**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, 2005


**OR**


[ 
      ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE


SECURITIES
      EXCHANGE ACT OF 1934


FOR
      THE TRANSITION PERIOD FROM _________ TO ________





COMMISSION
      FILE NO. 0-15443





**THERAGENICS
      CORPORATION** **®**


(Exact
      name of registrant as specified in its charter)





Delaware
            58-1528626(State
                of incorporation)
            (I.R.S.
                Employer Identification Number)







5203
                Bristol Industrial Way
              Buford,
                Georgia
            30518(Address
                of principal executive offices)
            (Zip
                Code)





Registrant's
      telephone number, including area code:


(770)271-0233





Securities
      registered pursuant to Section 12(b) of the Act:





Name
                of each exchange onTitle
                of each class
            which
                registeredCommon
                stock, $.01 par value,
              Together
                with associated
              Common
                Stock Purchase Rights
            New
                York Stock Exchange








Securities
      registered pursuant to Section 12(g) of the Act: None





Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act. Yes o  No ý





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 o   No ý





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 ý No 
      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. ý


1




Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of “accelerated
        filer and large accelerated filer” in Rule 12b-2 of the Exchange
        Act.     Large accelerated filer o     
Accelerated
        filer ý Non-accelerated filer o


Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


Yes o No ý





The
      aggregate market value of the common stock of the registrant held by
      non-affiliates of the registrant, as determined by reference to the closing
      price of the Common Stock as reported on the New York Stock Exchange on July
      1,
      2005, the last business day of the registrant’s most recently completed second
      fiscal quarter, was $ 94,923,131.





As
      of March 6, 2006 the number of shares of Common Stock, $.01 par value, outstanding was
      32,057,423.





Documents
      incorporated by reference: Proxy Statement for the registrant’s 2005 Annual
      Meeting of Stockholders, to be filed with the Securities and Exchange Commission
      not later than 120 days after December 31, 2005, is incorporated by reference
      in
      Part III herein.





2


**Part
      I**





**Item
      1. BUSINESS**





***Overview***




Theragenics
      Corporation ® , incorporated
      under Delaware law in 1981, is
      a medical device company serving the cancer treatment and surgical markets
      with
      TheraSeed ® ,
      its premier palladium-103 prostate cancer treatment device, and wound closure
      and other medical products manufactured and sold through its CP Medical
      subsidiary .
      The Company also manufactures and distributes I-Seed, its iodine-125 based
      prostate cancer treatment device. Theragenics ® is the world’s largest producer of palladium-103, the radioactive isotope that
      supplies the therapeutic radiation for its TheraSeed ® device. Physicians, hospitals and other healthcare providers, primarily located
      in the United States, utilize the TheraSeed ® device. The TheraSeed ® device has also been approved for marketing throughout the member countries
      of
      the European Union by obtaining its CE Mark, though sales in Europe have
      not been significant. The majority of sales are channeled through one
      third-party distributor. The Company also sells its TheraSeed ® devices directly to physicians.




On
      May 6, 2005, the Company acquired CP Medical Corporation (“CP Medical”) for
      approximately $26.7 million, including $20.6 million in cash and 1,840,458
      shares of common stock valued at approximately $6.1 million.





CP
      Medical is a manufacturer and supplier of innovative wound closure and other
      medical products such as sutures, cardiac pacing cables, and brachytherapy
      needles, spacers and sleeves. CP Medical’s products have applications in
      urology, veterinary, cardiology, plastic surgery, dental, orthopedics, and
      other
      fields. Historically, CP Medical has generated the majority of its revenue
      in
      the wound closure market, an estimated $2.0 billion annual market worldwide
      and
      an estimated $1.2 billion annual market in the United States. During 2005,
      approximately 60% of CP Medical’s revenue was generated in the veterinary wound
      closure market, an estimated $50 million annual market in the United States.
      The
      transaction established a new growth platform for the Company within the field
      of medical devices and also serves to diversify the Company’s product offerings
      within its core brachytherapy business. Consolidated results of operations
      for
      the year ended December 31, 2005 include the results of CP Medical since May
      7,
      2005, the first date after the closing of the acquisition.





During
      the third quarter of 2005 a plan to restructure the Company was implemented.
      This plan was announced on August 11, 2005. See *Restructuring* below.





Early
      in 2003 the Company diversified its product line with the purchase of the U.S.
      iodine-125 prostate brachytherapy business of BEBIG Isotopen-und Medizintechnik
      GmbH (“BEBIG”). The purchase gives Theragenics ® exclusive U.S. manufacturing and distribution rights to an FDA-cleared
      iodine-125-based medical device (I-Seed) for the treatment of prostate cancer.
      The Company sells the I-Seed device directly to physicians, hospitals and other
      healthcare providers. The Company believes that the ability to provide both
      TheraSeed ® and I-Seed devices enhances the Company’s ability to market to direct customers
      who seek a single source for both palladium-103 and iodine-125 brachytherapy
      seeds.





***Restructuring***





On
      August 11, 2005, the Company announced a restructuring that resulted in
      th e
      closure of the Plasma Separation Process (“PSP”)
      facility in Oak
      Ridge, Tennessee, ending the research and development activities related to
      the
      vascular, macular degeneration and breast cancer areas, and the cessation of
      production of radiochemical products. Curtailing these activities allowed the
      Company to shrink its asset base by shutting down six cyclotrons and closing
      the
      Newton Terrace Facility in Buford, Georgia, as well as closing its PSP facility.
      The objective of the restructuring is to sharpen the Company’s


3


focus
      on its two main business segments; brachytherapy seeds and CP Medical products,
      as well as provide a more focused platform for continued diversification and
      expansion through acquisitions or other channels.





As
      a result, restructuring charges of approximately $33.4 million were recorded
      in
      2005. These restructuring charges were comprised of one time, non-cash
      impairment charges totaling $28.8 million which were related to the impairment
      of the PSP equipment and facilities in Oak Ridge, Tennessee, the Newton Terrace
      facility in Buford, Georgia, and six cyclotrons and related equipment and
      facilities; other one time, non-cash charges of $3.3 million, including the
      write off of inventory and other assets, and contract termination costs related
      to the Oak Ridge land lease; and $1.3 million of severance, site exit and
      disposal, and other costs. Completion of the restructuring will take a period of months, and the Company
      expects to incur additional pre-tax restructuring expenses during 2006 of
      approximately $1.4 million to $1.6 million. These future charges are expected
      to
      primarily relate to on going site exit and disposal costs.





During
      2005 the restructuring generated pre-tax operating expense savings of
      approximately $2.3 million, including cash based savings of approximately $1.6
      million. Beginning in 2006, the restructuring is expected to generate pre-tax
      operating expense savings of approximately $6.5 million to $7.0 million
      annually, including pre-tax cash savings of approximately $4.0 million to $4.4
      million annually. On a pre-tax net cash flow basis, the restructuring is
      expected to produce a positive pre-tax cash flow impact of approximately $2.4
      million to $3.0 million in 2006.








**Description
      of the Business**





***Financial
      Information about Operating Segments and Geographic
      Areas***





The
      Company operates in two segments; the brachytherapy seed segment and the CP
      Medical wound closure and medical products segment. The brachytherapy seed
      segment is comprised of the Company’s TheraSeed® and I-Seed products as well as
      related products and services. CP Medical is a manufacturer and distributor
      of
      wound closure and other medical products sold in the professional surgical
      and
      veterinary fields.





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
      F
      to the consolidated financial statements included in Part IV of this report.








**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 estimates
      there will be 234,460 new cases of prostate cancer diagnosed and an estimated
      27,350 deaths associated with the disease in the United States during 2006.





Prostate
      cancer incidence and mortality increase with age. Prostate cancer is found
      most
      often in men who are over the age of 50. About two out of every three prostate
      cancers are found in men over the age of 65. According to the American Cancer
      Society, approximately one man in six will be diagnosed with prostate cancer
      during his lifetime, although only one man in thirty-four will die of this
      disease. In addition to age, other risk factors are linked to prostate cancer,
      such as race, nationality, family history and diet.





4


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). The 5-year survival rate for men
      with prostate cancers found in the local and regional stages is nearly 100%.
      According to the American Cancer Society, among men diagnosed with prostate
      cancer, nearly 100% survive at least 5 years, 93% survive at least 10 years,
      and
      77% survive at least 15 years.




The
      prostate is a walnut-sized gland surrounding the male urethra, located below
      the
      bladder and adjacent to the rectum. The two most prevalent prostate diseases
      are
      benign prostatic hyperplasia (BPH) and prostate cancer. BPH is a non-cancerous
      enlargement of the innermost part of the prostate. Prostate cancer is a
      malignant tumor that begins most often in the periphery of the gland and, like
      other forms of cancer, may spread beyond the prostate to other parts of the
      body.





Prostate
      cancer can be detected early by testing the amount of prostate-specific antigen
      (PSA) contained in a man’s blood, and by a digital rectal exam (DRE) performed
      by a physician. The PSA blood test determines the amount of prostate specific
      antigen present in the blood. PSA is found in a protein secreted by the
      prostate, and elevated levels of PSA can be associated with either prostatitis
      (a noncancerous inflammatory condition) or a proliferation of cancer cells
      in
      the prostate.





The
      American Cancer Society believes that doctors should offer the PSA blood test
      and DRE annually, beginning at age 50 to men who do not have any major medical
      problems and can be expected to live at least ten more years. Men at higher
      risk, including African-Americans and men with a close relative who had prostate
      cancer before age 65, should begin testing at age 45. Men at even higher risk,
      such as those who had several close relatives with prostate cancer at an early
      age, could begin testing at age 40.





Transrectal
      ultrasound tests and biopsies are typically performed on patients with elevated
      PSA readings to confirm the existence of cancer. Since 1990 it has become more
      common for men to have tests to detect prostate cancer early. The prostate
      cancer death rate has declined, but the American Cancer Society does not know
      if
      this decline is a result of testing. Studies in other countries suggest that
      these tests do lower the death rate.





A
      tumor found by a prostate biopsy is usually assigned a grade by a pathologist.
      The most common prostate cancer grading system is called the Gleason grading
      system. A Gleason score, which ranges from 2 to 10, usually is used to estimate
      the tumor’s growth rate. Typically, the lower the score, the slower the cancer
      grows. Most localized cancers of the prostate gland are associated with an
      intermediate score ranging from Gleason scores 4 through 6.





If
      a biopsy discovers cancer, more testing is typically performed to determine
      whether the cancer has spread and if so, how far. Based on a man’s results from
      the DRE and PSA testing, and the Gleason score, other tests may be performed
      to
      stage the cancer. Staging is important because potential treatments and the
      outlook for recovery depend on the stage of the cancer. Additional tests may
      include bone and computed tomography scans, and magnetic resonance
      imaging.





“Staging”
      will determine the extent to which the cancer has spread, and most physicians
      use the American Joint Committee on Cancer staging system. In general terms,
      stages are expressed using Roman numerals 0 through IV (0 to 4), with a higher
      number generally meaning a more serious cancer.


5


***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. For example, the TheraSeed Ò device has been used in combination with other therapies to treat some locally
      advanced cases of prostate cancer. When the cancerous tissue is not completely
      eliminated, the cancer typically returns to the primary site, often with
      metastases to other areas. The following is a summary of treatment options
      for
      prostate cancer other than seeding.





*Radical
      Prostatectomy* is the most common surgical procedure. Radical Prostatectomy (RP) involves
      the
      complete removal of the prostate gland and has been used for over 30 years
      in
      treating early-stage, localized tumors. RP typically requires a three-day
      average hospital stay and a lengthy recovery period (generally three to five
      weeks). Possible side effects include impotence and incontinence.





*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.





Newer
      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
      to more accurately aim the radiation at the prostate. The objective is to
      minimize the risk of damage to healthy tissue caused by radiation. Conformal
      proton radiation is another new form of radiation therapy that uses a similar
      approach, but instead of using x-rays this technique focuses proton beams on
      the
      cancer. Protons typically cause little damage to tissues and may be able to
      deliver more radiation to the prostate. While preliminary results using these
      techniques have been promising, longer term results are needed. In addition,
      proton beam radiation is expensive and there are very few proton beam devices
      in
      the U.S. at this time.





*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. According
      to
      the American Cancer Society, physicians do not include cryosurgery among the
      first options they recommend for treating prostate cancer because of not knowing
      how well the method works over the long term.





*Ancillary
      Therapies,* primarily consisting of hormone therapy and chemotherapy, are used to slow
      the
      growth of cancer and reduce tumor size, but are generally not intended to be
      curative. Ancillary therapies are often used during advanced stages of the
      disease to extend life and relieve symptoms, and can have significant side
      effects. Drug therapy and chemotherapy require long-term, repeated
      administration of medication on an outpatient basis.





*Watchful
      Waiting,* while not a treatment, is recommended by some physicians in certain
      circumstances based on the severity and growth rate of the disease, as well
      as
      on the age and life expectancy of the patient. The aim of watchful waiting
      is to
      monitor the patient, treat some of the attendant symptoms and determine when
      more active intervention is required. Watchful waiting requires periodic
      physician visits and PSA monitoring.





In
      addition to the treatment options described above, other forms of treatment
      and
      prevention, including drugs and other forms of radiation, may be developed
      and
      tested in clinical settings.





***The
      Theragenics Solution - Brachytherapy Seed Business***





Theragenics
      produces TheraSeed Ò ,
      an FDA-cleared device for treatment of all solid localized tumors and currently
      used principally for the treatment of prostate cancer. In the


6


prostate
      application, TheraSeed Ò devices are implanted throughout the prostate gland in a minimally invasive
      surgical technique, with transrectal ultrasound guidance. The radiation emitted
      by the seeds is contained within the immediate prostate area for the purpose
      of
      killing the tumor while attempting to spare surrounding organs of significant
      radiation exposure. The seeds, whose capsules are biocompatible, remain in
      the
      prostate after delivering their radiation dose. The TheraSeed Ò device is best suited for solid localized tumors.





Management
      believes the TheraSeed Ò device offers significant advantages over RP and EBRT 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 those of RP or EBRT 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, RP is an inpatient procedure typically accompanied by an average
      three day hospital stay and a three to five week recovery period, and EBRT
      involves eight to nine weeks of daily radiation treatments.





The
      TheraSeed Ò device is a radioactive "seed" approximately 4.5 millimeters long and 0.8
      millimeters wide, or roughly the size of a grain of rice. Each seed consists
      of
      biocompatible titanium that encapsulates the radioactive substance
      palladium-103. The half-life of palladium-103, or the time required to reduce
      the emitted radiation to one-half of its initial level, is 17 days. The
      half-life characteristics result in the loss of almost all radioactivity in
      less
      than four months.





The
      Company also offers the I-Seed device. This iodine-based device was acquired
      as
      part of the purchase of the U.S. iodine-125 prostate brachytherapy business
      from
      BEBIG during 2003. While management believes that palladium-103 continues to
      have certain advantages over iodine-125, including (i) higher dose rates; (ii)
      a
      shorter half life, which shortens the duration of some radiation induced side
      effects by two-thirds; and (iii) reduced radiation exposure to medical personnel
      in treatment follow-up, the purchase of the iodine product line enables the
      Company to compete more effectively for those direct customers who prefer to
      buy
      both seeds from a single source. The non-exclusive distributor of the
      TheraSeed ® device has no distribution rights for the I-Seed device.





The
      I-Seed device is also a radioactive "seed" approximately 4.5 millimeters long
      and 0.8 millimeters wide, or roughly the size of a grain of rice. Each seed
      consists of biocompatible titanium that encapsulates a ceramic substrate
      containing the radioactive substance iodine-125. The half-life of iodine-125
      is
      approximately 60 days. The half-life characteristics result in the loss of
      almost all radioactivity in approximately 20 months.














***Treatment
      Protocol - Brachytherapy Seed Business***





Prostate
      cancer patients electing seed therapy first undergo a transrectal ultrasound
      test or CT scan, which generates a two-dimensional image of the prostate. With
      the assistance of a computer program, a three-dimensional treatment plan is
      created that calculates the number and placement of the seeds required for
      the
      best possible distribution of radiation to the prostate.





O nce
      the implant model has been constructed, the procedure is scheduled and the
      seeds
      are ordered. The number of seeds implanted normally ranges from 50 to 150,
      but
      the number of seeds varies with the size of the prostate. The procedure is
      usually performed under local anesthesia in an outpatient setting. A transrectal
      ultrasound probe is first positioned in the rectum to guide needle placement
      and
      seed location. Correct needle placement is facilitated by a template, or grid,
      that covers the perineum (the area between the scrotum and rectum through which
      the needles are inserted). This template is attached to the transrectal
      ultrasound probe. Implant needles loaded with seeds are assigned to the
      appropriate template holes as indicated in


7


the
      treatment plan. Each needle is guided through the template and then through
      the
      perineum to its predetermined position within the prostate under direct
      transrectal ultrasound visualization. The seeds are implanted as the needle
      is
      withdrawn from the prostate. When all seeds have been inserted, seed placement
      is verified through a transrectal ultrasound image, CT scan, fluoroscope or
      MRI.
      An experienced practitioner typically performs the procedure in approximately
      45
      minutes, with the patient often returning home the same day.





Seeding
      has been used as a treatment for prostate cancer for more than 20 years. Twenty
      years ago, seeds containing the radioactive isotope iodine-125 were implanted
      in
      prostate tumors under open surgery. However, this technique fell into disfavor
      because the seeds were often haphazardly arranged resulting in radiation not
      reaching all of the targeted cancerous prostate tissue. Compounding this was
      the
      fact that often an unintended radiation dose was delivered to healthy
      surrounding tissues, particularly the urethra and rectum. Clinical results
      indicate that the computer modeling, advanced imaging and other techniques
      used
      in seeding today have significantly ameliorated these drawbacks.




** ***Clinical
      Results - 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 radical
      prostatectomy (RP) or external beam radiation therapy (EBRT). A number of
      published studies on the use of seeding in the treatment of early-stage prostate
      cancer have been very positive.





