006
      annual meeting of stockholders filed with the Securities and Exchange
      Commission on March 27, 2006).10.26A
              First
      Amendment to Theragenics Corporation 2006 Stock Incentive Plan*
      (incorporated by reference to Exhibit 18.1 on Form 8-K filed November 13,
      2006)10.27
              Stock
      Purchase Agreement by and among Theragenics Corporation, James R. Eddings,
      as Sellers’ Representative, those shareholders and holders of Company
      Stock Derivatives of Galt Medical Corp. listed on Schedule 1 thereto,
      dated August 2, 2006 (incorporated by reference to Exhibit 2.1 of Form 8-K
      filed on August 8, 2006)10.28
              Employment
      Agreement between Galt Medical Corp. and James R. Eddings, dated as of
      August 2, 2006 * (incorporated by reference to Exhibit 10.1 of Form 8-K
      filed on August 8, 2006)10.29
              Registration
      Rights Agreement between Theragenics Corporation and James R. Eddings, as
      Sellers’ Representative, dated as of August 2, 2006 (incorporated by
      reference to Exhibit 10.2 of Form 8-K filed on August 8,
      2006).10.30
              Rights
      Agreement dated February 14, 2007 between the Company and Computershare
      Investor Services LLC (incorporated by reference to Exhibit 99.1 of the
      Company’s registration statement on Form 8-A/A filed February 16,
      2007)10.31
              Employment
      Agreement between Galt Medical Corp. and Michael F. Lang dated August 21,
      2007* (incorporated by reference to Exhibit 10.1 of the Company’s Form
      10-Q filed November 8, 2007)10.31A
              Amendment
      to Employment Agreement dated December 31, 2008, between Galt Medical
      Corp. and Michael F. Lang*10.32
              Theragenics
      Corporation Incentive Stock Option Award for 2008 and 2009 grants*
      (incorporated by reference to Exhibit 10.1 of the Company’s Form 8-K
      dated February 25, 2008)10.33
              Restricted
      Stock Award for 2008 and 2009 grants, pursuant to the Theragenics
      Corporation 2006 Stock Incentive Plan* (incorporated by
      reference to Exhibit 10.2 of the Company’s Form 8-K dated February
      25, 2008)10.34
              Theragenics
      Corporation 2008 Long-Term Cash Incentive Plan* (incorporated by
      reference to Exhibit 10.3 of the Company’s Form 8-K dated February
      25, 2008)
  IV-4
  10.35
              Stock
      Purchase Agreement dated as of July 16, 2008 with respect to NeedleTech
      Products, Inc. by and among Theragenics Corporation, as Purchaser, Ronald
      Routhier, as Sellers’ Representative, the individual Stockholders of
      NeedleTech Products, Inc. listed on Schedule 1 to the Agreement, as
      Sellers, and Rockland Trust Company, as Special Fiduciary and Trustee
      (incorporated by reference to Exhibit 2.1 of the Company’s form 8-K filed
      on July 21, 2008).10.36
              Employment
      Agreement between NeedleTech Products, Inc. and Ronald Routhier, dated as
      of July 28, 2008* (incorporated by reference to Exhibit 10.1 of the
      Company’s form 8-K filed on July 31, 2008).10.36A
              Amendment
      to Employment Agreement dated December 31, 2008, between NeedleTech
      Products, Inc. and Ronald Routhier*10.37
              Employment
      Agreement between NeedleTech Products, Inc. and Russell Small, dated as of
      July 28, 2008* (incorporated by reference to Exhibit 10.2 of the Company’s
      form 8-K filed on July 31, 2008)10.37A
              Amendment
      to Employment Agreement dated December 31, 2008, between NeedleTech
      Products, Inc. and Russell Small*10.38
              Employment
      Agreement between CP Medical Corporation and Janet Zeman dated August 6,
      2008 (incorporated by reference to Exhibit 10.1 of the Company’s Form 10-Q
      filed on November 6, 2008)10.38A
              Amendment
      to Employment Agreement dated December 31, 2008, between CP Medical
      Corporation and Janet Zeman*10.39
              Theragenics
      Corporation 2009 Long-Term Cash Incentive Plan* (incorporated by
      reference to Exhibit 10.1 of the Company’s Form 8-K dated March 4,
      2009)10.40
              Standard
      Form Commercial Lease between Chartier-Tate, LLC and NeedleTech Products,
      Inc. dated April 19, 2006 and Amendment dated May 22,
  200821.1
              Subsidiaries
      of Registrant23.1
              Consent
      of Dixon Hughes PLLC23.2
              Consent
      of Grant Thornton LLP31.1
              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.
  IV-5
 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.
 THERAGENICSCORPORATION
                (Registrant)By:
              /s/
      M. Christine JacobsM.
      Christine JacobsChief
      Executive OfficerDated:
      March 13, 2009Buford,
      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
              Chief
      Executive Officer
              3/13/09M.
      Christine Jacobs
              (Principal
      Executive Officer)President
      and Chairman/s/
      Francis J. Tarallo
              Chief
      Financial Officer (Principal Financial
              3/13/09Francis
      J. Tarallo
              and
      Accounting Officer) and Treasurer/s/
      Kathleen A. Dahlberg
              Director
              3/13/09Kathleen
      A. Dahlberg/s/
      K. Wyatt Engwall
              Director
              3/13/09K.
      Wyatt Engwall/s/
      John V. Herndon
              Director
              3/13/09John
      V. Herndon/s/
      C. David Moody, Jr.
              Director
              3/13/09C.
      David Moody, Jr./s/
      Peter A.A. Saunders
              Director
              3/13/09Peter
      A. A. Saunders
  IV-6
 
 THERAGENICS
CORPORATION®
  TABLE
OF CONTENTS
  PageREPORTS
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
              F-2CONSOLIDATED
      FINANCIAL STATEMENTSConsolidated
      Balance Sheets as of December 31, 2008 and 2007
              F-4Consolidated
      Statements of Operations and Comprehensive Earnings (Loss) for each of the
      three years in the period ended December 31, 2008
              F-6Consolidated
      Statements of Shareholders’ Equity for each of the three years in the
      period ended December 31, 2008
              F-8Consolidated
      Statements of Cash Flows for each of the three years in the period ended
      December 31, 2008
              F-11NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS
              F-13REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
       SCHEDULE
              S-1Schedule
      II - Valuation and Qualifying Accounts for each of the three years in the
      period ended December 31, 2008
              S-2
  F-1
  Report of Independent
Registered Public Accounting Firm
  To the
Board of Directors and
 Shareholders
of Theragenics Corporation
  We have
audited the accompanying consolidated balance sheets of Theragenics Corporation
and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and the
related consolidated statements of operations and comprehensive earnings (loss),
shareholders’ equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
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 that our audits provide a
reasonable basis for our opinion.
  In our
opinion, the 2008 and 2007 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the Company
as of December 31, 2008 and 2007, and the results of their operations and
their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
  We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2008, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated March 12, 2009, expressed an
unqualified opinion thereon.  Our report on internal control over
financial reporting refers to the fact that we excluded from the scope of our
audit of internal control over financial reporting the NeedleTech Products, Inc.
subsidiary, which was acquired by the Company in July 2008.
  
  /s/ DIXON
HUGHES PLLC
  Atlanta,
Georgia
 March 12,
2009
 F-2
  Report of Independent
Registered Public Accountants
  Board of
Directors and Shareholders of
 Theragenics
Corporation
 
 We have
audited the accompanying consolidated statements of operations and comprehensive
earnings (loss), shareholders’ equity, and cash flows of Theragenics Corporation
and subsidiaries (the “Company”) for the year ended December 31, 2006. Our audit
of the consolidated financial statements included the financial statement
schedule listed in the index under item 15(a)(2). These consolidated financial
statements and financial statement schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule 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 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 audit provides a reasonable
basis for our opinion.
 
 In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated results of the Company’s operations
and its cash flows for the year ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
 
 As
discussed in Note B to the Consolidated Financial Statements, the Company
adopted Statement of Financial Accounting Standards No. 123R, Share-Based Payment,effective January 1, 2006.
  /s/ GRANT
THORNTON LLP
  Atlanta,
Georgia
 March 7,
2007
 F-3
  Theragenics
Corporation and Subsidiaries
  CONSOLIDATED
BALANCE SHEETS
  December
31,
  (Amounts
in thousands, except per share data)
  ASSETS
  2008
              
              
              2007CURRENT
      ASSETSCash
      and cash equivalents
              
              $
              39,088
              
              
              $
              28,666Marketable
      securities
              
              
              1,507
              
              
              
              20,123Trade
      accounts receivable, less allowance of $481 in 2008 and $372 in
      2007
              
              
              8,532
              
              
              
              7,882Inventories
              
              
              11,667
              
              
              
              7,644Deferred
      income tax asset
              
              
              2,158
              
              
              
              1,664Refundable
      income taxes
              
              
              1,504
              
              
              
              -Prepaid
      expenses and other current assets
              
              
              1,129
              
              
              
              1,338Total
      current assets
              
              
              65,585
              
              
              
              67,317PROPERTY
      AND EQUIPMENT, NET
              
              
              30,035
              
              
              
              27,972OTHER
      ASSETSGoodwill
              
              
              -
              
              
              
              38,658Customer
      relationships, net
              
              
              12,742
              
              
              
              6,600Other
      intangible assets, net
              
              
              5,978
              
              
              
              5,281Asset
      held for sale
              
              
              -
              
              
              
              2,900Other
              
              
              79
              
              
              
              9318,799
              
              
              
              53,532Total
      assets
              
              $
              114,419
              
              
              $
              148,821
  F-4
  Theragenics
Corporation and Subsidiaries
  CONSOLIDATED
BALANCE SHEETS - Continued
  December
31,
  (Amounts
in thousands, except per share data)
  LIABILITIES
AND SHAREHOLDERS’ EQUITY
  2008
              
              
              2007CURRENT
      LIABILITIESAccounts
      payable
              
              $
              1,437
              
              
              $
              1,530Accrued
      salaries, wages and payroll taxes
              
              
              1,968
              
              
              
              1,868Short-term
      borrowings
              
              
              32,000
              
              
              
              -Income
      taxes payable
              
              
              209
              
              
              
              867Other
      current liabilities
              
              
              1,896
              
              
              
              724Total
      current liabilities
              
              
              37,510
              
              
              
              4,989LONG-TERM
      LIABILITIESLong-term
      borrowings
              
              
              -
              
              
              
              7,500Deferred
      income taxes
              
              
              2,006
              
              
              
              1,369Contract
      termination liability
              
              
              -
              
              
              
              1,487Decommissioning
      retirement
              
              
              646
              
              
              
              602Other
      long-term liabilities
              
              
              147
              
              
              
              255Total
      long-term liabilities
              
              
              2,799
              
              
              
              11,213COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS’
      EQUITYCommon
      stock - authorized 100,000 shares of $.01 par value; issued and
      outstanding, 33,243 in 2008 and 33,274 in 2007
              
              
              332
              
              
              
              333Additional
      paid-in capital
              
              
              72,894
              
              
              
              72,918Retained
      earnings
              
              
              884
              
              
              
              59,424Accumulated
      other comprehensive loss
              
              
              -
              
              
              
              (56
              )Total
      shareholders’ equity
              
              
              74,110
              
              
              
              132,619Total
      liabilities and shareholders’ equity
              
              $
              114,419
              
              
              $
              148,821
 
 The
accompanying notes are an integral part of these consolidated
statements.
 F-5
  Theragenics
Corporation and Subsidiaries
  CONSOLIDATED
STATEMENTS OF OPERATIONS
  AND
COMPREHENSIVE EARNINGS (LOSS)
  Year
ended December 31,
  (Amounts
in thousands, except per share data)
 
 2008
              
              
              2007
              
              
              2006RevenueProduct
      sales
              
              $
              66,447
              
              
              $
              61,286
              
              
              $
              53,076License
      and fee income
              
              
              911
              
              
              
              924
              
              
              
              1,02067,358
              
              
              
              62,210
              
              
              
              54,096Cost
      of sales
              
              
              36,264
              
              
              
              31,994
              
              
              
              27,752Gross
      profit
              
              
              31,094
              
              
              
              30,216
              
              
              
              26,344Operating
      expensesSelling,
      general and administrative
              
              
              20,500
              
              
              
              19,131
              
              
              
              19,951Amortization
      of purchased intangibles
              
              
              2,410
              
              
              