A
      twelve-year study published in the Volume 4, Issue 1 (2005) edition of the
      Journal *Brachytherapy* revealed
      that high-risk prostate cancer patients treated with brachytherapy using
      palladium-103 experienced greater success than patients treated with radical
      prostatectomy. The study was conducted by Dr. Jerrold Sharkey of the Urology
      Health Center in New Port Richey, Florida, Dr. Alan Cantor, et al and
      retrospectively reviewed 1,707 prostate cancer patients, treated from 1992
      to
      2004, 80% of whom were treated with brachytherapy and 20% of whom were treated
      with surgery. The study reported that high-risk patients treated with seeding
      showed an 88% cure rate compared to a 43% cure rate obtained from surgery at
      12
      years. The results for intermediate-risk patients reflected a success rate
      of
      89% with seed therapy compared to a 58% success rate with surgery at 12 years
      and for low-risk patients the success rate for seeding was 99% compared to
      a 97%
      success rate with surgery at 10 years.





A
      twelve-year clinical study published in the 2004 Supplement of *International
      Journal of Radiation Oncology Biology and Physics* ,
      reported that the relative survival rate is 84% for low risk cancer patients,
      78% for intermediate risk cancer patients and 68% for high risk cancer patients.
      The study was conducted by Dr. Lou Potters, et al. of the New York Prostate
      Institute and included 1,504 patients treated with brachytherapy between 1992
      and 2000.





A
      study published in the January 2004 issue of *International
      Journal of Radiation Oncology, Biology and Physics* ,
      reported that brachytherapy, radical prostatectomy, high-dose external beam
      radiation therapy and combined therapies produced similar cure rates. The study
      was conducted by Dr. Patrick Kupelian, Dr. Louis Potters, et al. and included
      2,991 patients with Stage T1 or T2 (localized) prostate cancer. Of these
      patients, 35% of patients underwent surgery, 16% received low-dose EBRT, 10%
      received high-dose EBRT, 7% received combination therapy and 32% received
      brachytherapy. After five years, the biochemical relapse-free survival rate
      was
      83% for brachytherapy, 81% for radical prostatectomy, 81% for high-dose EBRT,
      77% for combination therapy and 51% for low-dose EBRT.





In
      the June 2002 issue of *Current
      Science, Inc.* ,
      a study by Dr. Jerrold Sharkey, Dr. Alan Cantor, et al. compared the
      effectiveness of brachytherapy and radical prostatectomy in 1,305 men with
      stage
      T1 and T2 prostate cancer. From 1993 to 2002, data from the treated patients
      were reviewed and classified by initial PSA level and Gleason scores. According
      to the


8


publication,
      “The results failed to show any superiority of prostatectomy over brachytherapy
      with palladium-103 (the TheraSeed ® device) with respect to time until relapse indicated by PSA level increase.
      In
      fact, any differences between treatments favor brachytherapy, particularly
      for
      intermediate and high-risk groups.”





A
      nine-year clinical study published in the March 2000 issue of *International
      Journal of Radiation Oncology, Biology and Physics* ,
      reported that 83.5% of the patients treated with the TheraSeed ® device were cancer-free at nine years. The study was conducted by Dr. John
      Blasko of the Seattle Prostate Institute and included 230 patients with clinical
      stage T1 and T2 prostate cancer. Only 3% experienced cancer recurrence in the
      prostate.




Seeding
      treatment in combination with EBRT has also recorded impressive results in
      the
      treatment of higher risk prostate cancer patients.





An
      eight-year clinical study published in the January 2005 issue of *International Journal of Radiation Oncology Biology and Physics* ,
      reported biochemical progression-free survival rates of 98.2%, 98.4% and 88.2%
      for low-, intermediate-, and high-risk patients, respectively, who underwent
      brachytherapy using either palladium-103 or iodine-125 and supplemental EBRT
      or
      androgen deprivation therapy (ADT). The study was conducted by Dr. Gregory
      Merrick, et al., of the Schiffler Cancer Center and included 668 patients who
      underwent brachytherapy between April 1995 and January 2001 followed by EBRT
      and/or ADT.





Results
      from a 10-year study conducted by Dr. Datolli and Dr. Wallner published in
      the *International
      Journal of Radiation Oncology,*  *Biology
      and Physics* in September 2002 were presented at the October 2002 American Society of
      Therapeutic Radiology and Oncology (ASTRO) conference confirming the
      effectiveness of the TheraSeed ® device in patients with aggressive cancer who previously were considered poor
      candidates for seeding. The 10-year study was comprised of 175 patients with
      Stage T2a-T3 (localized to locally advanced) prostate cancer treated from 1991
      through 1995. Of these patients 79 percent remained completely free of cancer
      after 10 years without the use of hormonal therapy or chemotherapy.





In
      their paper published for the *Seminars
      in Surgical Oncology 1997,* Drs.
      Blasko, Ragde, Grimm, et al. ** presented
      an eight-year actuarial local and distal disease-free rate of 91% and 83%,
      respectively for 231 patients who were considered to represent higher risks
      of
      locally advanced prostate cancer and were treated with a combination of
      palladium-103 or iodine-125 seeding and a modified dose of EBRT.





A
      study by Dr. Michael Dattoli of University Community Hospital, Tampa, Florida,
      and Dr. Kent Wallner of Memorial Sloan-Kettering Cancer Center, New York, New
      York, published in the *International
      Journal of Radiation Oncology, Biology and Physics* in July 1996 found a three-year actuarial freedom from biochemical failure
      (based on PSA scores) of 79% among 73 patients with clinically localized, high
      risk prostate cancer who were treated with EBRT in combination with
      palladium-103. This compares favorably to results reported for patients treated
      with conventional dose EBRT alone. These locally advanced cases are significant
      because typical RP protocols would not classify them as suitable for surgical
      treatment.





*Reduced
      Incidence of Side Effects.* Because the TheraSeed Ò device delivers a highly concentrated and confined dose of radiation directly
      to
      the prostate, healthy surrounding tissues and organs are typically spared
      excessive radiation exposure. This typically results in fewer and less severe
      side effects and complications than may be incurred with other conventional
      therapies.





A five-year
      study, using either palladium-103 or iodine-125 seed devices, published in
      the
      August 2001 edition of *International
      Journal of Radiation Oncology, Biology and Physics* promotes brachytherapy treatment for early-stage prostate cancer in men under
      65
      while indicating lower incidence of side effects such as incontinence and
      impotence. According to


9


Dr. Gregory
      Merrick of Schiffler Cancer Center in Wheeling, West Virginia, the findings
      from
      the study involving 76 patients ranging in ages between 48 and 62 years who
      received seed implants between the period of 1995 to 1999 are encouraging
“because it shows younger men that they can survive cancer with a significantly
      lower incidence of side effects.”





Doctors
      Gregory S. Merrick, Kent E. Wallner and Wayne M. Butler, in their paper
“Permanent Interstitial Brachytherapy for the management of Carcinoma of the
      Prostate Gland” published in the *Journal
      of Urology* in
      May 2003, summarized the permanent prostate brachytherapy literature, including
      biochemical outcomes, quality of life parameters and areas of controversy.
      The
      result of this study included the statement that “using various planning and
      intraoperative techniques the majority of the brachytherapy literature
      demonstrates durable biochemical outcomes for patients with low, intermediate
      and high risk features.” The paper concluded that continued refinements in
      brachytherapy planning and implementation techniques, postimplantation
      evaluation and continued elucidation of the etiology of urinary, bowel and
      sexual dysfunction should result in further improvements in biochemical and
      quality of life outcomes.





*Lower
      Treatment Cost.* The total one-time cost of seeding is typically lower than the cost of RP,
      which
      usually requires a three-day average hospital stay, and EBRT, which requires
      a
      six-to-eight week course of treatment.





***Production
      - 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. Rhodium-103 is readily available on the open
      market.





Palladium-103
      is a radioactive isotope that can be produced by neutron bombardment of
      palladium-102 in a nuclear reactor, or by proton bombardment of Rh-103 in a
      cyclotron. Following the production of palladium-103 from Rh-103 in a cyclotron,
      the palladium-103 is harvested from the cyclotron and moved through a number
      of
      proprietary production processes until it reaches its final seed
      form.





The
      Company has produced palladium-103 using Company-owned cyclotrons since 1993.
      The Company currently has eight cyclotrons in production, and has no current
      plans to purchase additional cyclotrons. The Company's cyclotrons were designed,
      built, installed and tested by a company specializing in the construction of
      such equipment.





Cyclotron
      operations constitute only one component of the TheraSeed Ò device manufacturing process. Because the production of the
      TheraSeed Ò device is highly sensitive and labor intensive, management has been focusing
      attention and effort on automating and otherwise improving aspects of the
      Company's manufacturing process. Certain portions of the Company’s production
      processes were automated during the past several years, and management believes
      it can continue to improve efficiency.





The
      Company began production of the I-Seed product early in 2004. The automated
      production equipment was acquired as part of the purchase of the U.S. iodine-125
      prostate brachytherapy business from BEBIG during 2003.





Since
      1997, the Company’s quality control system related to its medical device
      manufacturing has been certified as meeting all the requirements of the
      International Organization for Standards’ ISO 9001/EN46001 Quality System
      Standard.


10





***Marketing
      and Major Customers - Brachytherapy Seed Business***





The
      Company sells its TheraSeed ® device directly to health care providers and to a third party distributor,
      and
      sells its I-Seed device directly to health care providers. Currently, the
      Company has a non-exclusive distribution agreement in place with C. R. Bard
      (“Bard”) for the distribution of the TheraSeed ® device (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 term expires on December 31, 2007, and will be automatically
      extended for one additional year unless either party gives notice of its intent
      not to extend by December 31, 2006. 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.
      A
      distribution agreement with Medi-Physics, Inc., formerly d/b/a Nycomed Amersham
      and part of Oncura (the “Oncura Agreement”) terminated on September 8, 2005. A
      summary of sales to significant customers follows:





Percentage
                ofBrachytherapy
                Product
              Revenue
            
            
            
            
            
            Percentage
                of
              Consolidated
                Revenue2005
            
            2004
            
            2003
            
            2005
            
            2004
            
            2003Bard
            61.0%
            
            60.1%
            
            54.2%
            
            49.0%
            
            59.6%
            
            53.9%Oncura
            9.6%
            
            20.8%
            
            26.7%
            
            7.7%
            
            20.6%
            
            26.6%





Sales
      to Bard for 2003 include sales to two other distributors that were acquired
      by
      Bard in subsequent periods.





Subsequent
      to the termination of the Oncura Agreement on September 8, 2005, approximately
      85% of the TheraSeed ® unit volume from former Oncura customers has been retained (based on comparison
      to the average weekly volume for sales to such customers for the first ten
      months of 2004). While the Company believes that a significant portion of the
      customers previously supplied through Oncura will continue to order
      TheraSeed ® ,
      some of these customers may not and accordingly transition issues may affect
      sales. To the extent that the Company is able to convert customers of Oncura
      to
      direct customers, margins would be improved on these particular sales.





Beginning
      in 2002, the Company engaged marketing and advertising specialists with
      experience in healthcare and direct-to-consumer marketing, and expects
      direct-to-consumer activity to continue during 2006. The Company also expects
      to
      continue other activities in an attempt to support its 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***





The
      Company holds twelve United States patents directed to radiation delivery
      devices for therapeutic uses, including palladium and iodine delivery devices,
      processes for making such devices, and containers for storing and shipping
      such
      devices, and has several additional United States patent applications pending
      that also relate to this subject matter. The Company also has some corresponding
      issued patents in Australia, Canada, Mexico and New Zealand, as well as
      some corresponding pending patent applications in Australia, Canada, Japan,
      the
      European Patent Office (representing up to 24 European Countries), New Zealand,
      and South Africa, as well as one pending Patent Cooperation Treaty
      patent application currently designating more than 120 countries. The Company
      also has an issued United States patent relating to the use of
      isotopes and isotopic compositions for secure identification of various articles
      of commerce, as well as corresponding pending patent applications in Canada
      and
      the European Patent Office. In addition, the Company has six
      pending United States patent applications relating to other new
      products and


11


services
      related to the business of the Company. The Company considers the ownership
      of patents important, but not necessarily essential, to its operations. The
      Company also uses a strategy of confidentiality agreements and trade secret
      treatment to provide primary protection to a number of proprietary design
      modifications in the cyclotrons, as well as various production
      processes.





The
      Company also holds a worldwide exclusive license from the University of Missouri
      for the use of technology required for producing the TheraSphere Ò device. Theragenics holds the rights to all improvements developed by the
      University of Missouri on this technology. The Company, in turn, sublicenses
      exclusive worldwide rights to this technology and all improvements to Nordion
      International, Inc. Pursuant to its licensing agreement with the University
      of
      Missouri, the Company is obligated to pay the university the greater of a fixed
      annual amount or a percentage of the gross sales amount derived from sales
      of
      the TheraSphere Ò device.





The
      Company holds an exclusive license to patents for technology concerning methods
      for delivery of the TheraSphere Ò device in several countries, including the United States, Canada, Australia,
      Argentina, South Africa and the countries of the European Patent Convention,
      and
      has an exclusive license to some additional patent applications on file in
      other countries, including Japan. The Company exclusively sub-licenses this
      technology to Nordion International, Inc. for worldwide use.





The
      Company also relies to a significant degree on trade secrets, proprietary
      know-how and technological advances that are either not patentable or which
      the
      Company chooses not to patent. In particular, the Company has designed certain
      modifications to its cyclotrons as well as various production processes that
      it
      deems to be proprietary. The Company seeks to protect non-patented proprietary
      information, in part, by confidentiality agreements with suppliers, employees
      and consultants.





***Competition
      - Brachytherapy Seed Business***





The
      Company competes in a market characterized by technological innovation,
      extensive research efforts and significant competition. In general, the
      TheraSeed ® and I-Seed devices compete with conventional methods of treating localized
      cancer, including, but not limited to, radical prostatectomy (RP) and external
      beam radiation therapy (EBRT) which includes intensity modulated radiation
      therapy (IMRT), as well as competing permanent devices. RP currently represents
      the most common medical treatment for early-stage, localized prostate cancer.
      EBRT is also a well-established method of treatment and is widely accepted
      for
      patients who represent a poor surgical risk or whose prostate cancer has
      advanced beyond the stage for which surgical treatment is indicated. Management
      believes that if general conversion from these treatment options (or other
      established or conventional procedures) to brachytherapy treatment does occur,
      such conversion will likely be the result of a combination of equivalent or
      better efficacy, reduced incidence of side effects and complications, lower
      cost, other quality of life issues and pressure by health care providers and
      patients.





Several
      companies produce and distribute palladium-103 and iodine-125 seeds, which
      compete directly with the TheraSeed ® and I-Seed devices. Management believes that Theragenics has competitive
      advantages over these companies including, but not limited to: (i) its
      proprietary production processes that have been developed and patented; (ii)
      its
      16 year history of manufacturing radioactive medical devices and its record
      of
      reliability and safety in its 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 Theragenics; (v) outsourcing of the
      Company’s cancer information center to healthcare specialist, Telerx, a
      subsidiary of Merck Pharmaceutical and (vi) its direct sales force, and the
      non-exclusive distribution agreement that the Company currently has in place.


12





Other
      isotopes are also utilized in seeding, including cesium-131 (Cs-131), introduced
      during 2005. Cs-131 has a significantly higher energy than Pd-103 and I-125,
      which may cause issues related to production, handling and side effects
      associated with its use. The Company is not aware of any long-term clinical
      data
      demonstrating the effectiveness of Cs-131 as a therapy for prostate
      cancer.





At
      any point in time, management of Theragenics and/or its non-exclusive
      distributors may change their respective pricing policies for the
      TheraSeed ® or I-Seed (in the case of Theragenics) device in order to take advantage of
      market opportunities or respond to competitive situations. Responding to market
      opportunities and competitive situations, including but not limited to
      competitor selling tactics, could have an adverse effect on the prices of the
      TheraSeed ® or I-Seed device and/or could have a favorable effect on market share and
      volumes, while failure to do so could adversely affect market share and volumes
      although per unit pricing could possibly be maintained.





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 Theragenics’ products.








**CP
      Medical Products Business**





***Overview***





Through
      its subsidiary, CP Medical Corporation (“CP Medical”) based
      in
      Portland, Oregon, the Company operates its wound closure and medical
      products segment. CP Medical manufactures and distributes sutures, cardiac
      pacing cables and other surgical products with applications in, among other
      areas, urology, veterinary, orthopedics, dental, plastic surgery and cardiology.
      CP Medical sells directly to customers and through manufacturers’
representatives.





The
      wound closure market is estimated by industry sources to be a $2.0 billion
      dollar annual market worldwide, and a $1.2 billion annual market in the United
      States. The wound closure market is commonly divided into the following
      segments: sutures, staples, wound closure strips and tape, and glues and other
      surgical sealants. Approximately 60% of revenue was in veterinary applications
      and 40% in human applications in 2005 and approximately 70% of total revenue
      was
      generated by suture sales.





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, polyglactin, and
      polydioxanone.


13





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.





CP
      Medical manufactures and distributes suture, staple, and glue products under
      the
      following registered trademarks:





Monoswift®
      polyglycolic/caprolactone suture


Mono-Dox ® polydioxanone
      (PDO) suture


Monomid ® nylon monofilament suture


Polyamid ® braided nylon suture


Polybond ® braided
      polyester suture


Polypro ® polypropylene monofilament suture


Visorb ® polyglycolic acid (PGA) suture


CP
      Fiber ® high strength polyethylene sutures


Medbond ® skin adhesive


X-act ® skin staplers





CP
      Medical also manufactures specialty needles used in general surgery, including
      a
      line of needles and related products used in brachytherapy surgical procedures.





***Production
      - CP Medical Products Business***




CP
      Medical assembles, packages and distributes its products. The
      majority **** of
      its component raw materials, primarily natural and synthetic sutures, needle
      tubing and other surgical supply components, are 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 CP Medical’s products are
      produced as a private label product for its customers.





***Marketing
      and Major Customers - CP Medical Products Business***




CP
      Medical primarily utilizes a network of distributors in the United States and
      Europe to market and distribute its products. CP Medical performs no direct
      marketing in the wound closure segment, and maintains a small direct sales
      force
      for direct sales to veterinary, healthcare providers and group purchasing
      organizations, as well as to service the needs of its distributors. One customer
      represented approximately 14% of CP Medical revenue for 2005, and 3% of
      consolidated revenue for the year.




14


***Competition
      - CP Medical Products Business***




CP
      Medical operates in the wound closure market, which is dominated by a few large
      suppliers that can limit the growth opportunities available to smaller
      participants. The primary suppliers are Ethicon, Inc., a subsidiary of Johnson
      and Johnson, and U.S. Surgical, a subsidiary of Tyco. CP Medical competes in
      this market by providing custom labeled products, timely and cost effective
      products, and a high level of customer service in niche markets that are
      underserved by the larger suppliers. CP Medical also has extensive experience
      and knowledge of the market as well as many established relationships with
      distributors and providers.




***Patents
      and Licenses; Trade Secrets - CP Medical Products
      Business***





CP
      Medical holds six U.S. patents related to suture dispensing systems and suture
      and needle design, and has a number of U.S. patents pending related to its
      sutures and other products. CP Medical also relies to a significant degree
      on
      trade secrets, proprietary know-how and technological advances that are either
      not patentable or which CP Medical chooses not to patent. CP Medical seeks
      to
      protect non-patented proprietary information, in part, by confidentiality
      agreements with suppliers, employees and consultants.








**Seasonality**





Although
      effects from seasonality cannot be identified in relation to a specific quarter
      or quarters, management believes that holidays, major medical conventions and
      vacations taken by physicians, patients and patients’ families, may have a
      seasonal impact on sales in both the brachytherapy seed and CP Medical products
      segments.




**Research
      and Development**





Research
      and development (R&D) expenses were $3.6 million, $9.6 million, and $7.5
      million in 2005, 2004 and 2003, respectively. R&D expenses for 2003 to 2005
      have related primarily to the peripheral vascular and macular degeneration
      programs. These programs were curtailed in connection with the Company’s
      restructuring in 2005 (see *“Restructuring”* above). Looking forward, the only activity expected for these programs is the
      follow up of all patients previously treated in the macular degeneration trial,
      in accordance with the FDA-approved protocol for this trial. The Company expects
      the study endpoint to be completed by late 2006. R&D activities will take
      place in connection with new product development at CP Medical and automation
      in
      the production processes at the brachytherapy seed business. However, the
      Company expects R&D expenses to be reduced significantly in 2006 from the
      levels of the last three years (see *“Restructuring”* above
      and *Item
      7* - *“Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations”* ).





**Government
      Regulation**





The
      Company’s present and future intended activities in the development, manufacture
      and sale of cancer therapy products and certain products of CP Medical are
      subject to extensive laws, regulations, regulatory approvals and guidelines.
      Within the United States, the Company’s therapeutic radiological devices must
      comply with the U.S. Federal Food, Drug and Cosmetic Act, which is enforced
      by
      the FDA. The Company is also subject to regulation by other governmental
      agencies, including the Occupational Safety and Health Administration (OSHA)
      ,
      the Environmental Protection Agency (EPA), the Nuclear Regulatory Commission,
      and other federal and state agencies. As a result of receiving its CE Mark
      during 1998, the Company must also comply with the regulations of the Competent
      Authorities of the European Union for any TheraSeed ® device sold in the member nations of the European Union.


15


Theragenics
      and CP Medical 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.





The
      Company obtained FDA 510(k) clearance in 1986 to market the
      TheraSeed ® device for, in general, the treatment of localized solid tumors. CP Medical
      has
      also obtained FDA clearance for marketing its products. New FDA approvals would
      be required for any modifications in the Company’s products, including its
      TheraSeed ® and I-Seed devices and wound closure products, or its labeling that could
      significantly affect the safety or effectiveness of the original
      product.





The
      Company’s manufacturing, distribution and security of radioactive materials are
      governed by the State of Georgia in agreement with the Nuclear Regulatory
      Commission (NRC). The users of the TheraSeed ® device are also required to possess licenses issued either by the states in
      which they reside or the NRC depending upon the state involved and the
      production process used.





The
      Company is required under its radioactive materials license to maintain
      radiation control and radiation safety personnel, procedures, equipment and
      processes, and to monitor its facilities and its employees and contractors.
      The
      Company is also required to provide financial assurance that adequate funding
      will exist for end-of-life radiological decommissioning of its cyclotrons and
      other areas of its property where radioactive materials are handled. The
      Company’s decommissioning obligations will increase if production capacity is
      expanded.





The
      Company is also subject to federal, state and local environmental regulations
      ensuring the general protection of the environment. During 2003, the Company
      became aware of the need for an Industrial Process Waste Water Permit from
      the
      City of Buford, Georgia. The Company has taken all the required steps to obtain
      this permit and expects to obtain this permit, but has also requested a
      determination of non-applicability. The Company has been authorized by the
      City
      to discharge industrial process waste water to the municipal sewage system
      while
      the City considers its final decision.





The
      Company transfers low-level radioactive waste to licensed commercial radioactive
      waste treatment or disposal facilities for incineration or land disposal. The
      Company provides training and monitoring of its personnel to facilitate the
      proper handling of all materials.





The
      U.S. Department of Energy (DOE) has granted Theragenics access to unique DOE
      technology, known as the PSP, for use in production of isotopes. The Company
      is
      in the process of returning the PSP equipment to the DOE. However, U.S.
      Government Export Control Laws and Regulations, and classification restrictions,
      which govern the export of certain products which can be produced in the PSP
      and
      the disclosure and export of certain technology and capabilities associated
      with
      the PSP, continue to apply as long as the equipment is in the Company’s
      possession.




**Employees**





As
      of December 31, 2005, the Company and its subsidiary had 219 full time employees
      (including full time temporary employees and executive personnel). Of this
      total, 146  were
      employed by Theragenics in the brachytherapy seed business (including 107 in
      the
      development and production of the business’ products and 39 in selling, general
      and administrative positions) and 73 were employed by CP Medical (including
      65
      in the development and production of the business’ products and 8 in selling,
      general and administrative positions). Theragenics’ and CP Medical’s employees
      are not represented by a union or a collective bargaining agreement, and
      management considers employee relations to be good.


16


**Available
      Information**





The
      Company’s website address is http://www.theragenics.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q,
      current reports on Form 8-K and all amendments to those reports filed pursuant
      to Section 13(a) or 15(c) of the Securities and Exchange Act of 1934 are
      available free of charge through its website by clicking on the “Investor
      Relations” page and selecting “SEC Filings.” These reports will be available as
      soon as reasonably practicable after such material has been electronically
      filed
      with, or furnished to, the SEC. These reports are also available through the
      SEC’s website at http://www.sec.gov. The information on these websites and the information contained therein or
      connected thereto are not intended to be incorporated by reference into this
      Form 10-K. In addition the Company will provide paper copies of these filings
      (without exhibits) free of charge to its shareholders upon request.











**Item
      1A. Risk Factors**





**The
      Company cautions the reader that the risk factors discussed below may not be
      exhaustive. The Company operates in a continually changing business environment
      and new risk factors may emerge from time to time. The Company can not predict
      such new risk factors, nor can it assess the impact, if any, of such new risk
      factors on the Company’s business or 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.**





**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. 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 or to integrate 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.


17





***We
      may not realize the benefits of the CP Medical
      acquisition.***




The
      process of continued integration of CP Medical may be complex, time consuming
      and expensive and may disrupt our businesses, and could affect our financial
      condition, results of operations or future prospects.. The combined company
      will
      need to overcome significant challenges in order to realize benefits or
      synergies from the acquisition. These challenges include the timely, efficient
      and successful execution of a number of post-acquisition events, including:





•
            integrating
                the operations and technologies of the two companies;•
            retaining
                and assimilating the key personnel of each company;•
            retaining
                existing customers of both companies 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.




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•
            potential
                unknown liabilities associated with the acquisition and the combined
                operations.




The
      Company may not succeed in addressing these risks or any other problems
      encountered in connection with the acquisition. The inability to successfully
      integrate the operations, technology and personnel of the two companies, or
      any
      significant delay in achieving integration, could have a material adverse effect
      on the Company.





***The
      cost of the CP Medical acquisition could harm our financial
      results.***




Theragenics
      invested approximately $26.7 million for the acquisition of CP Medical. If
      the
      benefits of the acquisition do not exceed the associated costs, including
      costs related to integrating the two companies and dilution to our
      stockholders resulting from the issuance of shares in connection with the
      acquisition, 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. While our former chief financial officer and
      treasurer and our former general counsel and corporate secretary resigned in
      2005, management believes that our business and financial results have not
      been
      adversely affected. However, 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 Ms. Jacobs in the
      amount of $1 million. In addition, we are a party to agreements with our
      executive officers to help ensure each officer’s continual service in the event
      of a change-in-control.





***Our
      stock price has 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 or new products by us or
      our
      competitors, developments with respect to patents or proprietary rights, general
      conditions in the medical device and wound closure industries, changes in




18


***We
      face production risks.***




Theragenics’
      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
      the Company’s ability to achieve and increase sales levels. Due to the intricate
      nature of cyclotrons and the Company’s 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 the Company’s production
      capacity and its business, financial condition and results of
      operations.




Subsequent
      to the restructuring announced on August 11, 2005 (see *“Restructuring”* above),
      the Company operates eight cyclotrons. Management has no plans to purchase
      additional cyclotrons. Cyclotron operation constitutes only one component of
      our
      brachytherapy device manufacturing process. Manufacturing or quality control
      problems may arise as the Company increases production or as additional
      manufacturing capacity is required in the future. These factors may have an
      adverse impact on the Company’s business, financial condition and results of
      operations.





CP
      Medical procures components from suppliers located locally 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 the Company’s products are subject to stringent
      government regulation in the United States and other countries. As of
      December 31, 2005, TheraSeed ® ,
      I-Seed, and certain CP Medical products have 510(k) clearance from the Food
      and
      Drug Administration (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
      products developed by the Company 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
      the Company’s products are not approved as of December 31, 2005, the use or sale
      of the Company’s products will require approvals by government agencies
      comparable to the FDA. The process of obtaining such approvals is lengthy,
      expensive and uncertain. There can be no assurance that the necessary approvals
      for the marketing of the Company’s products in other markets will be obtained on
      a timely basis or at all. The Company is also required to comply with applicable
      FDA regulations for Quality System Regulation (“QSR”), including extensive
      record keeping, reporting and periodic inspections of its manufacturing
      facilities. Similar requirements are imposed by governmental agencies in other
      countries. A new 510(k) clearance is required for any modifications in the
      TheraSeed ® ,
      I-Seed, or certain CP 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 management has 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
      medical device for safety and effectiveness, may be required for future products
      or for future modifications to the TheraSeed ® or I-Seed devices or certain CP Medical products.


19




The
      TheraSeed ® and I-Seed devices and certain CP Medical products 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, the Company 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.




The
      Company’s manufacturing operations involve the manufacturing and possession of
      radioactive materials, which are subject to stringent regulation. The users
      of
      the Company’s 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 the Company may seek to market its products. There can
      be
      no assurance that current licenses held by the Company for its manufacturing
      operations will remain in force or that additional licenses required for the
      Company’s operations will be issued. There also can be no assurance that the
      Company’s 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 the
      Company’s ability to market its products. Furthermore, regulation of the
      Company’s 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 the Company’s 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 the Company’s business, financial condition and results
      of operations.




The
      Company is required under its radioactive materials license to maintain
      radiation control and radiation safety personnel, procedures, equipment and
      processes, and to monitor its facilities and its employees and contractors.
      The
      Company is also required to provide financial assurance that adequate funding
      will exist for end-of-life radiological decommissioning of its cyclotrons and
      other radioactive areas of its properties that contain radioactive materials.
      The Company has provided this financial assurance through the issuance of
      letters of credit. The Company has so far been successful in explaining to
      the
      Georgia Department of Natural Resources that it will not have to dispose of
      its
      cyclotrons, but instead will be able to sell them for re-use or use for spare
      parts if it ceases to operate them. Thus, the Company is 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 the Company include the
      cost
      of decommissioning its cyclotrons in its financial assurance demonstration,
      the
      amount of money required to be set aside by the Company to cover decommissioning
      costs could dramatically increase.




Failure
      to obtain and maintain regulatory approvals, licenses and permits could
      significantly delay the Company’s marketing efforts. Furthermore, changes in
      existing regulations, or interpretations of existing regulations or the adoption
      of new restrictive regulations could adversely affect the Company in
      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 the Company’s business, financial condition and results of
      operations.


20




***We
      face risk related to lack of diversification.***




Prior
      to the acquisition of CP Medical, virtually all of the Company’s revenues were
      generated from the brachytherapy seed market, and the Company may continue
      to be
      substantially dependent on the brachytherapy market. As of December 31, 2005,
      the Company is divided into two business segments: the brachytherapy seed
      segment and the CP Medical segment. However, the majority of our revenues may
      continue to be generated from the brachytherapy seed market, and our lack of
      diversification should be considered a risk as the Company is not able to offset
      losses from one product line with another.




***We
      are dependent on new technological development.***




The
      Company competes in a market 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
      the
      Company’s 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 the
      Company, are currently engaged in the development of products and innovative
      methods for treating cancer that are similar to, or compete with, certain of
      the
      Company’s products and technologies. 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 the Company’s products.




***We
      face significant competition.***




All
      of our products are subject to intense competition. Our brachytherapy seeds
      compete with prostate cancer treatment methods that are well established in
      the
      medical community, including radical prostatectomy (see *“Treatment
      Options - Brachytherapy Seed Business”* ,
      and *“Competition
      - Brachytherapy Seed Business”* in Item 1 above). Although favorable clinical results for seeding have been
      released, more extensive outcome data is available for radical prostatectomy
      (RP), and urologists continue to perform RP with considerable
      frequency.




Our
      brachytherapy business is also subject to intense competition within the
      brachytherapy seed market. C.R. Bard, Inc. distributes Palladium-103 (“Pd-103”)
      seeds manufactured by Theragenics, and also manufactures and distributes its
      own
      Iodine-125 (“I-125”) seeds; Nycomed Amersham PLC, a subsidiary of General
      Electric (through its control of Oncura) and Mentor Corporation manufacture
      and
      sell I-125 brachytherapy seeds and distribute Pd-103 seeds produced by other
      manufacturers; and North American Scientific, Inc. manufactures and sells I-125
      and Pd-103 brachytherapy seeds. Several
      additional companies currently manufacture and sell brachytherapy seeds as
      well.
      Mentor has announced that its urology division, which includes its brachytherapy
      business, is for sale, though no purchaser has been publicly identified as
      of
      the current date. Management believes that Theragenics has competitive
      advantages over these companies including, but not limited to: (i) its
      proprietary production processes that have been developed and patented; (ii)
      its
      16 year history of manufacturing radioactive medical devices and its record
      of
      reliability and safety in its 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 Theragenics; (v) outsourcing of the
      Company’s cancer information center to healthcare specialist, Telerx, a
      subsidiary of Merck Pharmaceutical (vi) its direct sales force, and the
      non-exclusive distribution agreement that the Company currently has in place.




Through
      CP Medical, we also compete with other suppliers of sutures, cardiac pacing
      cables, brachytherapy needles, sleeves and spacers, and other related medical
      products. Many of these competitors, including Ethicon, Inc., a Johnson &
Johnson company, and U.S. Surgical, a division
      of Tyco Healthcare Group LP, have substantially greater financial, technical,
      sales, marketing and other resources, as well as greater name recognition and
      a
      larger customer base, than CP Medical. 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 CP Medical
      fails to compete effectively, our business, financial condition and results
      of
      operations may be adversely affected.


21




***We
      are highly dependent on our marketing and advertising specialists and our direct
      sales organization. Any failure to build and manage our direct sales
      organization could negatively affect our revenues.***




Beginning
      in 2002, the Company engaged marketing and advertising specialists with
      experience in healthcare and direct-to-consumer marketing, and expects
      direct-to-consumer activity to continue during 2006. The Company also expects
      to
      continue other activities in an attempt to support its brand name and increase
      demand for the brachytherapy seed devices, including direct-to-consumer
      television and print advertising, clinical studies aimed at showing the
      advantages of the TheraSeed ® and I-Seed devices in the treatment of prostate cancer, technical field support
      to TheraSeed ® and I-Seed customers, and other customer service and patient information
      activities. 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. Any failure to build 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 TheraSeed*** ***®*** ***and I-Seed and certain of our CP Medical products, and if these relationships
      are discontinued or if we are unable to develop new relationships, our revenues
      could decline.***




We
      rely, and will continue to rely, upon collaborative relationships with agents
      and distributors and other industry participants to maintain
      TheraSeed ® ,
      I-Seed and certain CP Medical products market access to potential customers.
      Some of the entities with whom we have relationships to help market and
      distribute our products also produce or distribute products that directly
      compete with TheraSeed ® ,
      I-Seed and certain CP Medical products. In particular, C.R. Bard, one of our
      primary competitors in the brachytherapy seed business, is also a distributor
      of
      our TheraSeed® product. Sales to Bard represented 61% of
      brachytherapy product revenue in 2005. The terms of our distribution agreement
      with Bard provides 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, 2007,
      and
      will be automatically extended for one additional year unless either party
      gives
      notice of its intent not to extend by December 31, 2006. We cannot assure you
      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 retained.




We
      cannot assure you that we will be able to maintain or develop these
      relationships with 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.


22





***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 worldwide
      market for prostate cancer treatment, innovative sutures, cardiac pacing cables
      and brachytherapy needles/sleeves/spacers. 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 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. We continually
      evaluate and monitor developments with respect to new and proposed rules and
      cannot predict or estimate the amount of the additional costs we may incur
      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.