              1,875
              
              
              
              1,371Research
      and development
              
              
              1,300
              
              
              
              1,365
              
              
              
              805Change
      in estimated value of asset held for sale
              
              
              (142
              )
              
              
              500
              
              
              
              -Impairment
      of goodwill and tradenames
              
              
              70,376
              
              
              
              -
              
              
              
              -Restructuring
      expenses
              
              
              -
              
              
              
              -
              
              
              
              369Gain
      on sale of equipment
              
              
              (5
              )
              
              
              -
              
              
              
              (201
              )94,439
              
              
              
              22,871
              
              
              
              22,295Earnings
      (loss) from operations
              
              
              (63,345
              )
              
              
              7,345
              
              
              
              4,049Other
      income (expense)Interest
      income
              
              
              1,065
              
              
              
              2,192
              
              
              
              1,541Interest
      expense
              
              
              (841
              )
              
              
              (691
              )
              
              
              (419
              )Other
              
              
              53
              
              
              
              1
              
              
              
              (18
              )277
              
              
              
              1,502
              
              
              
              1,104Earnings
      (loss) before income taxes
              
              
              (63,068
              )
              
              
              8,847
              
              
              
              5,153Income
      tax expense (benefit)
              
              
              (4,528
              )
              
              
              3,212
              
              
              
              (1,712
              )NET
      EARNINGS (LOSS)
              
              $
              (58,540
              )
              
              $
              5,635
              
              
              $
              6,865
  F-6
  Theragenics
Corporation and Subsidiaries
  CONSOLIDATED
STATEMENTS OF OPERATIONS
  AND
COMPREHENSIVE EARNINGS (LOSS) – Continued
  Year
ended December 31,
  (Amounts
in thousands, except per share data)
 
 2008
              
              
              2007
              
              
              2006NET
      EARNINGS (LOSS) PER SHAREBasic
              
              $
              (1.77
              )
              
              $
              0.17
              
              
              $
              0.21Diluted
              
              $
              (1.77
              )
              
              $
              0.17
              
              
              $
              0.21WEIGHTED
      AVERAGE SHARESBasic
              
              
              33,066
              
              
              
              33,103
              
              
              
              32,452Diluted
              
              
              33,066
              
              
              
              33,299
              
              
              
              32,540COMPREHENSIVE
      EARNINGS (LOSS)Net
      earnings (loss)
              
              $
              (58,540
              )
              
              $
              5,635
              
              
              $
              6,865Other
      comprehensive earnings, net of taxesReclassification
      adjustment for loss included in net earnings
              
              
              347
              
              
              
              5
              
              
              
              39Unrealized
      gain (loss) on securities arising during the year
              
              
              (291
              )
              
              
              21
              
              
              
              63Total
      other comprehensive earnings
              
              
              56
              
              
              
              26
              
              
              
              102Total
      comprehensive earnings (loss)
              
              $
              (58,484
              )
              
              $
              5,661
              
              
              $
              6,967
  The
accompanying notes are an integral part of these consolidated financial
statements.
 F-7
  Theragenics
Corporation and Subsidiaries
  CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
  For the
three years ended December 31, 2008
  (Amounts
in thousands, except per share data)
  Common
      StockNumber
                of
                Shares
              
              
              Par
                value
                $0.01
              
              
              Additional
                paid-in
                capital
              
              
              Deferred
                compensation
              
              
              Retained
                earnings
              
              
              Accumulated
                other
                comprehensive
                loss
              
              
              TotalBalance,
      December 31, 2005
              
              
              32,008
              
              
              $
              320
              
              
              $
              68,717
              
              
              $
              (94
              )
              
              $
              46,924
              
              
              $
              (184
              )
              
              $
              115,683Adoption
      of SFAS No. 123R
              
              
              -
              
              
              
              -
              
              
              
              (94
              )
              
              
              94
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of restricted units and restricted shares
              
              
              80
              
              
              
              1
              
              
              
              (1
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of common stock for acquisition of Galt
              
              
              978
              
              
              
              10
              
              
              
              3,042
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,052Employee
      stock purchase plan
              
              
              30
              
              
              
              -
              
              
              
              77
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              77Share
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              362
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              362Other
      comprehensive earnings
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              102
              
              
              
              102Net
      earnings for the year
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              6,865
              
              
              
              -
              
              
              
              6,865Balance,
      December 31, 2006
              
              
              33,096
              
              
              $
              331
              
              
              $
              72,103
              
              
              $
              -
              
              
              $
              53,789
              
              
              $
              (82
              )
              
              $
              126,141
  F-8
  Theragenics
Corporation and Subsidiaries
  CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY – Continued
  For the
three years ended December 31, 2008
  (Amounts
in thousands, except per share data)
 
 Common
      StockNumber
                of
                Shares
              
              
              Par
                value
                $0.01
              
              
              Additional
                paid-in
                capital
              
              
              Deferred
                compensation
              
              
              Retained
                earnings
              
              
              Accumulated
                other
                comprehensive
                loss
              
              
              TotalBalance,
      December 31, 2006
              
              
              33,096
              
              
              $
              331
              
              
              $
              72,103
              
              
              $
              -
              
              
              $
              53,789
              
              
              $
              (82
              )
              
              $
              126,141Exercise
      of stock options
              
              
              30
              
              
              
              -
              
              
              
              126
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              126Tax
      benefit related to stock plans
              
              
              -
              
              
              
              -
              
              
              
              15
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              15Issuance
      of restricted shares
              
              
              135
              
              
              
              1
              
              
              
              (1
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Restricted
      shares forfeited
              
              
              (1
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of common stock upon vesting of restricted units
              
              
              23
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Retirement
      of common stock received in settlement for other
receivable
              
              
              (21
              )
              
              
              -
              
              
              
              (83
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (83
              )Employee
      stock purchase plan
              
              
              12
              
              
              
              1
              
              
              
              35
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              36Share
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              723
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              723Other
      comprehensive earnings
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              26
              
              
              
              26Net
      earnings for the year
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              5,635
              
              
              
              -
              
              
              
              5,635Balance,
      December 31, 2007
              
              
              33,274
              
              
              $
              333
              
              
              
              72,918
              
              
              
              -
              
              
              
              59,424
              
              
              
              (56
              )
              
              
              132,619
  F-9
  Theragenics
Corporation and Subsidiaries
  CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY – Continued
  For the
three years ended December 31, 2008
  (Amounts
in thousands, except per share data)
 
 Common
      StockNumber
                of
                Shares
              
              
              Par
                value
                $0.01
              
              
              Additional
                paid-in
                capital
              
              
              Deferred
      compensation
              
              
              Retained
                earnings
              
              
              Accumulated
                other
                comprehensive
                loss
              
              
              TotalBalance,
      December 31, 2007
              
              
              33,274
              
              
              $
              333
              
              
              $
              72,918
              
              
              $
              -
              
              
              $
              59,424
              
              
              $
              (56
              )
              
              $
              132,619Tax
      benefit related to stock plans
              
              
              -
              
              
              
              -
              
              
              
              7
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7Issuance
      of restricted shares
              
              
              159
              
              
              
              1
              
              
              
              (1
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Restricted
      shares forfeited
              
              
              (23
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Issuance
      of common stock upon vesting of restricted units
              
              
              27
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Retirement
      of common stock received in settlement for other
receivable
              
              
              (202
              )
              
              
              (2
              )
              
              
              (695
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (697
              )Employee
      stock purchase plan
              
              
              8
              
              
              
              -
              
              
              
              31
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              31Share
      based compensation
              
              
              -
              
              
              
              -
              
              
              
              634
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              634Other
      comprehensive earnings
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              56
              
              
              
              56Net
      loss for the year
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (58,540
              )
              
              
              -
              
              
              
              (58,540
              )Balance,
      December 31, 2008
              
              
              33,243
              
              
              $
              332
              
              
              $
              72,894
              
              
              $
              -
              
              
              $
              884
              
              
              $
              -
              
              
              $
              74,110
  The
accompanying notes are an integral part of these consolidated
statements.
 F-10
  Theragenics
Corporation and Subsidiaries
  CONSOLIDATED
STATEMENTS OF CASH FLOWS
  Year
ended December 31,
  (Amounts
in thousands)
 
 2008
              
              
              2007
              
              
              2006Cash
      flows from operating activities:Net
      earnings (loss)
              
              $
              (58,540
              )
              
              $
              5,635
              
              
              $
              6,865Adjustments
      to reconcile net earnings (loss) to net cash provided by operating
      activities:Impairment
      of goodwill and tradenames
              
              
              70,376
              
              
              
              -
              
              
              
              -Depreciation
      and amortization
              
              
              5,626
              
              
              
              6,146
              
              
              
              6,029Deferred
      income taxes
              
              
              (4,535
              )
              
              
              1,300
              
              
              
              (1,935
              )Share-based
      compensation
              
              
              634
              
              
              
              723
              
              
              
              362Gain
      on sale of scrap metal
              
              
              (457
              )
              
              
              -
              
              
              
              -Contract
      termination liability
              
              
              (15
              )
              
              
              (26
              )
              
              
              (24
              )Provision
      for allowances
              
              
              362
              
              
              
              19
              
              
              
              517Loss
      on marketable securities
              
              
              347
              
              
              
              5
              
              
              
              39Change
      in estimated value of asset held for sale
              
              
              (142
              )
              
              
              500
              
              
              
              -Decommissioning
      retirement liability
              
              
              44
              
              
              
              41
              
              
              
              (111
              )Gain
      on sale of equipment
              
              
              (5
              )
              
              
              -
              
              
              
              (201
              )Changes
      in assets and liabilities, net of acquisitions:Accounts
      receivable
              
              
              984
              
              
              
              (124
              )
              
              
              764Inventories
              
              
              (244
              )
              
              
              (325
              )
              
              
              (1,113
              )Prepaid
      income tax
              
              
              (1,504
              )
              
              
              -
              
              
              
              -Prepaid
      expenses and other current assets
              
              
              458
              
              
              
              2,140
              
              
              
              (745
              )Other
      assets
              
              
              19
              
              
              
              19
              
              
              
              27Trade
      accounts payable
              
              
              (380
              )
              
              
              (238
              )
              
              
              (41
              )Accrued
      salaries, wages and payroll taxes
              
              
              (236
              )
              
              
              356
              
              
              
              (342
              )Income
      taxes payable
              
              
              (1,235
              )
              
              
              970
              
              
              
              -Other
      current liabilities
              
              
              802
              
              
              
              (277
              )
              
              
              (125
              )Other
              
              
              (108
              )
              
              
              255
              
              
              
              -Net
      cash provided by operating activities
              
              
              12,251
              
              
              
              17,119
              
              
              
              9,966Cash
      flows from investing activities:Cash
      paid for acquisition, net of cash acquired
              
              
              (46,063
              )
              
              
              -
              
              
              
              (29,656
              )Purchases
      and construction of property and equipment
              
              
              (1,531
              )
              
              
              (1,450
              )
              
              
              (733
              )Proceeds
      from sale of equipment, including asset held for sale
              
              
              1,576
              
              
              
              -
              
              
              
              234Purchases
      of marketable securities
              
              
              (8,000
              )
              
              
              (29,493
              )
              
              
              (9,699
              )Maturities
      of marketable securities
              
              
              6,399
              
              
              
              21,658
              
              
              
              24,535Proceeds
      from sales of marketable securities
              
              
              21,949
              
              
              
              2,480
              
              
              
              5,961Net
      cash used in investing activities
              
              
              (25,670
              )
              
              
              (6,805
              )
              
              
              (9,358
              )
  F-11
  Theragenics
Corporation and Subsidiaries
  CONSOLIDATED
STATEMENTS OF CASH FLOWS - Continued
  Year
ended December 31,
  (Amounts
in thousands)
  2008
              
              
              2007
              
              
              2006Cash
      flows from financing activities:Proceeds
      from borrowings under credit facility
              
              
              24,500
              
              
              
              -
              
              
              
              7,500Retirement
      of common stock
              
              
              (697
              )
              
              
              (83
              )
              
              
              -Proceeds
      from exercise of stock options and stock purchase plan
              
              
              31
              
              
              
              162
              
              
              
              77Excess
      tax benefit related to share plans
              
              
              7
              
              
              
              15
              
              
              
              -Net
      cash provided by financing activities
              
              
              23,841
              
              
              
              94
              
              
              