23




***There
      are limitations on our ability to protect our intellectual property and we
      are
      dependent on trade secrets.***




The
      Company’s success will depend, in part, on its ability to obtain, assert and
      defend patent rights, protect trade secrets and operate without infringing
      the
      proprietary rights of others. The Company holds rights to issued United States
      and foreign patents. The Company also holds a worldwide exclusive license for
      the use of technology required for producing the TheraSphere device.
      Theragenics ® holds the rights to all improvements developed on this technology. The Company,
      in turn, sublicenses exclusive worldwide rights to this technology and all
      improvements. The Company holds an exclusive license to patents for technology
      concerning methods for delivery of the TheraSphere device in several countries,
      and has an exclusive license to some additional patent applications on file
      in
      other countries. There can be no assurance that rights under patents held by
      or
      licensed to the Company will provide it with competitive advantages or that
      others will not independently develop similar products or design around or
      infringe the patents or other proprietary rights owned by or licensed to the
      Company. In addition, there can be no assurance that any patent obtained or
      licensed by the Company will be held to be valid and enforceable if challenged
      by another party.




There
      can be no assurance that patents have not been issued or will not be issued
      in
      the future that conflict with the Company’s patent rights or prevent the Company
      from marketing its products. Such conflicts could result in a rejection of
      the
      Company’s or its licensors’ patent applications or the invalidation of patents,
      which could have a material adverse effect on the Company’s business, financial
      condition and results of operations. In the event of such conflicts, or in
      the
      event the Company believes that competitive products infringe patents to which
      the Company holds rights, the Company 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 the Company will be
      successful in any such litigation or proceeding, and the results and cost of
      such litigation or proceeding may materially adversely affect the Company’s
      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, the
      Company 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 the Company, if at all. If the Company does not obtain such licenses, it
      could encounter delays or could find that the development, manufacture or sale
      of products requiring such licenses is foreclosed.




The
      Company relies to a significant degree on trade secrets, proprietary know-how
      and technological advances that are either not patentable or that the Company
      chooses not to patent. The Company seeks 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 the Company would have adequate remedies for any breach, or
      that
      the Company’s 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
      the Company’s business, financial condition and results of
      operations.







***We
      are dependent on Medicare reimbursement policies.***




A
      substantial percentage of the patients treated for prostate cancer in the United
      States are covered by Medicare, 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 CP Medical products may be influenced by Medicare’s
      reimbursement levels, which can change periodically.


24




On
      December 8, 2003, the President signed the Medicare Prescription Drug,
      Improvement and Modernization Act of 2003 (“MMA”) into law that provides for
      improved reimbursement and coding policies in 2004 and beyond for brachytherapy
      seeds/sources under Medicare’s hospital outpatient prospective payment system
      (“OPPS”).





The
      brachytherapy provisions in the MMA, which went into effect on January 1, 2004,
      require Medicare to unbundle the cost of the brachytherapy seeds/sources from
      the costs of the brachytherapy procedure, catheters and needles under the OPPS.
      More specifically, the MMA requires Medicare to reimburse hospitals for each
      brachytherapy seed/source furnished between January 1, 2004 to December 31,
      2006
      based on the hospital’s costs for each patient (calculated from the hospital’s
      charges adjusted by the hospital’s specific cost-to-charge ratio). This means
      that hospital reimbursement is no longer limited to or dictated by the bundled
      reimbursement amounts assigned to the brachytherapy codes that the Centers
      for
      Medicare and Medicaid Services (“CMS”) used in 2003.





The
      MMA also directs the U.S. Government Accountability Office (“GAO”, formerly the
      General Accounting Office) to conduct a study examining future payment policies
      for brachytherapy seeds. The GAO study is still pending.





On
      November 10, 2005, CMS published its final rule on the OPPS for calendar year
      2006.  There are no changes in the reimbursement policy for brachytherapy
      seeds/sources for 2006, although there are some reductions for hospital payments
      for procedures required to implant brachytherapy seeds.  Additionally, the
      GAO study referred to above may have an effect on the reimbursement level for
      seeds beginning January 1, 2007. Any new reimbursement policies may have an
      adverse effect on utilization of the Company's brachytherapy
      products.





The
      Company believes its previous efforts in assisting policymakers in formulating
      and revising Medicare policies to recognize the unique aspects of classification
      and reimbursement that apply to brachytherapy devices such as
      TheraSeed â were pivotal to the enactment of the improved 2003 Medicare legislation for
      brachytherapy seeds/sources. The Company plans to continue working to assist
      policymakers regarding these important issues in the future.





Due
      to the fact that the Medicare rules governing coding of brachytherapy
      seeds/sources and the procedures required to implant seeds have undergone
      significant change during the past few years, and are likely to continue to
      undergo additional changes, the Company believes that Medicare reimbursement
      may
      continue to create confusion for hospitals and doctors going forward. Medicare’s
      OPPS reimbursement levels for the procedures performed during prostate
      brachytherapy could influence the utilization of brachytherapy seeds, including
      the Company’s brachytherapy products.





There
      can be no assurance that (i) 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
      TheraSeed ® ,
      or any of our 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 the Company to maintain prices at levels sufficient to realize an
      appropriate return.





***We
      may be unable to maintain sufficient liability
      insurance.***




The
      Company’s business is subject to product liability risks inherent in the
      testing, manufacturing and marketing of medical devices. The Company maintains
      a
      product liability insurance policy and a general liability insurance policy,
      each with coverage of an annual aggregate
      maximum amount of $5 million. The Company also maintains umbrella liability
      policies with limits of $20 million per occurrence in the aggregate. The
      Company’s 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 the Company does not or cannot maintain
      sufficient liability insurance, its ability to market its 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 the business, financial condition and results of operations of the
      Company.


25





***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. During 2003, the Company became aware
      of the need for an Industrial Process Water Permit from the City of Buford,
      Georgia. The Company has taken all the required steps to obtain this permit
      and
      expects to obtain this permit, but has also requested a determination of
      non-applicability. In addition, the Company has been authorized by the City
      to
      discharge industrial process water to the municipal sewage system while the
      City
      considers its final decision. 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.





***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.




***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.***




Because
      both TheraSeed ® and I-Seed deliver a highly concentrated and confined dose of radiation directly
      to the prostate, healthy surrounding tissues and organs are typically spared
      excessive radiation exposure. This typically results in fewer and less severe
      side effects and complications than may be incurred with other conventional
      prostate cancer therapies. It is an inherent risk of this industry that we
      might
      be sued in a situation where one of our products results in, or is alleged
      to
      result in, a personal injury. Although we believe that as of December 31,
      2005 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.


26




The
      FDA’s medical device reporting regulations and the European Union Viligence
      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 occurred. 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 CP Medical products are Class II devices subject to certain
      special controls by the FDA, many of the CP Medical 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.




As
      of December 31, 2005, we maintain product liability insurance, which has
      deductible amounts and per claim and aggregate limits. However, we cannot assure
      you that this insurance will continue to be available on terms acceptable to
      us
      or in sufficient amounts if at all, or that it will provide adequate coverage
      in
      the event that any product liability is actually incurred.







***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, operating losses could significantly
      reduce our remaining cash, cash equivalents and investments in marketable
      securities. Furthermore, we may require additional capital for the purchase
      of
      complementary 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.




27





We
      have a Credit Agreement with a financial institution which expires
      October 29, 2006 and provides for revolving borrowings of up to $40.0
      million at any time outstanding, including a $5.0 million sub-limit for letters
      of credit. 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 its subsidiary (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. No assurances are made
      regarding whether such refinancing can be arranged.





***If
      we are unable to develop new enhancements and new generations of brachytherapy
      products and innovative sutures, 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 products and innovative sutures. Many of our brachytherapy
      products and sutures 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 regulatory approvals and clearances;


•  competitors’
      response to new product developments;


•  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 the
      brachytherapy and innovative suture markets, 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 sutures. Without new
      product introductions, our revenues will likely suffer. Even if customers accept
      new or 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.





***We
      may not be successful in implementing our restructuring
      initiatives.***





In
      August 2005, we began implementing certain restructuring initiatives in
      connection with our decision to begin focusing on our two main business sectors:
      brachytherapy and the wound closure and other product lines for the surgical
      markets through our newly acquired subsidiary, CP Medical. The restructuring,
      including the closure of our PSP facility in Oak Ridge, Tennessee and the Newton
      Terrace facility in Buford Georgia, has resulted in (i) the elimination of
      23
      positions within the Company; (ii) the discontinuation of the Company’s
      radiochemical activities; and (iii) the discontinuation of research and
      development activities


28




***Our
      restructuring of operations may not achieve the results we intend and may harm
      our business.***





As
      a result of the restructuring, we have incurred significant restructuring
      charges and expenses and realized significant pre-tax savings associated with
      the restructuring. We anticipate that the expected net effect of both
      restructuring charges and savings on pre-tax cash flow in 2006 will be a net
      increase in pre-tax cash flow. However, the implementation of our restructuring
      initiatives may place a strain on our managerial, operational, financial,
      employee and other resources. If we experience difficulties in carrying out
      the
      restructuring initiatives we may not achieve the cost savings anticipated and
      may incur greater expenses than expected.








**Item
      2. Properties**





During
      2005, the Company owned two manufacturing facilities located in Buford, Georgia.
      One facility houses cyclotrons, raw material processing, assembly and shipping
      operations. The second facility housed four cyclotrons as well as certain
      research and development activities of the Company. This second facility was
      closed in connection with the Company’s restructuring in August 2005 (see *“Restructuring”* above
      and *“Item
      7 - Management’s Discussion and Analysis of Operations”* )
      and is no longer in service. The Company also owns an administrative facility
      adjacent to its production facilities in Buford.





The
      Company owns approximately 32 acres in Buford Georgia on which the two
      manufacturing facilities and administration facilities are located. Land remains
      available for future development adjacent to its current Buford location.





The
      Company leases 21 acres of land in the Oak Ridge, Tennessee area, on which
      it
      constructed a facility to house the PSP equipment. The Oak Ridge facility was
      shut down in connection with the Company’s restructuring in August 2005. The
      Company is actively marketing its interest in its Oak Ridge real estate and
      the
      intellectual property generated by the curtailed research and development
      programs (See *“Restructuring”* above
      and *Item
      7* - *“Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations”* ).





CP
      Medical leases production, warehouse and office space from an entity controlled
      by the former owner of CP Medical, who is currently an officer and stockholder
      of Theragenics. Monthly payments of approximately $13,600 are due under this
      lease through April 2010.








**Item
      3. Legal Proceedings**





In
      January 1999, the Company and certain of its officers and directors were named
      as defendants in certain securities actions alleging violations of the federal
      securities laws, including Sections 10(b), 20(a) and Rule 10b-5 of the
      Securities and Exchange Act of 1934, as amended. These actions were consolidated
      into a single action in the U.S. District Court for the Northern District of
      Georgia. The amended complaint generally alleged that the defendants made
      certain misrepresentations and omissions in connection with the performance
      of
      the Company during the class period and sought unspecified damages. In July
      2004, the consolidated federal securities


29







On
      May 14, 1999 a stockholder of the Company filed a derivative complaint in the
      Delaware Court of Chancery purportedly on behalf of the Company, alleging that
      certain directors breached their fiduciary duties by engaging in the conduct
      that was alleged in the consolidated federal class action complaint. The
      derivative lawsuit is still pending, and its status is currently being
      reevaluated in light of the settlement of the securities class action
      lawsuit.





The
      Company and one of its distributors, Oncura, had been arbitrating claims arising
      in connection with the non-exclusive distribution agreement between the parties
      (the “Oncura Agreement”). On April 9, 2005, the arbitration was settled by
      mutual consent of the parties. As part of the settlement, each party dropped
      the
      claims it had been arbitrating against the other and the parties agreed to
      advance the termination of the Oncura Agreement to September 8, 2005.





From
      time to time the Company may be a party to claims that arise in the ordinary
      course of business, none of which, in the view of management, is expected to
      have a material adverse effect on the consolidated financial position or results
      of operations of the Company.





**Item
      4. Submission of Matters to a Vote of Security Holders**





****  The
      Company did not submit any matter to a vote of its security holders during
      the
      fourth quarter of calendar year 2005.





**PART
      II**





**Item
      5.**  **Market
      for Registrant's Common Equity and Related**


**Stockholder
      Matters**





The
      Company’s Common Stock, $.01 par value, (Common Stock) is traded on the New York
      Stock Exchange (NYSE) under the symbol “TGX”. The high and low prices for the
      Company’s Common Stock as reported on the NYSE for each quarterly period in 2005
      and 2004 are as follows:




**High**
            **Low****2005**
              First
                Quarter
            $4.08
            $
                3.04Second
                Quarter
            3.89
            3.13Third
                Quarter
            3.58
            2.78Fourth
                Quarter
            3.20
            2.75**2004**
              First
                Quarter
            $6.20
            $
                5.00Second
                Quarter
            5.42
            4.20Third
                Quarter
            4.60
            3.53Fourth
                Quarter
            4.35
            3.50




As
      of March 6 , 2006, the closing price of the Company's Common Stock was $3.26
      per
      share. Also, as of that date, there were approximately 497 holders of record of the Company's





30







The
      Company has a Stockholder Rights Plan (the “Rights Plan”), which contains
      provisions designed to protect the Company’s stockholders. Pursuant to the
      Rights Plan, each share of the Company’s Common Stock contains a share purchase
      right (a “Right”). The Rights expire in February 2007, and do not become
      exercisable unless certain events occur including the acquisition of, or
      commencement of a tender offer for, 15% or more of the outstanding Common Stock.
      In the event certain triggering events occur, including the acquisition of
      20%
      or more of the outstanding Common Stock, each Right that is not held by the
      20%
      or more stockholders will entitle its holder to purchase additional shares
      of
      Common Stock at a substantial discount to then current market prices. The Rights
      Plan and the terms of the Rights, which are set forth in a Rights Agreement
      between the Company and SunTrust Bank, Atlanta, as Rights Agent, could add
      substantially to the cost of acquiring the Company, and consequently could
      delay
      or prevent a change in control of the Company.





**Dividend
      Policy**





The
      Company has never declared or paid a cash dividend on its Common Stock. It
      is
      the present policy of the Board of Directors to retain all earnings to support
      operations and to finance expansion. Consequently, the Board of Directors does
      not anticipate declaring or paying cash dividends on the Common Stock in the
      foreseeable future. In addition, the Company's current credit facility prohibits
      the payment of dividends.





**Item
        6. Selected Financial Data**
  The
        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.





31




**Year
                Ended December 31,****2005**
            
            
            **2004**
            
            
            **2003**
            
            
            **2002**
            
            
            **2001****(Amounts
                in thousands, except per share data)**
              **Statement
                of Earnings Data:**Product
                sales
            
            **$**
            **43,693**
            
            $
            33,030
            
            $
            35,393
            
            $
            41,512
            
            $
            49,667Licensing
                fees
            
            
            **577**
            
            
            308
            
            
            187
            
            
            352
            
            
            333Total
                revenue
            
            
            **44,270**
            
            
            33,338
            
            
            35,580
            
            
            41,864
            
            
            50,000Cost
                of sales
            
            
            **23,763**
            
            
            14,122
            
            
            15,628
            
            
            14,677
            
            
            14,641Gross
                profit
            
            
            **20,507**
            
            
            19,216
            
            
            19,952
            
            
            27,187
            
            
            35,359Selling,
                general and administrative
            
            
            **20,152**
            
            
            17,619
            
            
            13,788
            
            
            12,845
            
            
            10,448Research
                and development
            
            
            **3,632**
            
            
            9,583
            
            
            7,467
            
            
            6,538
            
            
            2,671Restructuring
                expenses
            
            
            **33,390**
            
            
            -
            
            
            -
            
            
            -
            
            
            -Operating
                profit (loss)
            
            
            **(36,667**
            **)**
            
            (7,986
            )
            
            (1,303
            )
            
            7,804
            
            
            22,240Other
                income, net
            
            
            **1,267**
            
            
            1,134
            
            
            894
            
            
            897
            
            
            1,408Net
                earnings (loss) before income tax and cumulative effect of change
                in
                accounting principle
            
            
            **(35,400**
            **)**
            
            (6,852
            )
            
            (409
            )
            
            8,701
            
            
            23,648Income
                tax expense (benefit)
            
            
            **(6,394**
            **)**
            
            (2,542
            )
            
            (319
            )
            
            3,145
            
            
            8,514Earnings
                (loss) before cumulative effect of change in accounting
                principle
            
            
            **(29,006**
            **)**
            
            (4,310
            )
            
            (90
            )
            
            5,556
            
            
            15,134Cumulative
                effect of change in accounting principle, net of tax
            
            
            **-**
            
            
            -
            
            
            (222
            )
            
            -
            
            
            -Net
                earnings (loss)
            
            **$**
            **(29,006**
            **)**
            $
            (4,310
            )
            $
            (312
            )
            $
            5,556
            
            $
            15,134Earnings
                (loss) per common shareBasic:Earnings
                (loss) before cumulative effect of change in accounting
                principle
            
            **$**
            **(0.93**
            **)**
            $
            (0.14
            )
            $
            (0.00
            )
            $
            0.19
            
            $
            0.51Cumulative
                effect of change in accounting principle, net of tax
            
            
            **-**
            
            
            -
            
            
            (0.01
            )
            
            -
            
            
            -Net
                earnings (loss)
            
            **$**
            **(0.93**
            **)**
            $
            (0.14
            )
            $
            (0.01
            )
            $
            0.19
            
            $
            0.51Diluted:Earnings
                (loss) before cumulative effect of change in accounting
                principle
            
            **$**
            **(0.93**
            **)**
            $
            (0.14
            )
            $
            (0.00
            )
            $
            0.19
            
            $
            0.50Cumulative
                effect of change in accounting principle, net of tax
            
            
            **-**
            
            
            -
            
            
            (0.01
            )
            
            -
            
            
            -Net
                earnings (loss)
            
            **$**
            **(0.93**
            **)**
            $
            (0.14
            )
            $
            (0.01
            )
            $
            0.19
            
            $
            0.50





Weighted
      average common shares


Basic
            
            
            **31,273**
            
            
            29,971
            
            
            29,902
            
            
            29,746
            
            
            29,627Diluted
            
            
            **31,273**
            
            
            29,971
            
            
            29,902
            
            
            29,994
            
            
            30,029






**December
                31,****2005**
            
            **2004**
            
            **2003**
            
            **2002**
            
            **2001****(In
                thousands)****Balance
                Sheet Data:**Cash
                and short-term investments
            
            **$**
            **10,073**
            
            $
            28,450
            
            $
            45,104
            
            $
            56,344
            
            $
            45,373Marketable
                securities
            
            
            **35,535**
            
            
            33,811
            
            
            21,327
            
            
            11,977
            
            
            10,852Property,
                plant and equipment, net
            
            
            **32,766**
            
            
            70,215
            
            
            73,372
            
            
            74,050
            
            
            76,830Total
                assets
            
            
            **122,064**
            
            
            148,678
            
            
            152,789
            
            
            151,395
            
            
            144,007Long-term
                debt, including current installments
            
            
            **-**
            
            
            -
            
            
            -
            
            
            -
            
            
            -Contract
                termination liability, including current installments
            
            
            **1,560**
            
            
            -
            
            
            -
            
            
            -
            
            
            -Shareholders'
                equity
            
            **$**
            **115,683**
            
            $
            138,060
            
            $
            142,326
            
            $
            142,090
            
            $
            136,007










32





**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 cancer treatment and surgical markets,
      with TheraSeed ® ,
      its premier palladium-103 prostate cancer treatment device, and wound closure
      and other medical products manufactured and sold through its CP Medical
      subsidiary .
      The Company also manufactures and distributes I-Seed, its iodine-125 based
      prostate cancer treatment device. Theragenics ® is the world’s largest producer of palladium-103, the radioactive isotope that
      supplies the therapeutic radiation for its TheraSeed ® device. Physicians, hospitals and other healthcare providers, primarily located
      in the United States, utilize the TheraSeed ® device. The TheraSeed ® device has also been approved for marketing throughout the member countries
      of
      the European Union by obtaining its CE Mark, though sales in Europe have
      not been significant. The majority of sales are channeled through one
      third-party distributor. The Company also sells its TheraSeed ® devices directly to physicians.