              7,577Net
      increase in cash and cash equivalents
              
              
              10,422
              
              
              
              10,408
              
              
              
              8,185Cash
      and cash equivalents at beginning of year
              
              
              28,666
              
              
              
              18,258
              
              
              
              10,073Cash
      and cash equivalents at end of year
              
              $
              39,088
              
              
              $
              28,666
              
              
              $
              18,258Supplementary Cash
      Flow DisclosureInterest
      paid
              
              $
              793
              
              
              $
              662
              
              
              $
              419Income
      taxes paid (received), net
              
              $
              2,282
              
              
              $
              (928
              )
              
              $
              281Non-cash investing and
      financing activities:Stock
      issued for acquisition
              
              $
              -
              
              
              $
              -
              
              
              $
              3,052Termination
      of lease underlying contract termination liability
              
              $
              1,498
              
              
              $
              -
              
              
              $
              -
  The
accompanying notes are an integral part of these consolidated
statements.
 F-12
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
 NOTE
A - ORGANIZATION AND DESCRIPTION OF BUSINESS
 
 Theragenics
Corporation is a medical device company serving the surgical products and cancer
treatment markets, operating in two business segments. The Company’s surgical
products business consists of wound closure, vascular access, and specialty
needle products.  Wound closure includes sutures, needles, and other
surgical products.  Vascular access includes introducers, guidewires,
and related products.  Specialty needles include coaxial, biopsy,
spinal and disposable veress needles, access trocars, and other needle based
products.  The Company’s surgical products segment serves a number of
markets and applications, including among other areas, interventional
cardiology, interventional radiology, vascular surgery, orthopedics, plastic
surgery, dental surgery, urology, veterinary medicine, pain management,
endoscopy, and spinal surgery. The Company’s brachytherapy business manufactures
and markets its premier product, the palladium-103 TheraSeed® device,
and I-Seed, an iodine-125 based device, which are used primarily in the
minimally invasive treatment of localized prostate cancer.
 
 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. Consolidation
  These
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries, CP Medical Corporation (“CP Medical”), Galt Medical
Corp. (“Galt”), and NeedleTech Products, Inc. (“NeedleTech”). Results of
operations of acquired companies are included in the Company’s consolidated
results for periods subsequent to the acquisition date. All significant
intercompany accounts and transactions have been eliminated. The Company has no
unconsolidated entities and no special purpose entities.
  2. 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.
  3. Revenue Recognition and Cost
of Sales
  Product
sales are recognized upon shipment and are generally not returnable, including
sales to third party distributors. License fees are recognized in the periods to
which they relate.
  Shipping
and handling costs are included in cost of sales. Billings to customers to
recover such costs are included in product sales. Any sales taxes charged to
customers are excluded from both net sales and expenses.
  4. Cash and Cash
Equivalents
  For
purposes of reporting cash flows, cash and cash equivalents include cash on
hand, cash in banks, variable rate demand notes, treasury investments and U.S.
obligations and commercial paper with original maturities equal to or less than
90 days from purchase.
  5. Marketable Securities and
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, which consist primarily of high-credit quality corporate
and municipal obligations, are classified as available-for-sale and are reported
at fair value based upon quoted market prices, with unrealized gains or losses
excluded from earnings and included in other comprehensive income, net of
applicable taxes. The cost of marketable securities sold is determined using the
specific identification method. The Company evaluates individual securities to
determine whether a decline in fair value below the amortized cost basis is
other-than-temporary. The Company considers, among other factors, the length of
the time and the extent to which the market value has been less than cost, the
financial condition and near-term prospects of the issuer, including any
specific events which may influence the operations of the issuer and the
Company’s intent and ability to retain its investment in the issuer for a period
of time sufficient to allow for any anticipated recovery in market value.
Declines in value that are other-than-temporary are charged to
earnings.
  F-13
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  Available-for-sale
securities consist of (in thousands):
 
 December
      31,2008
              
              2007Amortized
                Cost
              
              Gross
                Unrealized
                Loss
              
              Estimated
                Fair
                Value
              
              Amortized
                Cost
              
              Gross
                Unrealized
                Loss
              
              Estimated
                Fair
                ValueState
      and municipal securities
              
              $
              500
              
              
              $
              -
              
              
              $
              500
              
              
              $
              13,890
              
              
              $
              -
              
              
              $
              13,890Corporate
      and other securities
              
              
              1,007
              
              
              
              -
              
              
              
              1,007
              
              
              
              6,319
              
              
              
              (86
              )
              
              
              6,233Total
              
              $
              1,507
              
              
              $
              -
              
              
              $
              1,507
              
              
              $
              20,209
              
              
              $
              (86
              )
              
              $
              20,123
  The
estimated fair value of marketable securities by contractual maturity at
December 31, 2008, is as follows (in thousands):
  
 Due
      in one year or less
              
              $
              1,507Due
      after one year through five years
              
              $
              -
  6. Accounts Receivable and
Allowance for Doubtful Accounts and Returns
  Trade
accounts receivable arise from sales in the Company’s various markets, are
stated at the amount expected to be collected and do not bear interest. The
Company maintains an allowance for doubtful accounts based upon the review of
accounts receivable aging and management’s estimate of the expected
collectibility of accounts receivable. Outstanding receivables are considered
past due based upon invoice due dates.  The collectibility of trade
receivable balances is regularly evaluated based on a combination of factors
such as customer credit-worthiness, past transaction history with the customer,
current economic industry trends, and changes in customer payment terms. If it
is determined that a customer will be unable to fully meet its financial
obligation, such as in the case of a bankruptcy filing or other material events
impacting its business, a specific reserve for bad debt is recorded to reduce
the related receivable to the amount expected to be recovered.
  7. Inventories
  Inventories
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out (FIFO) method or weighted average cost method, which
approximates FIFO. Market is replacement cost or net realizable value. The
Company estimates reserves for inventory obsolescence based on management’s
judgment of future realization. Inventories consist of the following (in
thousands):
  December
      31,2008
              
              
              2007Raw
      materials
              
              $
              5,024
              
              
              $
              3,702Work
      in progress
              
              
              3,054
              
              
              
              1,463Finished
      goods
              
              
              3,488
              
              
              
              2,211Spare
      parts and supplies
              
              
              848
              
              
              
              91312,414
              
              
              
              8,289Allowance
      for obsolete inventory
              
              
              (747
              )
              
              
              (645
              )Inventories,
      net
              
              $
              11,667
              
              
              $
              7,644
  8. Property, Equipment, and
Depreciation
  Property
and equipment are recorded at historical cost. Depreciation 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. Leasehold improvements
are amortized over the useful life of the asset or the lease term, whichever is
shorter. Depreciation expense related to property and equipment charged to
operations was approximately $3,056,000, $4,272,000 and $4,195,000 for 2008,
2007 and 2006, respectively. Estimated service lives are 30 years for buildings
and improvements, and 3 to 15 years for machinery, equipment and furniture.
Expenditures for repairs and maintenance not considered to substantially
lengthen the life of the asset or increase capacity or efficiency are charged to
expense as incurred.
  F-14
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  The
Company reassesses the estimated service lives of its depreciable assets on a
periodic basis. In December 2007 the Company changed the estimated service lives
of certain depreciable assets, mainly the cyclotron equipment used in its
brachytherapy segment. The estimated service life of the cyclotron equipment was
increased from 10 years to 15 years, and was based on, among other things, an
assessment of the equipment’s operating and maintenance history and expected
future performance. The Company accounted for this change as a change in
estimate in accordance with Statement of Financial Accounting (“SFAS”) No. 154,
Accounting Changes and Error
Corrections. Accordingly, this change was accounted for on a prospective
basis beginning in December 2007. The effect of this change was not significant
in 2007. This change reduced depreciation expense by approximately $1.4 million
in 2008 from what would have been reported otherwise. Periods prior to this
change have not been restated or retrospectively adjusted.
  9. Impairment of Long-Lived
Assets
  Pursuant
to SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,the Company
periodically evaluates long-lived assets, including property and equipment and
finite lived intangible assets whenever events or changes in conditions may
indicate that the carrying value may not be recoverable. Factors that management
considers important that could initiate an impairment review include the
following:
  ●
              Significant
      operating losses;●
              Recurring
      operating losses;●
              Significant
      adverse change in legal factors or in the business
  climate;●
              Significant
      declines in demand for a product produced by an asset capable of producing
      only that product;●
              Assets
      that are idled or held for sale; and●
              Assets
      that are likely to be divested
  The
impairment review requires the Company to estimate future undiscounted cash
flows associated with an asset or group of assets. If the future undiscounted
cash flows are less than the carrying amount of the asset, the Company must
estimate the fair value of the asset. If the fair value of the asset is below
the carrying value, then the difference will be written-off. Estimating
future cash flows requires the Company to make judgments regarding future
economic conditions, product demand and pricing. Although the Company believes
its estimates are appropriate, significant differences in the actual performance
of the asset or group of assets may materially affect the Company’s asset values
and results of operations.
  No
impairment charges pursuant to SFAS No. 144 related to long-lived assets subject
to depreciation and amortization were recorded in any of the three years in the
period ended December 31, 2008. See Note F.
  10. Goodwill and Intangible
Assets
  The
Company accounts for goodwill and other intangible assets in accordance with the
provisions of SFAS No. 142, Goodwill and Other Intangible
Assets. Under SFAS No. 142, goodwill and intangible assets with
indefinite lives are not amortized. The Company tests such goodwill and other
intangible assets with indefinite lives for impairment annually, or more
frequently if events or circumstances indicate that an asset might be impaired.
The Company recorded impairment charges related to all goodwill and a portion of
its tradenames in the fourth quarter of 2008.  See Note
F.
  Other
intangible assets determined to have finite lives are amortized over their
useful lives using a method that is expected to reflect the pattern of its
economic benefit. When a pattern of economic benefit cannot be determined, or if
the straight-line method results in greater amortization, then the straight-line
method is used. To date, all finite lived intangible assets have been amortized
using the straight-line method. Pursuant to SFAS No. 144, the Company also
reviews finite lived intangible assets for impairment to ensure they are
appropriately valued if conditions exist that indicate the carrying value may
not be recoverable.
  11. 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.
  F-15
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  The
Company adopted the provisions of Financial Accounting Standards Board
Interpretation No. 48, Accounting
for Uncertainty in Income Taxes ("FIN 48") on January 1, 2007.  In
accordance with FIN 48, tax benefits of uncertain tax positions are recognized
only if it is more likely than not that the Company will be able to substain a
position taken on an income tax return.  Accordingly, the Company has
concluded that there were no significant uncertain tax positions as of December
31, 2008 and 2007.  The Company’s policy is to recognize accrued interest
expense and penalties associated with uncertain tax positions as a component of
income tax expense.
  12. Earnings (Loss) Per
Share
  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 and awards
outstanding during the period.
  13. Share-Based
Compensation
  The
Company adopted SFAS No. 123R, Share-Based Payment,
effective January 1, 2006. SFAS No. 123R revised SFAS No. 123, Accounting for Stock-Based
Compensation, and superseded Accounting Principles Board Opinion
No. 25, Accounting for
Stock Issued to Employees (“APB 25”). SFAS No. 123R required compensation
costs related to share based payments, including stock options and other equity
awards, to be measured based on the grant date fair value of the award. The
Company adopted SFAS No. 123R using the modified prospective application, which
applies to new awards and to awards modified, repurchased, or cancelled after
January 1, 2006. Additionally, compensation cost for the portion of awards for
which the requisite service had not been rendered that were outstanding as of
January 1, 2006 is recognized as the requisite service is rendered, based on
their grant date fair value as calculated for the pro forma disclosures required
under SFAS No. 123. Accordingly, previous financial results were not restated.
Previously, the Company accounted for share based payments in accordance with
APB 25. In accordance with APB 25, compensation cost was recorded for restricted
stock and stock unit awards and recognized over the vesting periods of the
awards. No compensation had been recognized for stock options issued to
employees and directors, as all options granted had an exercise price at least
equal to the market value of the underlying common stock at the date of
grant.
  Stock
options outstanding at January 1, 2006 for which the requisite service period
had not been rendered were not significant. Restricted stock and stock unit
awards were previously recorded using fair value in a manner substantially
equivalent to the accounting required under SFAS No. 123R. Accordingly, the
adoption of SFAS No. 123R did not have a material effect on the Company’s
results of operations, earnings per share or cash flows in 2006.
  14. Research and Development
Costs
  Research
and development (R&D) costs are expensed as incurred.
  15. Advertising
  Advertising
costs are expensed as incurred and totaled approximately $1,523,000, $1,589,000
and $2,447,000 for the years ended December 31, 2008, 2007 and 2006,
respectively.
  16. Concentrations
  The
Company is potentially subject to financial instrument concentration of credit
risk through its cash and cash equivalents, marketable securities and trade
accounts receivable. To mitigate these risks, the Company maintains policies,
which require minimum credit ratings, and restricts the amount of credit
exposure with any one counterparty for short-term investments and marketable
securities. For cash and cash equivalents, the Company maintained approximately
$39.1 million with five financial institutions. The Company periodically
evaluates the credit standing of these financial institutions. Trade accounts
receivable are subject to risks related to the medical device industry
generally, and the wound closure, vascular access, specialty needle and prostate
cancer treatment markets specifically. These industries are in turn largely
dependent upon the health care market generally, which can be affected by, among
other things, innovation and advances in treatments and procedures, insurance
and government reimbursement policies, preferences of physicians and other
health care providers, demographics and patient requirements, and government
regulation. The significant portion of the Company’s trade accounts receivable
is with customers based in the United States. The Company has certain customers,
which comprise ten percent or more of its trade accounts receivable and net
revenue. See Note P.
  F-16
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  17.  Software
Capitalization
  Internally
used software, whether purchased or developed, is capitalized and amortized
using the straight-line method over an estimated useful life of five to seven
years. Capitalized software costs are included in machinery and equipment. In
accordance with Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, the Company capitalizes
certain costs associated with internal-use software such as the payroll costs of
employees devoting time to the projects and external direct costs for materials
and services. Costs associated with internal-use software are expensed during
the design phase until the point at which the project has reached the
application development stage. Subsequent additions, modifications or upgrades
to internal-use software are capitalized only to the extent that they allow the
software to perform a task it previously did not perform. Software maintenance
and training costs are expensed in the period in which they are incurred.
Capitalized costs related to internally used software were not material in any
of the three years in the period ended December 31, 2008.
  18. Recently Issued Accounting
Standards
  In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a framework
for measuring fair value in GAAP, and expands disclosures about fair value
measurements. SFAS No. 157 was effective for the Company on January 1,
2008.  However, in February 2008 the FASB released FASB Staff Position
(“FSP”) No. FAS 157-2, Effective Date of FASB Statement
No. 157(“FSP FAS 157-2”), which delayed the effective date of SFAS
No. 157 for all non-financial assets and non-financial liabilities, except those
that are recognized or disclosed in the financial statements at fair value at
least annually.  Accordingly, the Company has adopted the provisions
of SFAS No. 157 only with respect to its financial assets and liabilities as of
January 1, 2008. The Company will not apply the provisions of SFAS No. 157 until
January 1, 2009 for its nonfinancial assets and liabilities, which includes the
retirement obligation related to future decommissioning costs (See Note H). On
October 10, 2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value of a
Financial Assets When the Market for That Asset is Not Active (which was
effective upon issuance),to clarify the application of SFAS No.157 in a market that is not
active. The adoption of SFAS No. 157 for the Company’s financial assets and
liabilities did not have a material impact on its consolidated financial
statements.  The Company is currently assessing the potential effect
on its consolidated financial statements of the adoption of SFAS No. 157 for its
non-financial assets and liabilities.
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115.  SFAS No.159
permits entities to choose to measure eligible items at fair value at specified
election dates and report unrealized gains and losses on items for which the
fair value option has been elected in earnings at each subsequent reporting
date.  SFAS No. 159, which the Company adopted on January 1, 2008, did
not have a material impact on its consolidated financial statements. As
permitted under SFAS No. 159, the Company hascurrently chosen not to
elect the fair value option for any items that are not already required to be
measured at fair value in accordance with GAAP.
  In
December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS
141R”). SFAS 141R requires an acquirer to measure the identifiable assets
acquired, the liabilities assumed and any noncontrolling interest in the
acquiree at their fair value on the acquisition date, with goodwill being the
excess value of consideration paid over the fair value of the net identifiable
assets acquired. Among the new requirements, SFAS 141R requires that acquired
in-process research and development be capitalized and recorded as an intangible
asset at the acquisition date, that contingent consideration be recorded at fair
value on the acquisition date, and that transaction costs are to be expensed.
Generally, the effects of SFAS No. 141R on the Company’s consolidated financial
statements will depend on acquisitions occurring in 2009 and
thereafter.  The Company followed SFAS No. 141, Business Combinations,as
originally issued, for its NeedleTech acquisition in July 2008 (see Note
C).  SFAS No.141R does not require retroactive restatement of
accounting for business combinations prior to January 1, 2009.
  In April
2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3 (“FSP FAS
142-3”), Determination of the
Useful Life of Intangible Assets.    The intent of
FSP FAS 142-3 is to improve the consistency between the useful life of a
recognized intangible asset under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS No. 141R and other
GAAP.  FSP FAS 142-3 is effective for the Company beginning January 1,
2009.  While the Company is evaluating the impact of FSP FAS 142-3 on
its consolidated financial statements, it is not expected to have a material
impact on the Company’s financial statements.
  NOTE
C - ACQUISITIONS
  The
Company accounted for acquisitions prior to January 1, 2009 under the purchase
method of accounting, in accordance with SFAS No. 141, Business Combinations.
Accordingly, the purchase price was allocated based on the fair values of the
assets acquired and liabilities assumed at the date of acquisition, with the
excess of the purchase price over the fair value of the net assets acquired
recorded as goodwill. Results of operations of acquired companies are included
for the period subsequent to the acquisition date.
  F-17
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  NeedleTech
  The
Company acquired all of the outstanding common stock of NeedleTech on July 28,
2008.  The total purchase price, including transaction costs, was
approximately $44.1 million (net of cash, cash equivalents, and marketable
securities acquired with an estimated fair value of approximately $5.8
million).  The purchase price was paid in cash, including $24.5
million from borrowings under the Company’s $40 million credit
facility.  NeedleTech is a manufacturer of specialty needles and
related medical devices.  NeedleTech’s current products include
coaxial needles, biopsy needles, access trocars, brachytherapy needles,
guidewire introducer needles, spinal needles, disposable veress needles, and
other needle-based products.  End markets served include the
cardiology, orthopedics, pain management, endoscopy, spinal surgery, urology,
and veterinary medicine.  This transaction further diversifies
Theragenics’ surgical products business and leverages the Company’s existing
strengths within these markets. The acquisition of NeedleTech is designed to
forward the Company’s stated strategy of becoming a diversified medical device
manufacturer, increase its breadth of offerings to existing customers, and
expand its customer base of large leading-edge original equipment
manufacturers.
  Following
is a summary of the fair value of the assets acquired and liabilities assumed as
of the acquisition date, based on the allocation of the purchase price (in
thousands):
  Fair
      value
              
              Amortization
                life
                of
      intangible
                assetsCash
      and cash equivalents
              
              $
              3,754
              
              -Marketable
      securities
              
              
              1,998
              
              -Other
      current assets
              
              
              5,567
              
              -Equipment
              
              
              3,615
              
              -Goodwill
              
              
              29,203
              
              IndefiniteTradenames
              
              
              3,156
              
              IndefiniteCustomer
      relationships
              
              
              7,668
              
              7
      yearsNon-compete
      agreements
              
              
              943
              
              5
      yearsBacklog
              
              
              150
              
              3
      monthsOther
      assets
              
              
              5
              
              -Current
      liabilities
              
              
              (1,596
              )
              -Deferred
      income tax liability, short and long-term
              
              
              (4,646
              )
              -Net
      assets acquired
              
              $
              49,817
  The
weighted average life of intangible assets subject to amortization based upon
the acquisition allocation is 6.7 years. The intangible assets acquired,
including goodwill, are not being deducted for income tax purposes.
  Galt
  The
Company acquired all of the outstanding common stock and other equity interests
of Galt on August 2, 2006. The total purchase price, including transaction
costs, was approximately $32.7 million (net of cash acquired of approximately
$2.3 million). The purchase price was paid $29.6 million in cash and the
issuance of 978,065 shares of common stock valued at approximately $3.1 million.
Galt develops, manufactures and markets disposable medical devices utilized for
vascular access, primarily serving the interventional radiology, interventional
cardiology and vascular surgery markets. Galt’s products include guidewires,
micro-introducer kits and tear-away introducer sets and kits, and hemostasis
valved introducer kits and sets. This transaction further diversifies
Theragenics’ medical device and surgical businesses and leverages the Company’s
existing strengths within these markets.
  F-18
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  Following
is a summary of the fair value of the assets acquired and liabilities assumed as
of the acquisition date (in thousands):
 
 Fair
      value
              
              Amortization
                life
                of
      intangible
                assetsCurrent
      assets
              
              $
              2,937
              
              -Property
      and equipment
              
              
              1,597
              
              -Goodwill
              
              
              20,454
              
              IndefiniteTrade
      name
              
              
              900
              
              IndefiniteCustomer
      relationships
              
              
              5,100
              
              7.5
      yearsNon-compete
      agreements
              
              
              1,700
              
              3-4
      yearsDeveloped
      technology
              
              
              900
              
              14
      yearsBacklog
              
              
              170
              
              3
      mosCurrent
      liabilities
              
              
              (717
              )
              -Deferred
      income tax liability
              
              
              (333
              )
              -Net
      assets acquired
              
              $
              32,708
  The
weighted average life of intangible assets subject to amortization based upon
the acquisition allocation is 7.3 years. The intangible assets acquired,
including goodwill, are not being deducted for income tax purposes.
  At the
time of acquisition, $2.9 million of deferred income tax liability arising from
fair value adjustments in purchase accounting related to the acquisition of Galt
was recorded as a reduction of the allowance for the Company’s net deferred tax
asset and a reduction in the goodwill arising from the transaction. The deferred
income tax liability of $333,000 recorded in the purchase allocation above
related to the fair value of the trade name acquired, for which the income tax
basis is zero and for which the timing of the deduction for financial reporting
purposes could not be determined.
  Pro Forma
Information
  The
following unaudited pro forma summary combines the Company’s results with those
of NeedleTech as if the acquisition had occurred at the beginning of each of the
periods presented.  This unaudited pro forma information is not
intended to represent or be indicative of the Company’s consolidated results of
operations or financial condition that would have been reported for the periods
presented had the acquisition been completed at the beginning of each of the
periods presented, and should not be taken as indicative of the Company’s future
consolidated results of operations or financial condition (in thousands, except
per share data):
  
 Year
      Ended December 31,2008
              
              
              2007Revenue
              
              $
              77,419
              
              
              $
              79,118Net
      earnings (loss)
              
              $
              (58,306
              )
              
              $
              6,285Earnings
      (loss) per shareBasic
              
              $
              (1.76
              )
              
              $
              0.19Diluted
              
              $
              (1.76
              )
              
              $
              0.19
  Certain
pro forma adjustments have been made to reflect the impact of the purchase
transaction, primarily consisting of amortization of intangible assets with
determinate lives, reductions in interest income as a result of cash used in the
acquisition, increases in interest expense resulting from borrowings under the
Company’s credit facility and income taxes to reflect the Company’s effective
tax rate for the period.  Pro forma net earnings include pre-tax
charges of $885,000 in each of the periods presented for amortization of the
fair market value adjustments for inventory and backlog.
  F-19
 
 Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  NOTE
D – PROPERTY AND EQUIPMENT
  Property
and equipment is summarized as follows (in thousands):
 
 December
      31,2008
              
              
              2007Buildings
      and improvements
              
              $
              22,930
              
              
              $
              22,579Machinery
      and equipment
              
              
              41,771
              
              
              
              37,349Office
      furniture and equipment
              
              
              1,072
              
              
              
              98865,773
              
              
              
              60,916Less
      accumulated depreciation
              
              
              36,868
              
              
              
              34,32728,905
              
              
              
              26,589Land
      and improvements
              
              
              822
              
              
              
              822Construction
      in progress
              
              
              308
              
              
              
              561Property
      and equipment, net
              
              $
              30,035
              
              
              $
              27,972
  
 NOTE E–FAIR VALUE
  SFAS
No. 157 defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability (an exit price) in the principal or
most advantageous market for the asset or liability in an orderly transaction
between market participants at the measurement date. SFAS No. 157
establishes a three-level fair value hierarchy that prioritizes the inputs used
to measure fair value. This hierarchy requires entities to maximize the use of
observable inputs and minimize the use of unobservable inputs. The three levels
of inputs used to measure fair value are as follows:
  ●
              Level 1 —
      Quoted prices in active markets for identical assets or
      liabilities.●
              Level 2 —
      Observable inputs other than quoted prices included in Level 1, such
      as quoted prices for similar assets and liabilities in active markets;
      quoted prices for identical or similar assets and liabilities in markets
      that are not active; or other inputs that are observable or can be
      corroborated by observable market data.●
              Level 3 —
      Unobservable inputs that are supported by little or no market activity and
      that are significant to the fair value of the assets or liabilities. This
      includes certain pricing models, discounted cash flow methodologies and
      similar techniques that use significant unobservable
    inputs.
 