On
      May 6, 2005, the Company acquired CP Medical Corporation (“CP Medical”) for
      approximately $26.7 million, including $20.6 million in cash and 1,840,458
      shares of common stock valued at approximately $6.1 million.





CP
      Medical is a manufacturer and supplier of innovative wound closure and other
      medical products such as sutures, cardiac pacing cables, and brachytherapy
      needles, spacers and sleeves. CP Medical’s products have applications in
      urology, veterinary, cardiology, plastic surgery, dental, orthopedics, and
      other
      fields. Historically, CP Medical has generated the majority of its revenue
      in
      the wound closure market, an estimated $2.0 billion annual market worldwide
      and
      an estimated $1.2 billion annual market in the United States. During 2005,
      approximately 60% of CP Medical’s revenue was generated in the veterinary wound
      closure market, an estimated $50 million annual market in the United States.
      The
      transaction established a new growth platform for the Company within the field
      of medical devices and also serves to diversify the Company’s product offerings
      within its core brachytherapy business. Consolidated results of operations
      for
      the year ended December 31, 2005 include the results of CP Medical since May
      7,
      2005, the first date after the closing of the acquisition.





During
      the third quarter of 2005 a plan to restructure the Company was implemented.
      This plan was announced on August 11, 2005. See *“Restructuring”* below.





Early
      in 2003 the Company diversified its product line with the purchase of the U.S.
      iodine-125 prostate brachytherapy business of BEBIG Isotopen-und Medizintechnik
      GmbH (“BEBIG”). The purchase gives Theragenics ® exclusive U.S. manufacturing and distribution rights to an FDA-cleared
      iodine-125-based medical device (I-Seed) for the treatment of prostate cancer.
      The Company sells the I-Seed device directly to physicians, hospitals and other
      healthcare providers. The Company believes that the ability to provide both
      TheraSeed ® and I-Seed devices enhances the Company’s ability to market to direct customers
      who seek a single source for both palladium-103 and iodine-125 brachytherapy
      seeds.





***Restructuring***





On
      August 11, 2005, the Company announced a restructuring that resulted in
      th e
      closure of the Plasma Separation Process (“PSP”)
      facility in Oak
      Ridge, Tennessee, ended the research and development activities related to
      the
      vascular, macular degeneration and breast cancer areas, and eliminated
      production of radiochemical products. Curtailing these activities allowed the
      Company to shrink its asset base by shutting down six cyclotrons and closing
      the
      Newton Terrace Facility in Buford, Georgia, as


33


well
      as closing its PSP facility. The objective of the restructuring is to sharpen
      the Company’s focus on its two main business segments, brachytherapy seeds and
      CP Medical products, as well as provide a more focused platform for continued
      diversification and expansion through acquisitions or other channels.





As
      a result, restructuring charges of approximately $33.4 million were recorded
      in
      2005. These restructuring charges were comprised of one time, non-cash
      impairment charges totaling $28.8 million which were related to the impairment
      of the PSP equipment and facility in Oak Ridge, Tennessee, the Newton Terrace
      facility in Buford, Georgia, and six cyclotrons and related equipment and
      facilities; other one time, non-cash charges of $3.3 million, including the
      write off of inventory and other assets, and contract termination costs related
      to the Oak Ridge land lease; and $1.3 million of severance, site exit and
      disposal, and other costs. Completion of the restructuring will take a period of months, and the Company
      expects to incur additional pre-tax restructuring expenses during 2006 of
      approximately $1.4 million to $1.6 million. These future charges are expected
      to
      primarily relate to on going site exit and disposal costs.





During
      2005 the restructuring generated pre-tax operating expense savings of
      approximately $2.3 million, including cash based savings of approximately $1.6
      million. Beginning in 2006, the restructuring is expected to generate pre-tax
      operating expense savings of approximately $6.5 million to $7.0 million
      annually, including pre-tax cash savings of approximately $4.0 million to $4.4
      million annually. On a pre-tax net cash flow basis, the restructuring is
      expected to produce a positive pre-tax cash flow impact of approximately $2.4
      million to $3.0 million in 2006.





The
      Company intends on disposing of the assets idled by the restructuring. The
      Company does not expect to be able to sell its leasehold interest in the PSP
      equipment because of its highly specialized nature and the classification and
      export control regulations applicable to this technology. However, the Company
      is actively marketing its interest in its Oak Ridge real estate and the
      intellectual property generated by the curtailed R&D programs. Assets held
      for sale of approximately $3.4 million are included in the accompanying
      consolidated balance sheet at December 31, 2005.








***Results
      of Operations***





*Year
      Ended December 31, 2005, Compared to Year Ended December 31,
      2004*





Consolidated
      revenue for the year ended December 31, 2005 was $44.3 million, consisting
      of
      sales in the brachytherapy seed segment of $36.4 million and sales at CP Medical
      of $7.9 million. This represents an increase of $10.9 million, or 32.8%, over
      revenue in 2004, and an increase in brachytherapy seed revenue of $3.0 million,
      or 9.1% over 2004. The average selling price of the TheraSeed® device
      during 2005 was comparable to the average selling price during 2004. Management
      believes that the increases in brachytherapy revenue are a result of the efforts
      of the Company’s direct sales force and its direct to consumer advertising
      programs.





Currently,
      the Company has a non-exclusive distribution agreement in place with C. R.
      Bard
      (“Bard”) for the distribution of the TheraSeed ® device, which is effective through December 31, 2007 (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 term expires
      on
      December 31, 2007, and will be automatically extended for one additional year
      unless either party gives notice of its intent not to extend by December 31,
      2006.  The Company also had a non-exclusive distribution agreement in place
      with Medi-Physics, Inc., formerly d/b/a Nycomed Amersham and now part of Oncura,
      a company formed by a merger of the brachytherapy business of Amersham plc
      and
      Galil Medical Ltd. (the “Oncura Agreement”). In December 2004, Oncura notified
      the Company that it would not be renewing its distribution agreement effective
      December 31, 2005 and subsequently, the
      Oncura Agreement was terminated effective September 8, 2005 (see below). Sales
      to Oncura during the year ended December 31, 2005 declined by 50% compared
      to
      2004.


34




The
      Company and Oncura had been arbitrating claims arising in connection with the
      Oncura Agreement and on April 9, 2005, the arbitration was settled by mutual
      consent of the parties. As part of the settlement, each party has dropped the
      claims it had been arbitrating against the other and the parties agreed to
      advance the termination of Oncura’s distribution agreement for
      TheraSeed ® to September 8, 2005. The Company’s direct sales force and C.R. Bard, its other
      distributor, have aggressively marketed TheraSeed ® to
      customers of Oncura in an effort to retain the business. Subsequent to the
      termination of the Oncura Agreement on September 8, 2005, approximately 85%
      of
      the TheraSeed® unit volume from former Oncura customers has been
      retained (based on comparison to the average weekly volume for sales to such
      customers for the first ten months of 2004). While the Company believes that
      a
      significant portion of the customers previously supplied through Oncura will
      continue to order TheraSeed ® ,
      some of these customers may not and accordingly transition issues may affect
      sales. To the extent that the Company is able to convert customers of Oncura
      to
      direct customers, margins would be improved on these particular sales.




In
      addition, management believes that the brachytherapy industry continues to
      be
      adversely affected by competition from other therapies, changes and
      uncertainties regarding Medicare reimbursement, declining prices for iodine-125
      and palladium-103 seeds, competitors’ selling tactics and the effects of
      consolidation in the industry. At any point in time, Theragenics ® and/or its non-exclusive distributor may change their respective pricing
      policies for the TheraSeed ® or I-Seed (in the case of Theragenics ® )
      device in order to take advantage of market opportunities or to respond to
      competitive situations. Responding to market opportunities and competitive
      situations could have an adverse effect on average selling prices and could
      have
      a favorable effect or prevent an unfavorable effect on market share and volumes.
      Conversely, the Company and its non-exclusive distributor 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.





Licensing
      fees revenue represents licensing payments for the Company’s
      TheraSphere ® technology. Such licensing fees are not expected to become material in the
      foreseeable future.





Cost
      of sales was $23.8 million during 2005, resulting in a gross profit margin
      of
      46.3%, compared with cost of sales of $14.1 million and a gross profit margin
      of
      57.6% during 2004. Included in cost of sales for the year ended December 31,
      2005 was $4.4 million of cost of sales associated with CP Medical. The decreased
      gross margin during 2005 was due primarily to a decrease of $3.9 million in
      the
      amount of palladium-103 material produced and used to support research and
      development efforts during 2005 compared to 2004. The fixed costs associated
      with the $3.9 million in palladium-103 charged to R&D in 2004 remained in
      cost of sales during 2005. Additionally, $1.3 million of production costs were
      capitalized during 2004 associated with the first production of palladium-102
      material using the PSP technology at the Company’s Oak Ridge, Tennessee
      facility. As a result of the cessation of production of palladium-102 during
      the
      fourth quarter of 2004, no Oak Ridge production costs were capitalized during
      2005. The gross margin in 2005 was positively impacted by approximately $1.7
      million of manufacturing related cost savings resulting from the restructuring,
      plus the increased revenue during 2005. Going forward and based on current
      operations, the Company believes that its gross margins will be impacted by
      unit
      volumes in the brachytherapy business, due to its high fixed cost component,
      as
      well as product mix at CP Medical. Given these factors, the composition of
      cost
      of sales in the fourth quarter of 2005 is more representative of what is
      expected going forward in 2006.





Selling,
      general and administrative (“SG&A”) expenses were $20.2 million during 2005,
      compared to $17.6 million during 2004, an increase of $2.6 million. This
      increase resulted from approximately $2.0 million of SG&A at CP Medical,
      plus approximately $1.1 million of severance related expenses not associated
      with the restructuring. These increases were partially offset by a decrease
      in
      advertising. However, the Company expects to continue to invest in its direct
      sales force and increase direct to consumer advertising activities in
      2006.


35







Research
      and development (“R&D”) expense decreased to $3.6 million during 2005, from
      $9.6 million in 2004. The Company was previously conducting clinical trials
      related to the use of palladium-103 for the prevention of restenosis (the
“TheraP trial”), and clinical trials related to the use of palladium-103 to
      treat exudative (wet) age related macular degeneration (the “TheraSight trial”).
      The decrease in R&D expense during 2005 was primarily attributable to the
      completion of the TheraP trial during the second quarter of 2005 and curtailment
      of the TheraSight trial. In connection with the recent restructuring, all
      activities related to the TheraP trial have been discontinued, and activities
      related to the TheraSight trial have been curtailed. Looking forward, the only
      activity expected for these programs is the follow up of all patients previously
      treated in the TheraSight trial, in accordance with the FDA-approved protocol
      for this trial. The Company expects to reach the study endpoint by late
      2006.





Other
      income, comprising interest income and non-operating expenses, was $1.3 million
      during 2005, compared to $1.1 million in 2004. Interest income in 2005 was
      impacted by higher interest rates and improved returns compared to 2004, offset
      by less invested funds due to cash used in the acquisition of CP Medical. The
      Company’s investments consist primarily of short-term cash investments and
      high-credit quality corporate and municipal obligations, in accordance with
      the
      Company’s investment policies. Funds available for investment have and will
      continue to be utilized for the Company’s current and future expansion programs
      and strategic opportunities for growth and diversification. As funds continue
      to
      be used for these programs and activities, and as interest rates continue to
      change, management expects other income to fluctuate accordingly.





The
      Company’s effective income tax rate was a benefit of 18.1% during 2005, compared
      to a benefit of 37.1% during 2004. Primarily as a result of the restructuring
      charges incurred during the third quarter of 2005, the Company has a net
      deferred tax asset of approximately $6.8 million at December 31, 2005. The
      recent history of operating losses incurred by the Company has resulted in
      a
      valuation allowance recorded for the full amount of the net deferred tax assets,
      reducing the income tax benefit recognized in the 2005 periods. The Company’s
      income tax rate in each period also differed from statutory rates primarily
      due
      to the recognition of tax credits related to research activities and tax-exempt
      interest income.








***Results
      of Operations***





*Year
      Ended December 31, 2004, Compared to Year Ended December 31,
      2003*





Total
      revenue was $33.3 million in 2004 compared to $35.6 million in 2003, a decrease
      of $2.3 million, or 6.3%. The decline in revenue was primarily due to an 8.0%
      decrease in unit sales of the TheraSeed ® device, partially offset by $852,000 of revenue recognized during 2004 for
      ancillary services to one distributor. I-Seed unit sales represented
      approximately 4% of total unit sales in both 2004 and 2003. The average selling
      price of the TheraSeed ® device
      was consistent during 2004 when compared to the average selling price during
      2003. Revenue from distributors, including the $852,000 of revenue generated
      from ancillary services, decreased approximately 6.2% during 2004 compared
      to
      2003.





During
      December 2004, the Company was notified by one of its non-exclusive
      distributors, Oncura, that it would not be renewing its distribution agreements
      effective December 31, 2005. Sales to Oncura during 2004 declined by 28.4%
      compared to the corresponding period of 2003. The Company believes that sales
      through Oncura were adversely affected by the distributor’s efforts to market
      prostate cancer treatments other than the TheraSeed ® device
      or brachytherapy.


36


The
      Company’s licensing fees revenue represents licensing payments for the Company’s
      TheraSphere® technology. Such licensing fees are not expected to become material
      in the foreseeable future.





Cost
      of sales was $14.1 million during 2004 compared to $15.6 million in 2003. Gross
      profit was approximately 57.6% of revenue in 2004, compared to 56.1% in 2003.
      The increase in gross profit percentage in 2004 compared to 2003 was largely
      due
      to the capitalization of costs associated with the first production of
      palladium-102 material using the PSP technology at the Company’s Oak Ridge,
      Tennessee facility. Total production costs capitalized were approximately $1.3
      million during 2004. The total cost of the inventory, including the material
      and
      production costs capitalized, is $1.5 million and is included in work-in-process
      inventory in the accompanying December 31, 2004 balance sheet. The Company
      completed PSP production of palladium-102 at Oak Ridge during the fourth quarter
      of 2004. The Company sold the excess palladium metal remaining after the
      production of palladium-102 for approximately $431,000 in November 2004, which
      reduced the carrying value of inventory by this amount. The gross margin in
      2004
      was also favorably impacted by $852,000 of revenue from ancillary services
      to
      one distributor during the twelve months ended December 31, 2004. Gross margin
      during 2004 was negatively impacted by the considerable fixed cost component
      of
      Theragenics’ operations in combination with lower revenue during the twelve
      months ended December 31, 2004 compared to the corresponding period of 2003.





Selling,
      general and administrative (SG&A) expenses were $17.6 million in 2004,
      compared to $13.8 million in 2003, an increase of $3.8 million, or 27.8%. The
      increase in 2004, compared to 2003, was due primarily to costs incurred to
      comply with Section 404 of the Sarbanes-Oxley Act of 2002, an increase in
      professional fees for assistance in various key strategic initiatives, an
      increase in marketing and advertising costs and an increase in compensation
      and
      related expenses due primarily to the expansion of the direct sales force.





R&D
      expenses increased to $9.6 million, or 28.7% of revenue in 2004, from $7.5
      million, or 21.0% of revenue in 2003. The increase in research and development
      expense during 2004 was primarily attributable to an increase in costs to
      support the Company’s peripheral vascular and macular degeneration programs and
      include the cost of palladium-103 produced for use in R&D initiatives.







Other
      income, primarily comprising interest income, was $1.1 million in 2004 compared
      to $894,000 in 2003. The increase during 2004 is primarily the result of better
      returns on the Company’s investments as a result of higher interest rates in
      2004. The Company’s investments consist primarily of short-term cash investments
      and high-credit quality corporate and municipal obligations, in accordance
      with
      the Company’s investment policies.







The
      Company’s effective income tax rate was a benefit of 37.1% during the twelve
      months ended December 31, 2004 compared to a benefit of 78.0% during the twelve
      months ended December 31, 2003. The Company’s income tax rate in each period
      differed from statutory rates primarily due to the recognition of tax credits
      generated by the Company’s investments in its expansion projects, research
      activities and tax-exempt interest income.