 The
Company has segregated all financial assets and liabilities that are measured at
fair value on a recurring basis (at least annually) into the most appropriate
level within the fair value hierarchy based on the inputs used to determine the
fair value at the measurement date in the table below. FSP FAS 157-2
delayed the effective date for all nonfinancial assets and liabilities until
January 1, 2009, except those that are recognized or disclosed at fair
value in the financial statements on a recurring basis. The Company will not
apply the provisions of SFAS No. 157 until January 1, 2009 for its nonfinancial
assets and liabilities.
 
 The
Company’s assets measured at fair value on a recurring basis subject to the
disclosure requirements of SFAS No. 157 at December 31, 2008 were as follows (in
thousands):
  Quoted
                Prices
      in
                Active
                Markets
                (Level
      1)
              
              
              Significant
                Other
                Observable
      Inputs
                (Level
      2)
              
              
              Significant
      Unobservable Inputs
                (Level
      3)
              
              
              TotalMarketable
      securities
              
              $
              1,007
              
              
              $
              500
              
              
              $
              -
              
              
              $
              1,507
  F-20
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
 The
following table provides a reconciliation between the beginning and ending
balances of items measured at fair value on a recurring basis in the table above
that used significant unobservable inputs (Level 3) (in thousands):
  Auction Rate SecuritiesBalance
      at January 1, 2008
              
              $
              -Realized
      gain (loss) included in earnings
              
              
              -Unrealized
      gain (loss) included in other comprehensive income
              
              
              -Transfers
      into Level 3
              
              
              8,500Purchases,
      sales and settlements, net
              
              
              (8,000
              )Transfers
      out of Level 3
              
              
              (500
              )Balance
      at December 31, 2008
              
              $
              -
 
 Through
December 31, 2007, the Company valued all of its marketable securities at fair
value based on quoted market prices.  At December 31, 2008, $1.0
million of marketable securities consisted of A+ rated corporate bond funds and
AAA rated asset backed securities.  These securities were valued at
fair value based on quoted market prices.
 
 At
December 31, 2007, the Company held Auction Rate Securities (“ARS”) at a
recorded value of $13.9 million, which equaled the par value of the
ARS.   ARS totaling $5.4 million were liquidated at par through
successful auctions in the first half of 2008.  Subsequently, auctions
for the remaining $8.5 million of ARS continuously failed and no market activity
was available with which the Company could value these in accordance with SFAS
No. 157.  Accordingly, this $8.5 million of ARS was considered as
“Level 3” under the provisions of SFAS No. 157 and valued by the Company based
on, among other things, security yield, credit rating and the average life of
the assets in the portfolio.  In November 2008, $8.0 million of these
ARS were liquidated at par under a buy back program with one of the Company’s
investment banks.  The remaining $500,000 of ARS was successfully
liquidated at par in January 2009 when the issuer refinanced the
obligation.  Accordingly, this $500,000 of ARS was considered as Level
2 at December 31, 2008.
  The
Company reviews its investments in marketable securities for impairment based on
both quantitative and qualitative criteria that include the extent to which cost
exceeds market value, the duration of any market decline, the Company’s intent
and ability to hold to maturity or expected recovery, and the creditworthiness
of the issuer.  Management performs research and analysis, and
monitors market conditions to identify potential impairments.  In 2008
the Company realized a loss of $256,000 when a highly rated bond fund that it
was invested in unexpectedly liquidated at less than full value.  In
addition, the Company also recognized a $93,000 other-than-temporary impairment
related to a bond fund at December 31, 2008 based upon the duration and severity
of the impairment as well as an assessment of the potential recovery
period.  Due to the disruptions, volatility and uncertainties related
to the U.S. and global investment and credit markets, the Company is exposed to
the risk of changes in fair value of its marketable securities in future
periods, which may cause it to take impairment charges that are not currently
anticipated. While management will continue to research, analyze and
monitor our investments, it cannot predict what the effect of current investment
and credit market circumstances might have on its portfolio going
forward.
  NOTE
F - GOODWILL AND INTANGIBLE ASSETS
  Goodwill
and tradenames are assigned to reporting units and are not amortized. A
reporting unit is the same as, or one level below, an operating segment. The
Company performs tests for impairment of goodwill and other intangible assets
that are not amortized on an annual basis, or more frequently if events or
circumstances indicate it might be impaired. The Company completed its most
recent annual impairment assessments in the fourth quarter of 2008 after its
annual forecasting and budgeting process, and determined that all goodwill was
impaired and a portion of the tradenames intangible asset was
impaired.  See Impairment of goodwill and
tradenamesbelow.
  Changes
in the carrying amount of goodwill are as follows (in thousands):
  Surgical
                products
              
              
              Brachytherapy
              
              
              TotalBalance,
      January 1, 2006
              
              $
              15,792
              
              
              $
              2,578
              
              
              $
              18,370Goodwill
      acquired during the year
              
              
              20,454
              
              
              
              -
              
              
              
              20,454Balance,
      December 31, 2006
              
              
              36,246
              
              
              
              2,578
              
              
              
              38,824Adjustments
      to purchase price allocation
              
              
              (166
              )
              
              
              -
              
              
              
              (166
              )Balance,
      December 31, 2007
              
              
              36,080
              
              
              $
              2,578
              
              
              $
              38,658Goodwill
      acquired during the year
              
              
              29,203
              
              
              
              -
              
              
              
              29,203Goodwill
      impairment charges
              
              
              (65,283
              )
              
              
              (2,578
              )
              
              
              (67,861
              )Balance,
      December 31, 2008
              
              $
              -
              
              
              $
              -
              
              
              $
              -
  F-21
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  Intangibles
assets include the following (in thousands):
  December
      31, 2008
              
              
              December
      31, 2007Gross
                Carrying
                Amount
              
              
              Accum
                Amort
              
              
              Net
                Book
                Value
              
              
              Gross
                Carrying
                Amount
              
              
              Accum
                Amort
              
              
              Net
                Book
                Value
              
              Weighted
                Average
                LifeCustomer
      relationships
              
              $
              16,268
              
              
              $
              (3,526
              )
              
              $
              12,742
              
              
              $
              8,600
              
              
              $
              (2,000
              )
              
              $
              6,600
              
              8 yearsTradenames
              
              $
              3,240
              
              
              $
              -
              
              
              $
              3,240
              
              
              $
              2,600
              
              
              $
              -
              
              
              $
              2,600
              
              10
      yearsNon-compete
      agreements
              
              
              3,843
              
              
              
              (2,046
              )
              
              
              1,797
              
              
              
              2,900
              
              
              
              (1,278
              )
              
              
              1,622
              
              4 yearsDeveloped
      technology
              
              
              1,260
              
              
              
              (344
              )
              
              
              916
              
              
              
              1,260
              
              
              
              (228
              )
              
              
              1,032
              
              12
      yearsPatents
      and other
              
              
              553
              
              
              
              (528
              )
              
              
              25
              
              
              
              403
              
              
              
              (376
              )
              
              
              27
              
              17
      yearsOther
      intangibles
              
              $
              8,896
              
              
              $
              (2,918
              )
              
              $
              5,978
              
              
              $
              7,163
              
              
              $
              (1,882
              )
              
              $
              5,281
 
 At
December 31, 2008, the weighted average life of intangible assets subject to
amortization was 7.7 years. Amortization expense related to purchased
intangibles was $2,410,000, $1,875,000 and $1,371,000 in 2008, 2007 and 2006,
respectively, and is disclosed as such in the accompanying consolidated
statements of operations and comprehensive earnings (loss). Amortization expense
related to other intangibles was $5,000 and $21,000 for 2007 and 2006,
respectively, and is included in selling, general and administrative
expenses.  There was no amortization expense related to other
intangibles for 2008.
  As of
December 31, 2008, future approximate aggregate amortization expense for
intangible assets subject to amortization is as follows (in
thousands):
  Year
      Ending
                December
      31,2009
              
              $
              3,4432010
              
              
              3,0792011
              
              
              2,7952012
              
              
              2,7602013
              
              
              2,664Beyond
              
              
              3,979$
              18,720
  Impairment of Goodwill and
Tradenames
 
 In
accordance with the provisions of Statement of Financial Accounting Standards
No. 142, Goodwill and
OtherIntangible
Assets (“SFAS 142”), the Company performs an assessment
of impairment of goodwill and intangible assets not subject to amortization
annually, or more frequently if events or changes in circumstances indicate that
impairment in the value of goodwill recorded on its balance sheet may
exist.  The Company performs its impairment testing at the reporting
unit level.  A reporting unit is the same as, or one level below, an
operating segment.  The Company typically performs its annual
assessment during the fourth quarter of each year, which coincides with the
timing of its annual budgeting and forecasting process. In order to estimate the
fair value of goodwill, various assumptions about the future prospects for the
reporting unit that the goodwill relates to are made, market factors specific to
that reporting unit are considered, and future cash flows to be generated by
that reporting unit are estimated.  Assumptions used in these
assessments are consistent with the Company’s internal planning. The Company
also considers external economic and market conditions that could impact the
fair value of its reporting units.
  Theragenics’
common stock is listed and traded on the New York Stock Exchange
(“NYSE”).  The trading prices of many companies, including the
Company’s, declined significantly during the fourth quarter of 2008, along with
significant declines in the overall market value of the composite of all shares
traded on the stock exchanges.  These overall stock market declines
have continued into early 2009.  The Company believes that events in
the U.S. and global credit markets, banking and financial markets, the current
economic downturn, and negative economic news in general, have caused the
significant volatility in the prices of common stocks listed on the U.S. and
global stock exchanges.  This decline in stock market valuations
coincided with the Company’s annual impairment testing.
  F-22
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  The
extended decline in the Company’s share price and market capitalization, and the
overall deterioration in general macroeconomic conditions as discussed above,
had a material effect on the Company’s impairment testing in the fourth
quarter.  The Company’s assumptions and judgments reflected the
deteriorating macroeconomic environment and resulted in the use of discount
rates and comparable company market multiples that reflected the significantly
increased risk prevalent in the markets. In addition, the Company’s cash flow
estimates, discount rates and market multiple assumptions were severely limited
by the Company’s market capitalization, which is determined by its share price
as quoted on the NYSE.
  As
a result of these circumstances, the first step of the impairment testing
under SFAS No. 142 indicated that goodwill was impaired at each of the Company’s
reporting units. The Company then performed the second step of the goodwill
impairment test which involves calculating the implied fair value of goodwill by
allocating the fair value of the reporting unit to all of its assets and
liabilities other than goodwill (including both recognized and unrecognized
intangible assets) and comparing the residual amount to the carrying value of
goodwill.  The fair value of the Company’s reporting units was
determined using discounted cash flow and market multiple
approaches.  The estimates of fair value of the Company’s reporting
units were severely limited by the Company’s market
capitalization.  The results of this second step of impairment testing
indicated that all goodwill at each of the Company’s reporting units was
impaired.  Total impairment of goodwill was $65.3 in the surgical
products segment and $2.6 million in the brachytherapy seed
segment.
  The
Company’s tradenames were intangible assets with indefinite lives and
accordingly were not subject to amortization.  The recorded value of
the tradenames intangible asset is tested for impairment annually or more
frequently if changes in circumstances indicate that impairment may
exist.  The determination of fair value used in the impairment
evaluation is based on discounted estimates of future sales projections
attributable to ownership of the tradenames. Significant judgments inherent in
this analysis include assumptions about appropriate sales growth rates, royalty
rates, discount rates and the amount of expected future cash flows. The
judgments and assumptions used in the estimate of fair value are consistent with
the projections and assumptions that are used in the Company’s internal
budgeting and forecasting process.  They are also consistent with the
judgments and assumptions used in the Company’s goodwill impairment testing. The
determination of fair value is highly sensitive to changes in the related
discount rate used to evaluate the fair value of the tradenames. The Company
estimated the current fair value of tradenames, as determined using discount
rates reflective of current economic conditions and its market
capitalization.  The Company compared these estimated fair values to
the recorded amounts of the tradenames and determined that there was tradename
impairment of $2.5 million, all related to reporting units in the surgical
products segment.  In connection with the Company’s review of
tradename impairment, the Company determined that current facts and
circumstances no longer supported an indefinite life.  The Company
estimated that the remaining useful life of the tradenames was 10 years and
accordingly, the Company will amortize its tradenames over 10 years beginning in
2009. Amortization expense in 2009 is expected to be $324,000 higher than it
would have been if tradenames were not subject to
amortization.  Periods prior to this change will not be restated or
retrospectively adjusted.
  Pursuant
to SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets,the Company also
reviews long-lived assets, including its intangible assets subject to
amortization, for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. The
Company groups its long-lived assets at the lowest level that it could
reasonably estimate the identifiable cash flows.  Recoverability of
assets to be held and used is measured by a comparison of the carrying amount of
long-lived assets to future undiscounted net cash flows expected to be generated
by these assets. If the carrying amounts exceed the future undiscounted cash
flows, then the impairment recognized is the amount by which the carrying amount
of the assets exceeds their fair value.  As a result of the impairment
indicators related to goodwill, we tested our long-lived assets for impairment
and determined that there was no impairment.
  NOTE
G –ASSET HELD FOR SALE AND CONTRACT TERMINATION LIABILITY
  The
Company completed the sale of its Oak Ridge, Tennessee facility in July
2008.  At December 31, 2007, this facility was classified as a
long-term “Asset Held for Sale”, with the associated “Contract Termination
Liability”, representing the underlying land sublease, classified as a
liability.  As part of this transaction, the facility was sold and the
underlying land sublease was terminated.  The $142,000 gain realized
from the completion of the sale, including the termination of the sublease, was
recognized as a change in the estimate of the fair value of the Asset Held for
Sale in 2008.  In 2007, the Company recorded a write down to the
carrying value of the facility of $500,000 based upon the length of time the
facility had been for sale, the commercial real estate market in the Oak Ridge
area specifically and, more broadly, in the United States, and other economic
factors in the United States, which had deteriorated generally in late
2007.
  F-23
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  NOTE
H - ASSET RETIREMENT OBLIGATIONS
  The
Company provides for retirement obligations relating to future decommissioning
costs associated with certain of the Company’s equipment and buildings in
accordance with SFAS No. 143, Accounting for Asset Retirement
Obligations. The liability is recorded at present value by discounting
the Company’s estimated future cash flows associated with future decommissioning
activities using the Company’s estimated credit-adjusted borrowing rate. The
asset retirement obligation has been recorded in the accompanying consolidated
balance sheets and will be adjusted to fair value over the estimated useful
lives of the assets as an accretion expense. Changes in estimated future cash
flows are adjusted in the period of change.
  The
following summarizes activity in the Company’s asset retirement obligation
liability (in thousands):
 
 Year
      ended2008
              
              
              2007Asset
      retirement obligation at beginning of period
              
              $
              602
              
              
              $
              561Accretion
      expense
              
              
              44
              
              
              
              41Revision
      in estimated cash flows
              
              
              -
              
              
              
              -Asset
      retirement obligation at end of period
              
              $
              646
              
              
              $
              602
  NOTE
I - CREDIT FACILITY
  The
Company has a credit facility with a financial institution that provides for
borrowings of up to $40.0 million, including a $5.0 million sub-limit for
letters of credit (the “Credit Facility”). 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 Company had $32.0 million and $7.5 million of
borrowings outstanding under the Credit Facility at December 31, 2008 and 2007,
respectively, at an interest rate of LIBOR plus 1% (2.9% and 6.2% at December
31, 2008 and 2007, respectively). All outstanding borrowings are due upon
expiration of the Credit Facility, which is October 31, 2009.
  The
Credit Facility is unsecured, but provides for a 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 Facility. The
Credit Facility 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 Facility limit the incurrence of
additional debt and require the maintenance of certain financial ratios. In
addition, the terms of our Credit Facility require us to maintain a minimum of
$20 million of liquid assets, as defined in the Credit Facility.  The
Company was in compliance with these covenants at December 31,
2008.
  Letters
of credit totaling approximately $876,000 were outstanding under the Credit
Facility at December 31, 2008 and 2007. These letters of credit are related to
asset retirement liabilities of long-lived assets.  The letters of
credit are subject to terms identical to those of borrowings under the Credit
Facility.
  NOTE
J - INCOME TAXES
  The
income tax provision (benefit) consisted of the following (in
thousands):
 
 Year
      ended December 31,2008
              
              
              2007
              
              
              2006CurrentFederal
              
              $
              (56
              )
              
              $
              1,743
              
              
              $
              134State
              
              
              63
              
              
              
              169
              
              
              
              897
              
              
              
              1,912
              
              
              
              223DeferredFederal
              
              
              (4,172
              )
              
              
              1,392
              
              
              
              1,745State
              
              
              (394
              )
              
              
              (41
              )
              
              
              (55
              )Change
      in allowance
              
              
              31
              
              
              
              (51
              )
              
              
              (3,625
              )(4,535
              )
              
              
              1,300
              
              
              
              (1,935
              )Income
      tax expense (benefit)
              
              $
              (4,528
              )
              
              $
              3,212
              
              
              $
              (1,712
              )
  F-24
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  The
Company’s temporary differences are summarized as follows (in
thousands):
  December
      31,2008
              
              
              2007Deferred
      tax assets:Asset
      held for sale
              
              $
              -
              
              
              $
              3,706Net
      operating loss carryforwards
              
              
              922
              
              
              
              285Non-deductible
      accruals and allowances
              
              
              423
              
              
              
              347Inventories
              
              
              970
              
              
              
              820Share
      based compensation
              
              
              222
              
              
              
              547Asset
      retirement obligation
              
              
              225
              
              
              
              201Deferred
      revenue
              
              
              120
              
              
              
              -Contract
      termination liability
              
              
              -
              
              
              
              545Goodwill
      and intangible assets
              
              
              56
              
              
              
              -Other
              
              
              142
              
              
              
              69Gross
      deferred tax assets
              
              
              3,080
              
              
              
              6,520Deferred
      tax liabilities:Property
      and equipment
              
              
              (2,709
              )
              
              
              (2,604
              )Goodwill
      and intangible assets
              
              
              -
              
              
              
              (3,433
              )Gross
      deferred tax liabilities
              
              
              (2,709
              )
              
              
              (6,037
              )Valuation
      allowance
              
              
              (219
              )
              
              
              (188
              )Net
      deferred tax asset
              
              $
              152
              
              
              $
              295
 
 The net
deferred tax asset is classified in the accompanying consolidated balance sheets
as follows (in thousands):
  December
      31,2008
              
              
              2007Current
      deferred tax asset
              
              $
              2,158
              
              
              $
              1,664Long-term
      deferred tax liability
              
              
              (2,006
              )
              
              
              (1,369
              )Net
      deferred tax asset
              
              $
              152
              
              
              $
              295
  Activity
in the valuation allowance for deferred tax assets is as follows (amounts in
thousands):
  Year
      ended December 31,2008
              
              
              2007
              
              
              2006Valuation
      allowance, beginning of period
              
              $
              188
              
              
              $
              239
              
              
              $
              6,756Increase
      in allowance
              
              
              31
              
              
              
              -
              
              
              
              -Decrease
      in allowance from acquisition
              
              
              -
              
              
              
              -
              
              
              
              (2,892
              )Release
      of allowance
              
              
              -
              
              
              
              (51
              )
              
              
              (3,625
              )Valuation
      allowance, end of period
              
              $
              219
              
              
              $
              188
              
              
              
              239
  Management
periodically evaluates the recoverability of the deferred tax assets and
recognizes the tax benefit only as reassessment demonstrates that they are
realizable. At such time, if it is determined that it is more likely than not
that the deferred tax assets are realizable, the valuation allowance is
adjusted. In 2005, the Company had a $6.8 million net deferred tax asset
primarily as a result of its 2005 restructuring. At that time, a valuation
allowance for the entire amount of the net deferred tax asset was established
due to uncertainties surrounding its realizability. In 2006, the Company
released most of the valuation allowance when it determined that it was more
likely than not that a significant portion of these deferred tax assets would be
realized. Factors considered by management in determining that the significant
portion of the deferred tax assets would be realized included, among other
things, the Company’s performance for the year which included four consecutive
quarters of profitability, a full fiscal year of realization of the cost savings
associated with the 2005 restructuring which exceeded the expected cost savings,
certain changes in federal laws and policies occurring in December 2006 related
to Medicare reimbursement of brachytherapy seeds, and the continued successful
diversification of the Company’s business through its surgical products
segment.  The remaining allowance at December 31, 2008 and 2007
relates primarily to certain state net operating loss and capital loss
carryforwards for which the Company believes it is more likely than not that the
benefit will not be realized.
  F-25
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  A
reconciliation of the statutory federal income tax rate and the effective tax
rate follows:
 Year
      ended December 31,2008
              
              
              2007
              
              
              2006Tax
      expense (benefit) at applicable federal rates
              
              
              (34.0
              )%
              
              
              34.0
              %
              
              
              35.0
              %State
      tax, net of federal income tax
              
              
              (0.1
              )
              
              
              1.1
              
              
              
              2.2Non-deductible
      impairment loss
              
              
              26.7
              
              
              
              -
              
              
              
              -Deferred
      tax asset valuation allowance
              
              
              0.1
              
              
              
              (0.5
              )
              
              
              (70.0
              )Tax
      exempt interest
              
              
              (0.2
              )
              
              
              (1.0
              )
              
              
              (0.9
              )Deferred
      tax rate adjustment
              
              
              .5
              
              
              
              0.6
              
              
              
              -Domestic
      production deduction
              
              
              -
              
              
              
              (1.5
              )
              
              
              -Non-deductible
      stock compensation
              
              
              0.1
              
              
              
              0.9
              
              
              
              -Other
              
              
              (.3
              )
              
              
              2.7
              
              
              
              .5Effective
      tax expense (benefit)
              
              
              (7.2
              )%
              
              
              36.3
              %
              
              
              (33.2
              )%
 
 The
Company has a net operating loss carryforward for federal income tax purposes of
approximately $1.6 million that expires in 2023.  The Company also has
various state net operating loss carryforwards totaling approximately $12.3
million that expire in various years through 2028.
 