***Critical
      Accounting Policies***





The
      financial statements of Theragenics Corporation â are prepared in conformity with accounting principles generally accepted in
      the
      United States of America. Management is required to make certain estimates,
      judgments and assumptions that we believe are reasonable based upon the
      information available. These estimates and assumptions affect the reported
      amounts of assets and liabilities at the dates of the financial statements
      and
      the reported amounts of revenues and expenses during the periods presented.
      The
      significant accounting policies which we believe are the most critical to aid
      in
      fully understanding and evaluating our reported financial results include the
      following:


37





*Property,
      plant and equipment.* Property,
      plant and equipment are recorded at cost and depreciated on a straight-line
      basis over the estimated useful lives of such assets. The Company’s estimates
      can result in differences from the actual useful lives of certain assets. As
      of
      December 31, 2005, the Company owned and operated eight cyclotrons, the first
      of
      which entered service in 1998. Each of the Company’s cyclotrons is depreciated
      using an estimated 10-year life. Management’s estimate of the useful life of
      these cyclotrons is based on the Company’s experience to date with these
      cyclotrons. Based on experience gained relative to the operation, refurbishment,
      and maintenance of the cyclotrons, management believes there is a substantive
      basis for the current depreciable lives of the cyclotrons.





Management
      will continue to periodically examine the reasonableness of its estimates used
      for depreciation. If the Company should determine that the useful life of
      property, plant or equipment should be shortened or lengthened, depreciation
      expense would be adjusted accordingly for the remaining useful life/(lives)
      of
      the identified asset/(s).





Management
      assesses the impairment of its depreciable assets whenever events or
      circumstances indicate that such assets might be impaired. In the event the
      expected undiscounted future cash flows 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. During the third quarter of 2005 the
      Company recorded impairment charges of approximately $28.8 million related
      to
      the PSP facility, the Newton Terrace facility, six cyclotrons and other related
      long-lived assets. This impairment charge reflects the excess of these assets
      carrying value over their fair value as a result of the restructuring actions
      taken during the third quarter of 2005. See *“Restructuring”* above.





It
      is possible that management’s estimates concerning the realizability of the
      Company’s depreciable assets could change in the future.





*Goodwill.* On May 6, 2005, the Company completed the acquisition of CP Medical. A total
      of
      approximately $26.7 million was paid in connection with the acquisition (see *“Overview”* above) and the payments were allocated between the fair value of tangible assets
      acquired, identifiable intangible assets and liabilities assumed. The excess
      of
      cost over the fair value of acquired net assets in the amount of $15.8 million
      is recorded as goodwill. Early in 2003 the Company entered into an agreement
      to
      purchase the brachytherapy business of BEBIG Isotopen-und Medizintechnik GmbH,
      a
      subsidiary company of Eckert & Ziegler AG. A total of approximately $6.3
      million was paid in connection with the acquisition and the payments were
      allocated between the fair value of the assets in the amount of $3.7 million
      and
      $2.6 million to goodwill. The equipment supports the Company’s I-Seed product
      and became operational during the first quarter of 2004. The Company has
      determined that the production line will be amortized over a fifteen-year life.





The
      Company accounts for goodwill and other intangible assets in accordance with
      the
      provisions of Statement of Financial Accounting Standards No. 142, *Goodwill
      and Other Intangible Assets* (“SFAS 142”). Under SFAS 142, goodwill and intangible assets with indefinite
      lives are not amortized to expense and must be reviewed for impairment annually
      or more frequently if events or changes in circumstances indicate that 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.
      If
      book value exceeds market value, the second step of the impairment test is
      performed to measure the amount of impairment


38




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. The Company completed its annual
      goodwill impairment assessment associated with the CP Medical acquisition and
      I-Seed equipment during the fourth quarter of 2005, and determined that goodwill
      was not impaired.





Intangible
      assets with definite lives are being amortized and this amortization is included
      in the accompanying consolidated statements of operations.





*Allowance
      for doubtful accounts.* Management judgments and estimates are made and used in connection with
      establishing an allowance for the possibility that portions of our accounts
      receivable balances may become uncollectable. Accounts receivable are reduced
      by
      this allowance. Specifically, management analyzes accounts receivable in
      relation to current economic trends and changes in our customer payment history
      in establishing this allowance. The accounts receivable balance, net of the
      provision for trade accounts receivables allowance of $517,000, was
      approximately $7.6 million as of December 31, 2005.





*Stock-based
      compensation.* In
      February 2006 the Company granted performance restricted stock rights under
      which the number of shares issuable upon vesting will vary based on certain
      performance criteria over the vesting period. Each quarter the Company will
      determine the expected number of shares issuable upon vesting, based on the
      performance metrics as compared to the criteria to date. To the extent that
      the
      performance metric varies significantly from period to period, the Company
      may
      record additional compensation expense or adjust previously recorded
      compensation expense to reflect current estimates.





*Valuation
      allowance for deferred tax assets.* A
      full valuation reserve related to a $6.8 million net deferred tax asset has
      been
      provided as of December 31, 2005. In the future, if sufficient evidence of
      the
      Company’s ability to generate adequate future taxable income becomes apparent,
      the valuation allowance may be required to be reduced, resulting in income
      tax
      benefits in the consolidated statement of operations. Management evaluates
      the
      realizability of the deferred tax assets and assesses the need for the valuation
      allowance each reporting period.








**Commitments
      and Other Contractual Obligations**




Operating
      Leases




The
      Company leases equipment and production, warehouse, office and other space
      under
      non-cancelable leases that expire at various dates through April 2010.
      Approximate minimum payments of these obligations are as follows:




Obligation
            
            Payments
                due by periodTotal
            
            2006
            
            2007
            
            2008
            
            2009
            
            2010
            
            ThereafterRental
                Space and equipment
            
            $
            678,000
            
            $
            196,000
            
            $
            182,000
            
            $
            180,000
            
            $
            120,000
            
            $
            -
            
            $
            -Production,
                office and warehouse space - related party (1)
            
            
            711,000
            
            
            165,000
            
            
            163,000
            
            
            163,000
            
            
            163,000
            
            
            57,000
            
            
            -Total
                operating lease obligations
            
            $
            1,389,000
            
            $
            361,000
            
            $
            345,000
            
            $
            343,000
            
            $
            283,000
            
            $
            57,000
            
            $
            -





(1)
      - CP
      Medical leases production, warehouse and office space from an entity controlled
      by the former owner of CP Medical, who is currently an officer and stockholder
      of Theragenics. Monthly
      payments of approximately $13,600 are due under this lease through April 2010
      and are included in the above lease commitments.





39






*Contract
      Termination Liability*




The
      Company has recorded a contract termination liability of approximately
      $1,537,000 at December 31, 2005, consistingof the present value of future payments due under the Company’s Oak Ridge
      land lease, using a discount rate of 8.5%. This represents a liability for
      costs
      recorded in connection with the Company’s restructuring in August 2005 that will
      continue to be incurred through the remaining term of that lease agreement
      without economic benefit to the Company, measured at its fair value when the
      Company ceased using its Oak Ridge facility in August 2005 (see *“Restructuring”* in
      Item 1 above). The land lease requires monthly payments of $12,824 through
      April
      2029, adjusted every five years beginning in 2010 for changes in the Consumer
      Price Index. Future maturities of obligations under this lease are as follows:
      2006, $22,176; 2007, $24,136; 2008, $26,269; 2009, $28,591; 2010, $31,119;
      beyond, $1,427,273.





The
      Company has issued standby letters of credit from time to time as security
      for
      certain liabilities. At December 31, 2005, total outstanding letters of credit,
      under the Credit Agreement, approximated $933,000. These letters of credit
      are
      primarily related to asset retirement liabilities of long-lived
      assets.




***Liquidity
      and Capital Resources***





The
      Company had cash, short-term investments and marketable securities of $45.6
      million at December 31, 2005, compared to $62.3 million at December 31, 2004.
      Marketable securities consist primarily of short-term cash investments and
      high-credit quality corporate and municipal obligations, in accordance with
      the
      Company’s investment policies. The aggregate decrease in cash, short-term
      investments and marketable securities was primarily the result of cash paid
      in
      the acquisition of CP Medical (see “Overview” above).





Working
      capital was $60.3 million at December 31, 2005, compared to $72.6 million at
      December 31, 2004. The Company also has a Credit Agreement with a financial
      institution that provides for revolving borrowings of up to $40.0 million,
      including a $5.0 million sub-limit for letters of credit, through a credit
      facility which expires on October 29, 2006. No borrowings were outstanding
      under
      the Credit Agreement at December 31, 2005. The Company does have letters of
      credit totaling $933,000 outstanding under the Credit Agreement, representing
      decommission funding required by the Georgia Department of Natural Resources
      and
      a utility deposit to the City of Oak Ridge, Tennessee. The Credit Agreement
      is
      unsecured, but provides for a “springing lien” to be established on
      substantially all of the assets of the Company (subject to certain exceptions)
      in the event certain events of default occur under the Credit Agreement. The
      Credit Agreement, 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 Agreement limit
      the incurrence of additional debt and require the maintenance of certain
      financial ratios and tests.





Cash
      provided by operations was $4.2 million for the year ended December 31, 2005,
      compared to $126,000 in 2004. Cash provided by operations consists of net loss,
      plus non-cash expenses such as depreciation and amortization, and changes in
      balance sheet items such as accounts receivable, inventories, prepaid expenses
      and payables. Prepaid expenses and other current assets decreased $1.5 million
      during 2005, primarily as a result of the receipt of income tax refunds.
      Additionally, accounts receivable and inventories increased in aggregate by
      approximately $1.5 million from 2004, primarily as a result of higher sales
      volumes.


40


Capital
      expenditures totaled $533,000 and $3.3 million during 2005 and 2004,
      respectively. The spending during 2004 was related to equipment placed in
      service during the first quarter of 2005 that allows the Company to provide
      seed
      loading and sterilization services. During 2004, the Company also made a final
      payment of $1.0 million as part of the Company’s purchase of the U.S. iodine-125
      prostate brachytherapy business of BEBIG (see “ *Overview* ”
      above), procuring an automated production line that became operational during
      the first quarter of 2004.





In
      connection with the recent restructuring the
      Company incurred net pre-tax cash expenditures of approximately $825,000 during
      2005, primarily related to severance costs and site exit and disposal
      activities, and expects further pre-tax cash expenditures of approximately
      $1.4
      million to $1.6 million during 2006. The Company expects pre-tax cash savings
      of
      approximately $4.0 million to $4.4 million in 2006 (s ee *“Restructuring”* above).





On
      May 6, 2005, the Company acquired CP Medical Corporation (“CP Medical”) for
      approximately $26.7 million, including $20.6 million in cash and $6.1 million
      in
      common stock.





Cash
      could also be used in 2006 for increased marketing and TheraSeed ® support
      activities, support for CP Medical growth and in the pursuit of additional
      diversification efforts such as the purchase of technologies, products or
      companies.





Cash
      provided by financing activities was $363,000 and $108,000 in 2005 and 2004,
      respectively, consisting of cash proceeds from the exercise of stock options
      and
      the Company’s Employee Stock Purchase Plan.





The
      Company believes that current cash and investment balances and cash from future
      operations and credit facilities will be sufficient to meet its current
      anticipated working capital and capital expenditure requirements. In the event
      additional financing becomes necessary, management may choose to raise those
      funds through other means of financing as appropriate.





***Government
      Regulation***





The
      Company is required under its radioactive materials license to maintain
      radiation control and radiation safety personnel, procedures, equipment and
      processes, and to monitor its facilities and its employees and contractors.
      The
      Company is also required to provide financial assurance that adequate funding
      will exist for end-of-life radiological decommissioning of its cyclotrons and
      other radioactive areas of its property that contain radioactive materials.
      The
      Company has provided this financial assurance through the issuance of letters
      of
      credit. The Company is also subject to federal, state and local regulations
      relating to the discharge of materials into the environment generally. During
      2003, the Company became aware of the need for an Industrial Process Water
      Permit from the City of Buford, Georgia. The Company has taken all the required
      steps to obtain this permit and expects to obtain this permit, but has also
      requested a determination of non-applicability. The Company has been authorized
      by the City to discharge industrial process water to the municipal sewage system
      while the City considers its final decision.





***Medicare
      Developments***





On
      December 8, 2003, the President signed the Medicare Prescription Drug,
      Improvement and Modernization Act of 2003 (“MMA”) into law that provides for
      improved reimbursement and coding policies in 2004 and beyond for brachytherapy
      seeds/sources under Medicare’s hospital outpatient prospective payment system
      (“OPPS”).





The
      brachytherapy provisions in the MMA, which went into effect on January 1, 2004,
      require Medicare to unbundle the cost of the brachytherapy seeds/sources from
      the costs of the brachytherapy procedure, catheters and needles under the OPPS.
      More specifically,


41




requires
      Medicare to reimburse hospitals for each brachytherapy seed/source furnished
      between January 1, 2004 to December 31, 2006 based on the hospital’s costs for
      each patient (calculated from the hospital’s charges adjusted by the hospital’s
      specific cost-to-charge ratio). This means that hospital reimbursement is no
      longer limited to or dictated by the bundled reimbursement amounts assigned
      to
      the brachytherapy codes that the Centers for Medicare and Medicaid Services
      (“CMS”) used in 2003.





The
      MMA also directs the U.S. Government Accountability Office (“GAO”, formerly the
      General Accounting Office) to conduct a study examining future payment policies
      for brachytherapy seeds. The GAO study is still pending.





On
      November 10, 2005, CMS published its final rule on the OPPS for calendar year
      2006.  There are no changes in the reimbursement policy for brachytherapy
      seeds/sources for 2006, although there are some reductions for hospital payments
      for procedures required to implant brachytherapy seeds.  Additionally, the
      GAO study referred to above may have an effect on the reimbursement level for
      seeds beginning January 1, 2007. Any new reimbursement policies may have an
      adverse effect on utilization of the Company's brachytherapy
      products.





The
      Company believes its efforts in assisting policymakers in formulating and
      revising Medicare policies to recognize the unique aspects of classification
      and
      reimbursement that apply to brachytherapy devices such as TheraSeed â were pivotal to the enactment of the improved 2003 Medicare legislation for
      brachytherapy seeds/sources. The Company plans to continue working to assist
      policymakers regarding these important issues in the future.





Due
      to the fact that the Medicare rules governing coding of brachytherapy
      seeds/sources and the procedures required to implant seeds have undergone
      significant change during the past few years, and are likely to continue to
      undergo additional changes, the Company believes that Medicare reimbursement
      may
      continue to create confusion for hospitals and doctors going forward. In that
      regard, management continues to closely monitor any effects of the reimbursement
      structure on the brachytherapy market as it continues to evaluate pricing,
      marketing and distribution strategies. The Company continues to engage a
      consulting firm specializing in reimbursement practices to help communicate
      brachytherapy reimbursement guidelines to customers. Medicare’s OPPS
      reimbursement levels for the procedures performed during prostate brachytherapy
      could influence the utilization of brachytherapy seeds, including the Company’s
      brachytherapy products.








***Forward
      Looking and Cautionary Statements***





This
      document contains certain forward-looking statements within the meaning of
      the
      Private Securities Litigation Reform Act of 1995 including, without limitation,
      statements regarding sales, marketing and distribution efforts, the Company’s
      direct sales organization, including, but not limited to, its growth and
      effectiveness, third-party reimbursement, CMS policy, sales mix, effectiveness
      and continuation of non-exclusive distribution agreements, pricing for the
      TheraSeed ® and I-Seed devices, future cost of sales, R&D efforts and expenses,
      inventory investment, SG&A expenses, other income, potential new products
      and opportunities, the development of new markets and technologies, execution
      of
      restructuring plans, estimated impairment and other restructuring expenses,
      expected operating expense savings and associated cash expenditures and savings,
      Theragenics’ ® plans and strategies for diversification, and the sufficiency of the Company’s
      liquidity and capital resources. From time to time, the Company may also make
      other forward-looking statements relating to such matters as well as statements
      relating to anticipated financial performance, business prospects, technological
      developments, other research and development activities and similar matters.
      These forward-looking statements are subject to certain risks, uncertainties
      and
      other factors which could cause actual results to differ materially from those
      anticipated,


42


including
      risks associated with new product development cycles, including changes in
      the
      competitive landscape, effectiveness and execution of marketing and sales
      programs of Theragenics ® and its non-exclusive distributor, risks associated with customer distribution
      concentration and potential changes in distributor relationships, the iodine-125
      product line, actual or potential changes in product pricing, competitive
      conditions and selling tactics of the Company’s competitors, continued
      acceptance of TheraSeed ® or the I-Seed devices by the market, management of growth, government regulation
      of the therapeutic radiological pharmaceutical and device business, potential
      changes in third-party reimbursement, risks associated with market development
      activities, risks associated with governmental regulations, changes in
      assumptions used in estimating restructuring charges and operating expense
      savings, and unforeseen costs and cash expenditures associated with the
      restructuring plan. All forward looking statements and cautionary statements
      included in this document are made as of the date hereby based on information
      available to the Company as of the date hereof, and the Company assumes no
      obligation to update any forward looking statement or cautionary
      statement.





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. 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 or to integrate 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.





The
      integration of CP Medical may be complex, time consuming and expensive and
      may
      disrupt our businesses. The combined company will need to overcome significant
      challenges in order to realize benefits or synergies from the acquisition.
      These
      challenges include the timely, efficient and successful execution of a number
      of
      post-acquisition events, including:





·
            integrating
                the operations and technologies of the two
                companies;


·
            retaining
                and assimilating the key personnel of each
                company;


·
            retaining
                existing customers of both companies 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.





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;


43




·
            potential
                unknown liabilities associated with the acquisition and the combined
                operations.





The
      Company may not succeed in addressing these risks or any other problems
      encountered in connection with the acquisition. The inability to successfully
      integrate the operations, technology and personnel of the two companies, or
      any
      significant delay in achieving integration, could have a material adverse effect
      on the Company.