 During
2007, the IRS completed an examination of the Company’s 2004 and 2005 federal
income tax returns with no significant adjustments. Upon settlement of the 2004
audit, during 2007 the Company received a refund of federal income tax
previously paid of $1.9 million. This refund resulted from the carryback of tax
losses that were reported in the Company’s 2004 federal income tax return. The
Company also received $309,000 of interest income related to this refund, which
was recognized upon settlement of the IRS examination in 2007.
  The
Company has evaluated its tax positions for the tax years ended
December 31, 2004, 2005, 2006 and 2007, the tax years that remain subject
to examination by major tax jurisdictions as of December 31, 2008. With few
exceptions, the Company is no longer subject to U.S. federal, state and local,
or income tax examinations by tax authorities for years prior to 2004. The
Company concluded that there are no significant uncertain tax positions
requiring recognition in the consolidated financial statements.
  NOTE
K - COMMITMENTS AND CONTINGENCIES
  Licensing
Agreements
  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.
  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 is also entitled to a percentage of revenues
earned by Nordion as royalties under the agreement. Royalties from this
agreement are recorded as license and fee income in the accompanying
consolidated statements of operations. License and fee income in 2006 included
$400,000 of one-time license fees resulting from Nordion’s obtaining CE marking
and European registration for TheraSphere® during
the year.
  F-26
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  In May
2008, Theragenics entered into an exclusive license agreement for the rights to
certain intellectual property related to an expandable brachytherapy delivery
system that the Company developed.  The term of the agreement is
through the expiration of the last of the patents licensed under the agreement,
which is currently November 2024.  The term may be altered if such
patents are found to be invalid.  The agreement provides for a minimal
non-refundable initial license fee and non-refundable continuing royalties based
upon sales subject to certain minimums.  Royalties from this agreement
are recorded as license and fee income in the accompanying consolidated
statements of operations.  License fee revenue under this agreement
was not material in 2008.  Minimum annual royalties are based on the
contract year, which ends each May, and are as follows (in
thousands):
 
 12
      months ended May
              
              Amount2009
              
              $
              1002010
              
              
              2502011
              
              
              4502012
              
              
              4502013
              
              
              1,000Annually
      thereafter
              
              
              1,000
  The
minimum royalties are subject to increase under certain
circumstances.  The licensee has the right to terminate the agreement
without penalty until May 2012 if the product is found to be technically or
commercially impracticable, as defined in the agreement.  After May
2012, the licensee can terminate the agreement for any reason upon payment of
the minimum annual royalties due for that contract year, plus a termination fee
of $1 million. In the event the licensee terminates the agreement for any
reason, the initial license fee and all royalties previously paid are
non-refundable and all rights granted by the license terminate.  The
licensee can assign their rights to the agreement upon payment of an assignment
fee.
  Lease Commitments and
Obligations
  The
Company leases equipment and production, warehouse, office and other space under
non-cancelable leases that expire at various dates through June 2013.
Approximate minimum lease payments under the leases are as follows: 2009,
$720,000; 2010, $360,000; 2011, $213,000; 2012, $196,000; and 2013,
$82,000.
  The
Company leases certain production, warehouse and office space from two related
entities.  One is controlled by the former owner and officer of CP
Medical, who is currently a stockholder of Theragenics, and the second is
controlled by the former principal owners of NeedleTech, who are currently
officers. Approximate minimum lease payments under these leases are as
follows: 2009, $260,000; 2010, $137,000; 2011, $22,000.
  Rent
expense was approximately $746,000, $589,000 and $471,000 for the years ended
December 31, 2008, 2007 and 2006, respectively, including rent expense of
approximately $237,000, $185,000 and $167,000 in 2008, 2007 and 2006,
respectively, under the related party leases referred to above.
  Purchase
Commitment
  The
Company has approximately $300,000 of contractual purchase commitments related
to capital equipment.
 
 Contingencies
  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
L - SHARE BASED COMPENSATION AND SHAREHOLDERS’ EQUITY
  The
Company provides share-based compensation under equity incentive plans approved
by stockholders, which provide for the granting of stock options, restricted
stock and other equity incentives. As of December 31, 2008 there were 1,627,200
options and restricted stock rights outstanding and 1,253,699 shares of common
stock remaining available for issuance under the Company’s equity incentive
plans. The Company issues new shares from its authorized but unissued share
pool.
  F-27
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  Stock
Options
  Stock
options granted to date have had an exercise price at least equal to 100% of
market value of the underlying common stock on the date granted. These options
expire ten years from the date of grant and become exercisable over a three to
five-year vesting period.
  The
following is a summary of activity in stock options outstanding during the year
ended December 31, 2008 (shares in thousands):
  Shares
              
              
              Weighted
                average
                exercise
                price
              
              
              Weighted
                average
                remaining
                contractual
                life
      (yrs)
              
              
              Aggregate
                intrinsic
                valueOutstanding,
      beginning of period
              
              
              1,415
              
              
              $
              8.33Granted
              
              
              234
              
              
              
              3.74Exercised
              
              
              -
              
              
              
              -Forfeited
              
              
              (105
              )
              
              
              5.83Expired
              
              
              (148
              )
              
              
              20.29Outstanding,
      end of period
              
              
              1,396
              
              
              $
              6.48
              
              
              
              4.0
              
              
              $
              -Exercisable
      at end of period
              
              
              1,081
              
              
              $
              7.15
              
              
              
              2.5
              
              
              $
              -
  A summary
of grant date fair values and intrinsic values follows (in thousands, except per
share amounts):
  Year
      ended December 31,2008
              
              
              2007
              
              
              2006Weighted
      average grant date fair value of options granted
              
              $
              1.93
              
              
              $
              2.68
              
              
              $
              N/ATotal
      intrinsic value of options exercised
              
              $
              N/A
              
              
              $
              45
              
              
              $
              N/ATotal
      fair value of options vested
              
              $
              19
              
              
              $
              75
              
              
              $
              155
  The fair
values were estimated using the Black-Scholes options-pricing model with the
following weighted average assumptions:
  2008
              
              
              2007
              
              
              2006Expected
      dividend yield
              
              
              0.0
              %
              
              
              0.0
              %
              
              
              N/AExpected
      stock price volatility
              
              
              50.6
              %
              
              
              49.9
              %
              
              
              N/ARisk-free
      interest rate
              
              
              3.2
              %
              
              
              4.8
              %
              
              
              N/AExpected
      life of option (years)
              
              
              6.0
              
              
              
              6.0
              
              
              
              N/A
  Expected
stock price volatility is primarily based on the historical volatility of the
Company’s stock price over the most recent period commensurate with the expected
option life. When determining the expected life of stock options, the
Company classifies options into groups for employees where relatively
homogeneous exercise behavior is expected. The vesting period of the options,
the length of time similar grants have remained outstanding in the past, and the
expected volatility of the stock is also considered. These factors may cause the
expected volatility and expected life of options granted to differ from period
to period.
  The
Company recognizes compensation expense for awards with graded vesting on a
straight-line basis over the requisite service period for each separately
vesting portion of the award. Compensation cost related to stock options totaled
$275,000, $228,000, and $62,000 for the year ended December 31, 2008, 2007, and
2006 respectively.  As of December 31, 2008, there was approximately
$317,000 of unrecognized compensation cost related to non-vested stock options,
which is expected to be recognized over a weighted average period of
approximately 1.5 years.
  F-28
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  Restricted
Stock
  The
Company may issue restricted stock to employees, directors and others.
Restrictions limit the sale or transfer of the shares until vested. Vesting of
restricted stock is time-based over a three to four-year period. A summary of
activity in non-vested restricted stock awards for the year ended December 31,
2008 follows (shares in thousands):
  Non-vested
      Restricted Stock
              
              Shares
              
              
              Weighted
                average
      grant
                date
      fair
                valueNon-vested
      at January 1, 2008
              
              
              161
              
              
              $
              4.32Granted
              
              
              159
              
              
              
              3.70Vested
              
              
              (66
              )
              
              
              4.15Forfeited
              
              
              (23
              )
              
              
              4.31Non-vested
      at December 31, 2008
              
              
              231
              
              
              $
              3.70
  Fair
value of restricted shares granted to employees and directors is based on the
fair value of the underlying common stock at the grant date. The fair value of
the restricted shares granted to non-employees is remeasured each period until
they are vested based on the fair value of the underlying common stock.
Compensation cost related to the restricted shares is based on the grant date
fair value of the common stock granted and is recorded over the requisite
service period of three to four years. The weighted average per share grant date
fair value of restricted shares issued was $3.70, $4.89 and $3.21 in 2008, 2007
and 2006, respectively. Compensation expense related to the restricted stock
totaled approximately $393,000, $363,000 and $115,000 in 2008, 2007 and 2006,
respectively. As of December 31, 2008, there was approximately $402,000 of
unrecognized compensation cost related to the restricted shares, which is
expected to be recognized over a weighted average period of 1.6
years.
  Stock
Units
  The
Company issues restricted stock units and performance restricted stock units.
The following is a summary of activity for Stock Units:
  Restricted
Stock Units
  10,000
Restricted Stock Units previously granted vested on December 31, 2006. The grant
date fair value of this award was $3.42 and vesting was
time-based.  Compensation cost related to the Restricted Stock Units
was based on the grant date fair value of the common stock granted and recorded
over the requisite service period. Compensation expense related to these
Restricted Stock Units totaled approximately $24,000 in 2006.
  Performance
Restricted Stock Units
  In
February 2006, 104,000 performance restricted stock units were issued to
executive officers, which vested on December 31, 2008 (the “2006 Performance
Restricted Stock Units”). The number of shares issuable under the 2006
Performance Restricted Stock Units ranged from a minimum of 31,000 shares to a
maximum of 208,000 shares.   The number of shares issuable was
determined partly based on the Company’s revenue and earnings per share from
2006 to 2008, relative to its strategic objectives over the same period, and
partly based on the subjective discretion of the Compensation Committee. All of
the 2006 Restricted Stock Units were vested on December 31, 2008 and will result
in the issuance of approximately 64,000 shares. The grant date fair value of the
2006 Performance Restricted Stock Units was based on the fair value of the
underlying common stock and was recognized over the three-year requisite service
period. For the portion of the 2006 Performance Restricted Stock Units
containing performance conditions, the grant date fair value was adjusted each
period for the number of shares ultimately expected to be issued. For the
portion of the 2006 Performance Restricted Stock Units subject to discretionary
performance conditions, the fair value of the award was determined based on the
fair value of the underlying common stock at December 31, 2008.
  F-29
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  A summary
of activity in non-vested Performance Restricted Stock Units follows (shares in
thousands):
  Non-vested
      Performance Restricted Stock Units
              
              Units
              
              
              Weighted
                average
      grant
                date
      fair
                valueNon-vested
      at January 1, 2008
              
              
              104
              
              
              $
              3.50Granted
              
              
              -
              
              
              
              -Vested
              
              
              (104
              )
              
              
              3.50Forfeited
              
              
              -
              
              
              
              -Non-vested
      at December 31, 2008
              
              
              -
              
              
              $
              -
  No
Performance Restricted Stock Units were granted in 2008 or 2007. In 2008, the
Company recorded a benefit of $39,000 related to the Performance Restricted
Stock Units. Compensation cost related to Performance Restricted Stock Units
totaled $126,000 and $150,000 in 2007 and 2006, respectively.
  Employee Stock Purchase
Plan
  The
Theragenics Corporation Employee Stock Purchase Plan (the “ESPP”) 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. Compensation cost related to the ESPP totaled approximately
$5,000, $6,000 and $11,000 in 2008, 2007, and 2006, respectively.  As
of December 31, 2008, 175,000 shares had been issued under the plan; and 25,000
shares of common stock were reserved and remained available for issuance under
the ESPP.
  Shareholder Rights
Plan
  The
Company has a Shareholder Rights Plan (the “Rights Plan”), which contains
provisions designed to protect the Company’s shareholders in the event of an
unsolicited takeover attempt. It is not intended to prevent a takeover on terms
that are favorable and fair to all shareholders and will not interfere with a
merger approved by the Board of Directors. Pursuant to the Rights Plan each
share of the Company’s Common Stock contains a share purchase right (a “Right”),
which expires in February 2017 and does not become exercisable unless a group
acquires or announces a tender or exchange offer for 20% or more of the
Company’s outstanding Common Stock. Upon a triggering event, each Right that is
not held by the 20% or more shareholders will entitle its holder to purchase
additional shares of Common Stock at a substantial discount to then current
market prices.
  NOTE
M – 401(K) SAVINGS PLANS
  The
Company and its subsidiaries sponsor 401(k) defined contribution retirement
savings plans for employees. Matching contributions are made in Company stock or
in cash, depending on the plan. Matching contributions are charged to operating
expenses and totaled approximately $221,000, $313,000 and $114,000 in 2008, 2007
and 2006, respectively.
  NOTE
N – EARNINGS (LOSS) PER SHARE
  Earnings
(loss) per common share was computed as follows (in thousands, except per share
data):
  Year
      ended December 31,2008
              
              
              2007
              
              
              2006Net
      earnings (loss)
              
              $
              (58,540
              )
              
              $
              5,635
              
              
              $
              6,865Weighted
      average common shares outstanding
              
              
              33,066
              
              
              
              33,103
              
              
              
              32,452Incremental
      common shares issuable from stock options and awards
              
              
              -
              
              
              
              196
              
              
              
              88Weighted
      average common shares outstanding assuming dilution
              
              
              33,066
              
              
              
              33,299
              
              
              
              32,540Basic
      earnings (loss) per share
              
              $
              (1.77
              )
              
              $
              0.17
              
              
              $
              0.21Diluted
      earnings (loss) per share
              
              $
              (1.77
              )
              
              $
              0.17
              
              
              $
              0.21
  Diluted
earnings (loss) per share does not include the effect of certain stock options
and awards as their impact would be anti-dilutive. Approximately 1,396,000,
1,236,000 and 2,016,000 stock options and awards for the years ended
December 31, 2008, 2007 and 2006, respectively, were not included in the
computation of diluted earnings (loss) per share for those years because their
effect would be anti-dilutive.
  F-30
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  NOTE
O - SEGMENT REPORTING
  The
Company is a medical device company serving the surgical product and cancer
treatment markets, operating in two business segments. Its surgical products
segment consists of wound closure, vascular access, and specialty needle
products.  In its brachytherapy seed business, the Company produces,
markets and sells TheraSeed®, its
premier palladium-103 prostate cancer treatment device, I-Seed, its iodine-125
based prostate cancer treatment device, and related products and services. 
The following tables provide certain information for these segments (in
thousands):
  Year
      ended December 31,2008
              
              
              2007
              
              
              2006RevenueSurgical
      products
              
              $
              38,779
              
              
              $
              28,896
              
              
              $
              19,372Brachytherapy
      seed
              
              
              28,787
              
              
              
              33,520
              
              
              
              34,880Intersegment
      eliminations
              
              
              (208
              )
              
              
              (206
              )
              
              
              (156
              )$
              67,358
              
              
              $
              62,210
              
              
              $
              54,096Earnings
      (loss) from operationsSurgical
      products
              
              $
              (63,538
              )
              
              $
              3,977
              
              
              $
              1,955Brachytherapy
      seed
              
              
              176
              
              
              
              3,403
              
              
              
              2,122Intersegment
      eliminations
              
              
              17
              
              
              
              (35
              )
              
              
              (28
              )$
              (63,345
              )
              
              $
              7,345
              
              
              $
              4,049Write
      (up)/down of asset held for saleSurgical
      products
              
              $
              -
              
              
              $
              -
              
              
              $
              -Brachytherapy
      seed
              
              
              (142
              )
              
              
              500
              
              
              
              -$
              (142
              )
              
              $
              500
              
              
              $
              -Non-cash
      impairment charges of goodwilland
      tradenamesSurgical
      products
              
              $
              67,798
              
              
              $
              -
              
              
              $
              -Brachytherapy
      seed
              
              
              2,578
              
              
              
              -
              
              
              
              -$
              70,376
              
              
              $
              -
              
              
              $
              -Capital
      expenditures,excluding
      acquisition of businessesSurgical
      products
              
              $
              1,153
              
              
              $
              1,105
              
              
              $
              602Brachytherapy
      seed
              
              
              378
              
              
              
              345
              
              
              
              131$
              1,531
              
              
              $
              1,450
              
              
              $
              733Depreciation
      and amortizationSurgical
      products
              
              $
              3,512
              
              
              $
              2,445
              
              
              $
              2,035Brachytherapy
      seed
              
              
              2,114
              
              
              
              3,701
              
              
              
              3,994$
              5,626
              
              
              $
              6,146
              
              
              $
              6,029
  The
Company evaluates business segment performance based on segment revenue and
segment earnings from operations. Earnings from operations by segment do not
include interest expense, interest income, other income and expense, or
provisions for income taxes.  Intersegment eliminations are primarily
for surgical products segment sales transactions.
  F-31
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  Segment
information related to significant assets follows (in thousands):
  December
      31,2008
              
              
              2007Identifiable
      assetsSurgical
      products
              
              
              $
              62,738
              
              
              $
              74,450Brachytherapy
      seed
              
              
              
              51,731
              
              
              
              79,359Corporate
      investment in subsidiaries
              
              
              
              111,439
              
              
              
              61,667Intersegment
      eliminations
              
              
              
              (111,489
              )
              
              
              (66,655
              )$
              114,419
              
              
              $
              148,821GoodwillSurgical
      products
              
              
              $
              -
              
              
              $
              36,080Brachytherapy
      seed
              
              
              
              -
              
              
              
              2,578$
              -
              
              
              $
              38,658Customer
      relationshipsSurgical
      products
              
              
              $
              12,742
              
              
              
              6,600Brachytherapy
      seed
              
              
              
              -
              
              
              
              -$
              12,742
              
              
              
              6,600Other
      intangible assetsSurgical
      products
              
              
              $
              5,977
              
              
              $
              5,280Brachytherapy
      seed
              
              
              
              1
              
              
              
              1$
              5,978
              
              
              $
              5,281Asset
      held for saleSurgical
      products
              
              
              $
              -
              
              
              $
              -Brachytherapy
      seed
              
              
              
              -
              
              
              
              2,900$
              -
              
              
              $
              2,900Contract
      termination liabilitySurgical
      products
              
              
              $
              -
              
              
              $
              -Brachytherapy
      seed
              
              
              
              -
              
              
              
              1,513$
              -
              
              
              $
              1,513
  Information
regarding revenue by geographic regions follows (in thousands):
  Year
      ended December 31,2008
              
              
              2007
              
              
              2006Product
      salesUnited
      States
              
              $
              60,406
              
              
              $
              57,643
              
              
              $
              50,534Europe
              
              
              5,147
              
              
              
              2,978
              
              
              
              1,921Other
      foreign countries
              
              
              894
              
              
              
              665
              
              
              
              62166,447
              
              
              
              61,286
              
              
              
              53,076License
      and fee incomeUnited
      States
              
              
              162
              
              
              
              -
              
              
              
              -Canada
              
              
              749
              
              
              
              924
              
              
              
              1,020911
              
              
              
              924
              
              
              
              1,020$
              67,358
              
              
              $
              62,210
              
              
              $
              54,096
  Foreign
sales are attributed to countries based on location of the customer. The license
fees attributed to Canada are with Nordion, a Canadian based company, for the
license of the Company’s TheraSphere® product.
All other foreign sales are related to the surgical products segment. All of the
Company’s long-lived assets are located within the United States.
  F-32
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  NOTE
P - DISTRIBUTION AGREEMENT AND MAJOR CUSTOMERS
  Distribution
Agreement
  The
Company’s brachytherapy business sells its TheraSeed® device
directly to health care providers and to third party distributors. The
Company’s primary non-exclusive distribution agreement is with C.
R. Bard (“Bard”) (the “Bard Agreement”). The terms of the Bard Agreement provide
for automatic one-year extensions of the term, unless either party gives notice
of its intent not to renew at least twelve months prior to the end of the
current term. The current terms expires December 31, 2010, and will be
automatically extended for one additional year unless either party gives notice
of its intent not to extend by December 31, 2009. The Bard Agreement gives Bard
the non-exclusive right to distribute the TheraSeed® device
in the U.S., Canada, and other international locations for the treatment of
prostate cancer and other solid localized cancerous tumors.
  Major
Customers
  Sales to
Bard represented approximately 51%, 53% and 60% of brachytherapy product revenue
in 2008, 2007 and 2006, respectively, and 21%, 28% and 38% of consolidated
product revenue in 2008, 2007 and 2006, respectively.
  Accounts
receivable from Bard represented approximately 48% and 40% of brachytherapy
accounts receivable and 21% and 24% of consolidated accounts receivable at
December 31, 2008 and December 31, 2007, respectively.
  One
customer represented approximately 10% of surgical products revenue for 2006 and
4% of consolidated product revenue in 2006. This customer also totaled 23% of
surgical products accounts receivable at December 31, 2007 and 10% of
consolidated accounts receivable at December 21, 2007. No single customer
equaled or exceeded 10% of surgical products sales for the year ended December
31, 2008 and 2007 or of surgical products accounts receivable at December 31,
2008.
  NOTE
Q – NON-OPERATING INCOME/(EXPENSE)
 
 Other
non-operating income/(expense) consists of the following (in
thousands):
 
 Year
      Ended December 31,2008
              
              
              2007
              
              
              2006Loss
      on marketable securities,including
      impairment
              
              $
              (347
              )
              
              $
              -
              
              
              $
              -Gain
      on sale of scrap metal
              
              
              457
              
              
              
              -
              
              
              
              -Other
              
              
              (57
              )
              
              
              1
              
              
              
              (18
              )Total
      other
              
              $
              53
              
              
              $
              1
              
              
              $
              (18
              )
  NOTE
R - RELATED PARTY TRANSACTIONS
  CP
Medical leases production, warehouse and office space from an entity owned by
the former owner and officer of CP Medical. NeedleTech leases production and
warehouse space from an entity owned by officers of NeedleTech. See Note
K.
  During
2008 the Company utilized the services of a real estate firm whose principal
owner is related to one of the Company’s executive officers.  Payments
of $41,000 were made to this firm during 2008 for real estate consulting
services.
  F-33
  Theragenics
Corporation and Subsidiaries
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS - Continued
  NOTE
S - QUARTERLY FINANCIAL DATA (UNAUDITED)
  The
following summarizes certain quarterly results of operations (in thousands,
except per share data):
  Year
      ended December 31, 2008:
              
              Quarter
      endedApril
      1
              
              
              July
      1
              
              
              September
      30
              
              
              December
      31Net
      revenue
              
              $
              15,235
              
              
              $
              15,914
              
              
              $
              18,106
              
              
              $
              18,103Gross
      profit
              
              
              7,657
              
              
              
              8,250
              
              
              
              7,814
              
              
              
              7,373Impairment
      of goodwill and tradenames
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              70,376Change
      in estimated value of asset held for sale
              
              
              -
              
              
              
              (142
              )
              
              
              -
              
              
              
              -Net
      earnings (loss)
              
              
              1,636
              
              
              
              1,638
              
              
              
              641
              
              
              
              (62,455
              )Net
      earnings (loss) per common shareBasic
              
              $
              0.05
              
              
              $
              0.05
              
              
              $
              0.02
              
              
              $
              (1.89
              )Diluted
              
              $
              0.05
              
              
              $
              0.05
              
              
              $
              0.02
              
              
              $
              (1.89
              )Year
      ended December 31, 2007:
              
              Quarter
      endedApril
      1
              
              
              July
      1
              
              
              September
      30
              
              
              December
      31Net
      revenue
              
              $
              15,451
              
              
              $
              15,575
              
              
              $
              16,001
              
              
              $
              15,183Gross
      profit
              
              
              7,342
              
              
              
              7,711
              
              
              
              7,794
              
              
              
              7,369Change
      in estimated value of asset held for sale
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (500
              )Net
      earnings
              
              
              1,168
              
              
              
              1,544
              
              
              
              1,763
              
              
              
              1,160Net
      earnings per common shareBasic
              
              $
              0.04
              
              
              $
              0.05
              
              
              $
              0.05
              
              
              $
              0.04Diluted
              
              $
              0.04
              
              
              $
              0.05
              
              
              $
              0.05
              
              
              $
              0.03
 
 F-34
 
 Report of Independent
Registered Public Accounting Firmon
Schedule
 
 To the
Board of Directors and
 Shareholders
of Theragenics Corporation
 
 We have
audited in accordance with the standards of the Public Company Accounting
Oversight Board (United States) the 2008 and 2007 consolidated financial
statements of Theragenics Corporation and subsidiaries referred to in our report
dated March 12, 2009, which is included in the annual report to security
holders and included in Part II of this form. Our audits were conducted for the
purpose of forming an opinion on the basic consolidated financial statements
taken as a whole. Schedule II is presented for purposes of additional
analysis and is not a required part of the basic consolidated financial
statements. The 2008 and 2007 information in Schedule II has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, the 2008 and 2007 information is fairly stated
in all material respects in relation to the basic consolidated financial
statements taken as a whole.
 
 
 /s/ DIXON
HUGHES PLLC
 
 Atlanta,
Georgia
 March 12,
2009
 
 S-1
  Theragenics
Corporation and Subsidiaries
 
 SCHEDULE
II - VALUATION AND QUALIFYING ACCOUNTS
 
 For each
of the three years in the period ended December 31, 2008
 (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, 2008Allowance
      for doubtful  accounts receivable
              
              $
              372
              
              
              $
              162
              
              
              $
              18
              (c)
              
              $
              71
              (b)
              
              $
              481Year
      ended December 31, 2007Allowance
      for doubtful
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              202
              (a)accounts
      receivable
              
              $
              617
              
              
              $
              -
              
              
              $
              -
              
              
              $
              43
              (b)
              
              $
              372Year
      ended December 31, 2006Allowance
      for doubtful  accounts receivable
              
              $
              517
              
              
              $
              338
              
              
              $
              32
              (d)
              
              $
              270
              (b)
              
              $
              617
 
 (a)  -
reduction in allowance amounts
 (b)  -
write-off of uncollectible amounts
 (c)  -
acquisition of NeedleTech
 (d)  -
acquisition of Galt
     S-2