***New
      Accounting Pronouncements***




The
      following accounting standards are effective for the Company beginning January
      1, 2006:




SFAS
      No. 123(R) (revised 2004), *Share
      Based-Payment* ,
      (“SFAS 123R”). SFAS 123R requires 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. While the Company is still evaluating
      the impact of SFAS 123R, accounting for existing share-based payments in
      accordance with SFAS 123R is not expected to have a material impact on the
      Company’s consolidated financial statements. However, future awards may have a
      material impact on the Company’s results of operations, depending on the number,
      terms, conditions and grant date fair value of such awards.




SFAS
      No. 151, *Inventory
      Costs, an amendment of ARB No. 43, Chapter 4* .
      SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense,
      freight, handling costs, and wasted materials and requires that such items
      be
      recognized as current-period charges regardless of whether they meet the “so
      abnormal” criterion outlined in ARB No. 43. In addition, SFAS 151 requires that
      allocation of fixed production overhead to the cost of conversion be based
      on
      normal capacity of the production facilities. SFAS 151 is not expected to have
      a
      material impact on the Company’s consolidated financial statements.




SFAS
      No. 153, *Exchanges
      of Nonmonetary Assets, an amendment of APB Opinion No. 29* (“SFAS 153”). SFAS No. 153 eliminates the exception from fair value measurement
      for nonmonetary exchanges of similar productive assets and replaces it with
      an
      exception for exchanges that do not have commercial substance. SFAS
      153 is not expected to have a material impact on the Company’s consolidated
      financial statements.





Financial
      Accounting Standards Board Staff Position (FSP) No. 115-1, *The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments* ,
      an amendment to SFAS No. 115, *Accounting
      for Certain Investments Held in Debt and Equity Securities.* FSP
      No. 115-1 provides guidance on determining when an investment is considered
      impaired, evaluating whether that impairment is other than temporary, and
      recognizing the impairment loss. The FSP also addresses the accounting and
      disclosure for debt securities subsequent to the recognition of an
      other-than-temporary impairment. FSP No. 115-1 is not expected to have a
      material impact on the Company’s consolidated financial statements.








44








***Quarterly
      Results***





The
      following table sets forth certain statement of operations data for each of
      the
      Company's last eight quarters. This unaudited quarterly information has been
      prepared on the same basis as the annual audited information presented elsewhere
      in this Form 10-K, reflects all adjustments (consisting only of normal,
      recurring adjustments) which are, in management’s opinion, necessary for a fair
      presentation of the information for the periods covered and should be read
      in
      conjunction with the financial statements and notes thereto. The operating
      results for any quarter are not necessarily indicative of results for any future
      period. Quarterly data presented may not reconcile to totals for full year
      results due to rounding.






**2005**
            **2004****First**
            
            
            **Second**
            
            
            **Third**
            
            
            **Fourth**
            
            
            **First**
            
            
            **Second**
            
            
            **Third**
            
            
            **Fourth****Qtr**
            
            
            **Qtr**
            
            
            **Qtr**
            
            
            **Qtr**
            
            
            **Qtr**
            
            
            **Qtr**
            
            
            **Qtr**
            
            
            **Qtr****(Amounts
                in thousands, except per share data)**Total
                revenue
            
            $
            9,539
            
            $
            11,372
            
            $
            12,002
            
            $
            11,357
            
            $
            7,953
            
            $
            8,646
            
            $
            8,283
            
            $
            8,456Cost
                of product sales
            
            
            4,794
            
            
            6,244
            
            
            6,833
            
            
            5,891
            
            
            3,398
            
            
            3,467
            
            
            3,282
            
            
            3,975Gross
                profit
            
            
            4,745
            
            
            5,128
            
            
            5,169
            
            
            5,466
            
            
            4,555
            
            
            5,179
            
            
            5,001
            
            
            4,481Selling,general
                andadministrative
            
            
            4,501
            
            
            5,913
            
            
            4,414
            
            
            5,324
            
            
            4,072
            
            
            4,470
            
            
            4,463
            
            
            4,616Research
                and development
            
            
            1,407
            
            
            1,143
            
            
            823
            
            
            258
            
            
            2,278
            
            
            2,308
            
            
            2,749
            
            
            2,248Restructuring
                expenses
            
            
            -
            
            
            -
            
            
            32,915
            
            
            475
            
            
            -
            
            
            -
            
            
            -
            
            
            -Other
                income
            
            
            330
            
            
            292
            
            
            288
            
            
            355
            
            
            173
            
            
            257
            
            
            355
            
            
            349Net
                loss before income taxes
            
            
            (833
            )
            
            (1,636
            )
            
            (32,695
            )
            
            (236
            )
            
            (1,622
            )
            
            (1,342
            )
            
            (1,856
            )
            
            (2,034
            )Income
                tax benefit
            
            
            (337
            )
            
            (600
            )
            
            (5,457
            )
            
            -
            
            
            (656
            )
            
            (408
            )
            
            (734
            )
            
            (745
            )Net
                loss
            
            $
            (496
            )
            $
            (1,036
            )
            $
            (27,238
            )
            $
            (236
            )
            $
            (966
            )
            $
            (934
            )
            $
            (1,122
            )
            $
            (1,289
            )Earnings
                per common share:Basic
            
            $
            (0.02
            )
            $
            (0.03
            )
            $
            (0.85
            )
            $
            (0.01
            )
            $
            (0.03
            )
            $
            (0.03
            )
            $
            (0.04
            )
            $
            (0.04
            )Diluted
            
            $
            (0.02
            )
            $
            (0.03
            )
            $
            (0.85
            )
            $
            (0.01
            )
            $
            (0.03
            )
            $
            (0.03
            )
            $
            (0.04
            )
            $
            (0.04
            )Weighted
                average shares outstanding:Basic:
            
            
            30,014
            
            
            31,213
            
            
            31,915
            
            
            32,027
            
            
            29,957
            
            
            29,969
            
            
            29,974
            
            
            29,983Diluted
            
            
            30,014
            
            
            31,213
            
            
            31,915
            
            
            32,027
            
            
            29,957
            
            
            29,969
            
            
            29,974
            
            
            29,983





45




**Inflation**





Management
      does 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 the Company’s results of operations.





**Item
              7A.**
            **Quantitative
                and Qualitative Disclosure About Market
                Risk**





The
      Company's market risk exposure, related to market risk sensitive financial
      instruments, is not material. Letters of credit totaling approximately $933,000
      were outstanding under the terms of the Credit Agreement as of December 31,
      2005. No borrowings were outstanding under the Credit Agreement as of December
      31, 2005. (See *Liquidity
      and Capital Resources* above).





**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**





None





**Item
                9A.**
              **Controls
                  and Procedures**








**Evaluation
      of Disclosure Controls and Procedures**




Under
      the supervision and with the participation of the Company’s management,
      including its Chief Executive Officer and Chief Financial Officer, the Company
      conducted an evaluation of its 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 the Company’s
      disclosure controls and procedures were effective as of December 31, 2005,
      the
      end of the period covered by this annual report.


46


**Management’s
      Report on Internal Control over Financial Reporting**





Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting. Internal control over financial reporting is defined in
      Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of
      1934, as amended, as a process designed by, or under the supervision of, a
      company’s principal executive and principal financial officers and effected by a
      company’s board of directors, management and other personnel, to provide
      reasonable assurance regarding the reliability of financial reporting and the
      preparation of financial statements for external purposes in accordance with
      generally accepted accounting principles and includes those policies and
      procedures that:





·
            Pertain
                to the maintenance of records that in reasonable detail accurately
                and
                fairly reflect the transactions and dispositions of the assets of
                the
                company;





·
            Provide
                reasonable assurance that transactions are recorded as necessary
                to permit
                preparation of financial statements in accordance with generally
                accepted
                accounting principles, and that receipts and expenditures of the
                company
                are being made only in accordance with authorizations of management
                and
                directors of the company; and





·
            Provide
                reasonable assurance regarding prevention or timely detection of
                unauthorized acquisition, use or disposition of the company’s assets that
                could have a material effect on the financial
                statements.





All
      internal control systems, no matter how well designed, have inherent limitations
      and can provide only reasonable, not absolute, assurance that the objectives
      of
      the control system are met. Further, the design of a control system must reflect
      the fact that there are resource constraints, and the benefits of controls
      must
      be considered relative to their costs. Because of the inherent limitations
      in
      all control systems, no evaluation of controls can provide absolute assurance
      that all control issues and instances of fraud, if any, within Theragenics
      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, 2005 has excluded CP Medical Corporation.
      CP Medical Corporation was acquired by Theragenics in May 2005, and constituted
      17.8% of consolidated revenue for the year ended December 31, 2005 and 23.9%
      of
      consolidated assets as of December 31, 2005.




Management
      assessed the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2005. 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, 2005, the Company’s
      internal control over financial reporting is effective based on those
      criteria.




Management’s
      assessment of the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2005 has been audited by Grant Thornton LLP, an
      independent registered public accounting firm and their opinion of management’s
      assessment is stated in their report, which is included herein.





47


**CP
      Medical Corporation**





As
      more fully described in Note C to the consolidated financial statements included
      herein, the Company acquired CP Medical Corporation (“CP Medical”)on
      May 6, 2005.
      Since the date of acquisition, we have been focusing on analyzing, evaluating,
      and implementing changes in CP Medical’s procedures and controls to determine
      their effectiveness and to make them consistent with our disclosure controls
      and
      procedures. Prior to our acquisition of CP Medical, CP Medical was not required
      to prepare financial statements in accordance with accounting principles
      generally accepted in the United States of America. In addition, CP Medical
      was
      not previously 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 Securities and Exchange
      Commission.





As
      noted in *Management’s
      Report on Internal Control over Financial Reporting* above, ** CP
      Medical was excluded from the scope of our assessment over the effectiveness
      of
      internal controls over financial reporting as of December 31, 2005. During
      the
      course of integrating the operations of CP Medical, we have
      identified material weaknesses in internal control specifically related to
      inventory accounting at CP Medical, with respect to physical inventory
      quantities being accurately reflected in the automated inventory records and
      adequate control over movement of inventory. This was a result of inadequate
      information technology systems, specifically the software utilized for inventory
      accounting, a lack of adequately experienced accounting personnel for inventory
      accounting, and a lack of established and documented controls surrounding
      inventory activities. We have performed additional procedures to ensure that
      CP
      Medical inventory was properly stated in accordance with generally accepted
      accounting principles at December 31, 2005, and to begin remediation of the
      material weaknesses in internal controls over inventory at CP Medical, including
      the following:




·
            A
                controller possessing greater knowledge and experience was
                hired;




·
            a
                full physical inventory count was performed near year end and inventory
                activity from the date of the physical count back to the date of
                acquisition, and forward through December 31, 2005 was
                reconciled;




·
            differences
                in the physical count performed near year end and the computerized
                inventory records were identified, reconciled and differences were
                recorded;




·
            new
                accounting software that is appropriate for inventory accounting
                has been
                installed and implemented;




·
            inventory
                unit costing was reviewed for accuracy;




·
            formally
                documented procedures for inventory movement are being developed;
                and




·
            recruiting
                for additional experienced accounting personnel to increase resources
                and
                providing training to existing personnel to improve capabilities
                in the
                accounting department at CP Medical is currently
                underway.





During
      2006 we will continue to analyze, document, implement and test internal controls
      at CP Medical and will make additional changes in those controls as appropriate.





**Changes
      in Internal Control Over Financial Reporting**




No
      changes in the Company’s internal control over financial reporting were
      identified as having occurred during the fiscal quarter ended December 31,
      2005
      that have materially affected, or are reasonably likely to materially affect,
      the Company’s internal control over financial reporting, except as described
      above with respect to CP Medical.





48


Report
      of Independent Registered Public Accounting Firm

















Board
      of Directors and Shareholders of


Theragenics
      Corporation





We
      have audited management's assessment included in the accompanying management’s
      Report on Internal Controls Over Financial Reporting, that Theragenics
      Corporation (a Delaware Corporation) and Subsidiary (the “Company”) maintained
      effective internal control over financial reporting as of December 31, 2005
      based on criteria established in *Internal
      Control — Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission
      (COSO). The Company’s management is responsible for maintaining effective
      internal control over financial reporting and for its assessment of the
      effectiveness of internal control over financial reporting. Our responsibility
      is to express an opinion on management's assessment and an opinion on the
      effectiveness of the Company's internal control over financial reporting based
      on our audit.




We
      conducted our audit in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether effective
      internal control over financial reporting was maintained in all material
      respects. Our audit included obtaining an understanding of internal control
      over
      financial reporting, evaluating management's assessment, testing and evaluating
      the design and operating effectiveness of internal control, and performing
      such
      other procedures as we considered necessary in the circumstances. We believe
      that our audit provides a reasonable basis for our opinions.




A
      company's internal control over financial reporting is a process designed to
      provide reasonable assurance regarding the reliability of financial reporting
      and the preparation of financial statements for external purposes in accordance
      with generally accepted accounting principles. A company's internal control
      over
      financial reporting includes those policies and procedures that (1) pertain
      to
      the maintenance of records that, in reasonable detail, accurately and fairly
      reflect the transactions and dispositions of the assets of the company; (2)
      provide reasonable assurance that transactions are recorded as necessary to
      permit preparation of financial statements in accordance with generally accepted
      accounting principles, and that receipts and expenditures of the company are
      being made only in accordance with authorizations of management and directors
      of
      the company; and (3) provide reasonable assurance regarding prevention or timely
      detection of unauthorized acquisition, use, or disposition of the Company's
      assets that could have a material effect on the financial
      statements.




Because
      of its inherent limitations, internal control over financial reporting may
      not
      prevent or detect misstatements. Also, projections of any evaluation of
      effectiveness to future periods are subject to the risk that controls may become
      inadequate because of changes in conditions, or that the degree of compliance
      with the policies or procedures may deteriorate.




As
      described in management’s Report on Internal Controls Over Financial Reporting,
      management has excluded CP Medical Corporation (“CP Medical”) from its
      assessment of internal controls over financial reporting as of December 31,
      2005
      because it was acquired by the Company in May 2005. We have also excluded CP
      Medical from our audit of internal control over financial reporting. CP Medical
      is a wholly-owned subsidiary whose total assets and total revenues represent
      23.9% and 17.8%, respectively, of the related consolidated financial statement
      amounts as of and for the year ended December 31, 2005.


49








In
      our opinion, management's assessment that the Company maintained effective
      internal control over financial reporting as of December 31, 2005, is fairly
      stated, in all material respects, based on criteria established in *Internal
      Control — Integrated Framework* issued by the COSO. Also in our opinion, the Company maintained, in all material
      respects, effective internal control over financial reporting as of December
      31,
      2005, based on criteria established in *Internal
      Control — Integrated Framework* issued by the COSO.




We
      have also audited, in accordance with the standards of the Public Company
      Accounting Oversight Board (United States), the consolidated balance sheets
      of
      the Company as of December 31, 2005 and 2004, and the related consolidated
      statements of operations and comprehensive loss, shareholders’ equity, and cash
      flows for each of the three years in the period ended December 31, 2005 and
      our
      report dated March 13, 2006 expressed an unqualified opinion on those
      consolidated financial statements.








/s/
      GRANT THORNTON LLP





Atlanta,
      Georgia


March
      13, 2006





50




**Item
              9B.**
            **Other
                Information**




None.








**PART
      III**





**Item
      10. Directors and Officers of Registrant***





The
      Company has adopted a Code of Ethics for the Chief Executive Officer and Senior
      Financial Officers and a Code of Conduct for all employees. These codes are
      available on the Company’s website at http://www.theragenics.com .
      These codes are also available without charge upon request directed to Investor
      Relations, Theragenics Corporation, 5203 Bristol Industrial Way, Buford, Georgia
      30518. The Company intends to disclose amendments or waivers of these codes
      with
      respect to the Chief Executive Officer, Senior Financial Officers or Directors
      required to be disclosed by posting such information on its
      website.





The
      Company's Chief Executive Officer is required to certify to the New York Stock
      Exchange each year that she was not aware of any violation by the Company of
      the
      Exchange's corporate governance listing standards. The Chief Executive Officer
      made her annual certification to that effect to the New York Stock Exchange
      as
      of June 1, 2005. The Company's Form 10-K on file with the Securities and
      Exchange Commission includes the certifications of the Company's Chief Executive
      Officer and Chief Financial Officer required by Rule 13a-14 and Section 302
      of
      the Sarbanes-Oxley Act of 2002.








**Item
      11. Executive Compensation***





**Item
      12. Security Ownership of Certain Beneficial Owners and
      Management***





**Item
      13. Certain Relationships and Related Transactions***





**Item
      14. Principal Accounting Fees and Services***





*****
              Exceptas
                  set forth above,****the
                  information called for by Items 10, 11, 12, 13 and 14 is omitted
                  from this
                  Report and is incorporated by reference to the definitive Proxy
                  Statement
                  to be filed by the Company not later than 120 days after December
                  31,
                  2005, the close of its fiscal
                  year.







**PART
      IV**





**Item
      15. Exhibits and Financial Statement Schedules**





**a)**
            **The
                following documents are filed as part of this
                Report.**





**1.**
            **Financial
                Statements**
              See index to financial statements on page
                F-1.







**2.**
            **Financial
                Schedules**
              See financial statement schedule on page
                S-2.




51




**3.**
              **Exhibits**





3.1
            Certificate
                of Incorporation as amended through July 29, 1998 (incorporated by
                reference to Exhibit 3.1 of the Company’s report on Form 10-Q for the
                quarterly period ended June 30, 1998)3.2
            By-Laws
                (incorporated by reference to Exhibit 3.4 of the Company’s registration
                statement on Form S-1, File No. 33-7097, and post-effective amendments
                thereto)4.1
            See
                Exhibits 3.1 - 3.2 for provisions in the Company's Certificate of
                Incorporation and By-Laws defining the rights of holders of the Company's
                Common Stock10.1
            License
                Agreement with University of Missouri, as amended (incorporated by
                reference to Exhibit 10.3 of the Company’s registration statement on Form
                S-1, File No. 33-7097, and post-effective amendments
                thereto)10.2
            Reassignment
                and Release Agreement among the Company, John L. Russell, Jr., and
                Georgia
                Tech Research Institute (incorporated by reference to Exhibit 10.8
                of the
                Company’s registration statement on Form S-1, File No. 33-7097, and
                post-effective amendments thereto)10.3
            Agreement
                with Nordion International Inc. (incorporated by reference to the
                Company’s report on Form 8-K dated March 23, 1995)10.4
            Rights
                Agreement dated February 17, 1997 between the Company and SunTrust
                Bank,
                Atlanta (incorporated by reference to Exhibit 99.1 of the Company’s
                registration statement on Form 8-A filed February 27,
                1997)10.5
            Sublease
                dated March 25, 1999 between Theragenics Corporation and Community
                Reuse
                Organization of East Tennessee+ (incorporated by reference to Exhibit
                10.1
                of the Company’s report on Form 10-Q for the quarterly period ended March
                31, 1999)10.6
            Work
                for Others Agreement dated March 25, 1999 between Theragenics
                Corporation® and Lockheed Martin Energy Research Corporation+
                (incorporated by reference to Exhibit 10.2 of the Company’s report on Form
                10-Q for the quarterly period ended March 31, 1999)10.7
            Credit
                Agreement dated October 29, 2003 between Theragenics
                Corporation® and SouthTrust Bank (incorporated by reference to
                Exhibit 10.1 of the Company’s report on Form 10-Q for the quarterly period
                ended September 30, 2003)10.8
            1986
                Incentive and Non-Incentive Stock Option Plan* (incorporated by reference
                to Exhibit 10.11 of the Company’s registration statement on Form S-1, File
                No. 33-7097, and post-effective amendments thereto)10.9
            1990
                Incentive and Non-Incentive Stock Option Plan* (incorporated by reference
                to Exhibit 10.10 of the Company’s report on Form 10-K for the year ended
                December 31, 1990)10.10
            Theragenics
                Corporation 1995 Stock Option Plan* (incorporated by reference to
                Exhibit
                10.1 of the Company’s common stock registration statement on Form S-8,
                file no. 333-15313)10.11
            1997
                Stock Incentive Plan* (incorporated by reference to appendix B of
                the
                Company’s Proxy Statement for its 1997 Annual Meeting of Stockholders
                filed on Schedule 14A)10.12
            Theragenics
                Corporation Employee Stock Purchase Plan* (incorporated by reference
                to
                appendix A of the Company’s Proxy Statement for its 1998 Annual Meeting of
                Stockholders filed on Schedule
                14A)


52


10.13
              Theragenics
                  Corporation 2000 Stock Incentive Plan* (incorporated by reference
                  to
                  Exhibit 10.16 of the Company’s report on Form 10-K for the year ended
                  December 31, 1999)10.14
              Employment
                  Agreement 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)10.14A
              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)10.15
              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)10.15A
              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)10.15B
              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)10.15C
              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)10.15D
              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)10.15E
              Fifth
                  Amendment to Executive Employment Agreement for Bruce W. Smith*10.16
              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)10.16A
              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)10.16B
              Amendment
                  to Employee Employment Agreement for Michael O’Bannon*10.17
              Additional
                  Compensation Information* (incorporated by reference to Exhibit
                  10.19 of
                  the Company’s report on Form 10-K for the year ended December 31,
                  2004)10.18
              Short-Term
                  Incentive Program* (incorporated by reference to Exhibit 10.20
                  of the
                  Company’s report on Form 10-K for the year ended December 31,
                  2004)10.19
              Long-Term
                  Incentive Program* (incorporated by reference to Exhibit 10.21
                  of the
                  Company’s report on Form 10-K for the year ended December 31,
                  2004)10.20
              Forms
                  of Option Award* (incorporated by reference to Exhibit 10.22 of
                  the
                  Company’s report on Form 10-K for the year ended December 31,
                  2004)10.21
              Form
                  of Restricted Stock Award* (incorporated by reference to Exhibit
                  10.23 of
                  the Company’s report on Form 10-K for the year ended December 31,
                  2004)10.22
              Advisor
                  to the President Agreement dated December 22, 2004 with John Herndon*
                  (incorporated by reference to Exhibit 10.1 of the Company's Form
                  8-K filed
                  February 14, 2005)10.23
              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)


53




10.24
            Form
                of Restricted Stock Agreement 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)10.25
            Form
                of Performance Restricted Stock Rights Agreement* (incorporated by
                reference to Exhibit 10.2 of the Company’s report on Form 10-Q for the
                quarterly period ended July 3, 2005)10.26
            Form
                of Restricted Stock Rights Agreement* (incorporated by reference
                to
                Exhibit 10.3 of the Company’s report on Form 10-Q for the quarterly period
                ended July 3, 2005)10.27
            Borrower
                Party Joinder Agreement dated May 6, 2005 among CP Medical Corporation,
                the Company, and Wachovia Bank, National Association, successor interest
                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)10.28
            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)10.29
            Amendment
                to Credit Agreement dated August 11, 2005 among CP Medical Corporation,
                the Company, and Wachovia Bank, National Association, successor interest
                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)10.30
            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)10.31
            Form
                of Performance Restricted Stock Rights Agreement* (incorporated by
                reference to Exhibit 10.1 of the Company's Form 8-K filed February,
                2006)10.32
            Severance
                Agreement between the Company and James MacLennan dated May 26, 2005*
                (incorporated by reference to Exhibit 10.1 of the Company's Form
                8-K filed
                June 2, 2005)10.33
            Severance
                Agreement between the Company and Tracy Caswell dated May 26, 2005*
                (incorporated by reference to Exhibit 10.2 of the Company's Form
                8-K filed
                June 2, 2005)10.34
            Registration
                Rights Agreement dated May 6, 2005 by and among the Company, Patrick
                Ferguson and Cynthia Ferguson (incorporated by reference to Exhibit
                10.2
                of the Company's Form 8-K filed May 12, 2005)10.35
            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)10.36
            Stock
                Purchase Agreement by and among the Company, CP Medical Corporation,
                Patrick Ferguson and Cynthia Ferguson (incorporated by reference
                to
                Exhibit 2.1 of the Company’s Form 8-K filed April 29,
                2005)21.1
            Subsidiaries
                of Registrant


54





23.1
            Consent
                of Independent Registered Public Accounting Firm31.1
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a) and Section
                302 of
                the Sarbanes-Oxley Act of 200231.2
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) and Section
                302 of
                the Sarbanes-Oxley Act of 200232.1
            Certification
                of Chief Executive Officer pursuant to Section 1350, Chapter 63 of
                Title
                18, United States Code,as
                adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
                200232.2
            Certification
                of Chief Financial Officer pursuant to Section 1350, Chapter 63 of
                Title
                18, United States Code, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002




*
      Management contract or compensatory plan.


+
      Confidential treatment has been requested for portions of this
      document.
























































55


**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto
      duly authorized.





**THERAGENICS
                CORPORATION**(Registrant)By:
                /s/ M. Christine JacobsM. Christine JacobsChief Executive OfficerDated:
                March 13, 2006Buford,
                Georgia





Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on


the
      dates indicated.








**Name**
            **Title**
            **Date**/s/
                M. Christine Jacobs
              
              M.
                Christine Jacobs
            Chief
                Executive Officer
              (Principal
                Executive Officer)
              President
                and Director
            3/13/06/s/
                  Francis J. Tarallo
              
              Francis
                J. Tarallo
            Chief
                Financial Officer (Principal Financial
              and
                Accounting Officer) and Treasurer
            3/13/06/s/
                  Patrick L. Flinn
              
              Patrick
                L. Flinn
            Chairman
                and Director
            3/13/06/s/
                  Otis
                  W. Brawley, M.D.
              
              Otis
                W. Brawley, M.D.
            Director
            3/13/06/s/
                Orwin L. Carter
              Orwin
                L. Carter
            Director
            3/13/06/s/
                  Earnest W. Deavenport, Jr.
              
              Earnest
                W. Deavenport, Jr.
            Director
            3/13/06/s/
                  John V. Herndon
              
              John
                V. Herndon
            Director
            3/13/06/s/
                  Philip A. Incarnati
              
              Philip
                A. Incarnati
            Director
            3/13/06/s/
                  Peter A. A. Saunders
              
              Peter
                A. A. Saunders
            Director
            3/13/06





56








**THERAGENICS
      CORPORATION** **®**





**TABLE
      OF CONTENTS**







PageREPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            F-2CONSOLIDATED
                FINANCIAL STATEMENTSConsolidated
                Balance Sheets - December 31, 2005 and 2004
            F-3Consolidated
                Statements of Operations and Comprehensive Loss for each of the three
                years inthe
                period ended December 31, 2005
            F-5Consolidated
                Statements of Shareholders’ Equity for each of the threeyears
                in the period ended December 31, 2005
            F-7Consolidated
                Statements of Cash Flows for each of the three yearsin
                the period ended December 31, 2005
            F-9NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS
            F-11REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE
            S-1Schedule
                II - Valuation and Qualifying Accounts for eachof
                the three years in the period ended December 31, 2005
            S-2

























F-1


Report
      of Independent Registered Public Accounting Firm











Board
      of Directors and Shareholders of


Theragenics
      Corporation





We
      have audited the accompanying consolidated balance sheets of Theragenics
      Corporation (a Delaware corporation) and Subsidiary (the “Company”) as of
      December 31, 2005 and 2004, and the related consolidated statements of
      operations and comprehensive loss, shareholders’ equity, and cash flows for each
      of the three years in the period ended December 31, 2005. 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 our audits provide a reasonable
      basis for our opinion.





In
      our opinion, the consolidated financial statements referred to above present
      fairly, in all material respects, the consolidated financial position of the
      Company as of December 31, 2005 and 2004, and the consolidated results of its
      operations and its consolidated cash flows for each of the three years in the
      period ended December 31, 2005, in conformity with accounting principles
      generally accepted in the United States of America.





As
      discussed in Note N to the Consolidated Financial Statements, Theragenics
      Corporation  adopted
      Statement of Financial Accounting Standards No. 143, *Accounting
      for Asset Retirement Obligations* ,
      effective January 1, 2003.





We
      have also audited, in accordance with the standards of the Public Company
      Accounting Oversight Board (United States), the effectiveness of the Company's
      internal control over financial reporting as of December 31, 2005, based on
      the criteria established in *Internal
      Control — Integrated Framework* issued by the Committee of Sponsoring Organizations of the Treadway Commission
      and our report dated March 13, 2006, expressed an unqualified opinion on
      management's assessment of the effectiveness of the Company's internal control
      over financial reporting and an unqualified opinion on the effectiveness of
      the
      Company's internal control over financial reporting.





/s/
      GRANT THORNTON LLP





Atlanta,
      Georgia


March
      13, 2006











F-2





Theragenics
      Corporation and Subsidiary





CONSOLIDATED
      BALANCE SHEETS





December
      31,





(Amounts
      in thousands, except per share data)





ASSETS




2005
            
            2004CURRENT
                ASSETSCash
                and short-term investments
            
            $
            10,073
            
            $
            28,450Marketable
                securities
            
            
            35,535
            
            
            33,811Trade
                accounts receivable, less allowance of$517
                in 2005 and $177 in 2004
            
            
            7,622
            
            
            5,787Inventories
            
            
            5,042
            
            
            2,996Deferred
                income tax asset
            
            
            -
            
            
            410Prepaid
                expenses and other current assets
            
            
            2,720
            
            
            4,221Assets
                held for sale
            
            
            3,433
            
            
            -Total
                current assets
            
            
            64,425
            
            
            75,675PROPERTY,
                PLANT AND EQUIPMENT - AT COSTBuildings
                and improvements
            
            
            21,793
            
            
            43,618Machinery
                and equipment
            
            
            35,271
            
            
            61,560Office
                furniture and equipment
            
            
            701
            
            
            81057,765
            
            
            105,988Less
                accumulated depreciation
            
            
            25,960
            
            
            41,22631,805
            
            
            64,762Land
                and improvements
            
            
            822
            
            
            822Construction
                in progress
            
            
            139
            
            
            4,63132,766
            
            
            70,215OTHER
                ASSETSGoodwill
            
            
            18,370
            
            
            2,578Other
                intangible assets
            
            
            6,388
            
            
            86Other
            
            
            115
            
            
            12424,873
            
            
            2,788Total
                Assets
            
            $
            122,064
            
            $
            148,678





F-3





Theragenics
        Corporation and Subsidiary
  CONSOLIDATED
        BALANCE SHEETS - Continued
  December
        31,
  (Amounts
        in thousands, except per share data)
  LIABILITIES
        AND SHAREHOLDERS’ EQUITY


2005
                
                2004CURRENT
                    LIABILITIESAccounts
                    payable
                
                $
                1,488
                
                $
                1,871Accrued
                    salaries, wages and payroll taxes
                
                
                1,659
                
                
                608Other
                    current liabilities
                
                
                1,025
                
                
                607Total
                    current liabilities
                
                
                4,172
                
                
                3,086LONG
                    TERM LIABILITIESDeferred
                    income taxes
                
                
                -
                
                
                6,920Decommissioning
                    retirement
                
                
                672
                
                
                549Contract
                    termination liability
                
                
                1,537
                
                
                -Other
                
                
                -
                
                
                63Total
                    long term liabilities
                
                
                2,209
                
                
                7,532SHAREHOLDERS’
                    EQUITYCommon
                    stock - authorized 100,000 shares of $.01par
                    value; issued and outstanding, 32,008 in 2005 and 29,989 in
                    2004
                
                
                320
                
                
                300Additional
                    paid-in capital
                
                
                68,717
                
                
                61,987Deferred
                    compensation
                
                
                (94
                )
                
                (23
                )Retained
                    earnings
                
                
                46,924
                
                
                75,930Accumulated
                    other comprehensive loss
                
                
                (184
                )
                
                (134
                )Total
                    shareholders’ equity
                
                
                115,683
                
                
                138,060$
                122,064
                
                $
                148,678The
                    accompanying notes are an integral part of these consolidated
                    statements.







F-4








Theragenics
      Corporation and Subsidiary





CONSOLIDATED
      STATEMENTS OF OPERATIONS


AND
      COMPREHENSIVE LOSS





Year
      ended December 31,





(Amounts
      in thousands, except per share data)





2005
            
            2004
            
            2003RevenueProduct
                sales
            
            $
            43,693
            
            $
            33,030
            
            $
            35,393Licensing
                fees
            
            
            577
            
            
            308
            
            
            18744,270
            
            
            33,338
            
            
            35,580Cost
                of sales
            
            
            23,763
            
            
            14,122
            
            
            15,628Gross
                profit
            
            
            20,507
            
            
            19,216
            
            
            19,952Operating
                expensesSelling,
                general and administrative
            
            
            20,152
            
            
            17,619
            
            
            13,788Research
                and development
            
            
            3,632
            
            
            9,583
            
            
            7,467Restructuring
                expenses
            
            
            33,390
            
            
            -
            
            
            -57,174
            
            
            27,202
            
            
            21,255Loss
                from operations
            
            
            (36,667
            )
            
            (7,986
            )
            
            (1,303
            )Other
                income (expense)Interest
                income
            
            
            1,429
            
            
            1,209
            
            
            1,040Interest
                and financing costs
            
            
            (160
            )
            
            (171
            )
            
            (167
            )Other
            
            
            (2
            )
            
            96
            
            
            211,267
            
            
            1,134
            
            
            894Loss
                before income tax andcumulative
                effect of change in accountingprinciple
            
            
            (35,400
            )
            
            (6,852
            )
            
            (409
            )Income
                tax benefit
            
            
            (6,394
            )
            
            (2,542
            )
            
            (319
            )Loss
                before cumulative effect ofchange
                in accounting principle
            
            
            (29,006
            )
            
            (4,310
            )
            
            (90
            )Cumulative
                effect of change in accountingprinciple,
                net of tax of $131
            
            
            -
            
            
            -
            
            
            (222
            )NET
                LOSS
            
            $
            (29,006
            )
            $
            (4,310
            )
            $
            (312
            )








F-5


Theragenics
          Corporation and Subsidiary
 
 CONSOLIDATED
          STATEMENTS OF OPERATIONS
 AND
          COMPREHENSIVE LOSS - Continued
 
 Year
          ended December 31,
 
 (Amounts
          in thousands, except per share data)
 2005
                
                2004
                
                2003**BASIC
                    AND DILUTED NET LOSS PER COMMON SHARE**Loss
                    before cumulative effect of change in accounting principle
                
                $
                (0.93
                )
                $
                (0.14
                )
                $
                (0.00
                )Cumulative
                    effect of change in accounting principle, net of tax
                
                
                -
                
                
                -
                
                
                (0.01
                )Net
                    loss per common share
                
                $
                (0.93
                )
                $
                (0.14
                )
                $
                (0.01
                )BASIC
                    AND DILUTED WEIGHTED AVERAGE SHARES
                
                
                31,273
                
                
                29,971
                
                
                29,902Net
                    loss
                
                $
                (29,006
                )
                $
                (4,310
                )
                $
                (312
                )Comprehensive
                    lossUnrealized
                      loss on securitiesavailable
                      for sale:
                
                
                (50
                )
                
                (143
                )
                
                (34
                )Total
                    comprehensive loss
                
                $
                (29,056
                )
                $
                (4,453
                )
                $
                (346
                )





The
      accompanying notes are an integral part of these consolidated
      statements.


F-6


Theragenics
      Corporation and Subsidiary





CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY





For
      the three years ended December 31, 2005





(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
              income
            
            TotalBalance,
                December 31, 2002
            
            
            29,760
            
            $
            298
            
            $
            61,197
            
            $
            -
            
            $
            80,552
            
            $
            43
            
            $
            142,090Exercise
                of stock options
            
            
            162
            
            
            1
            
            
            434
            
            
            
            
            
            
            
            
            
            
            
            435Employee
                stock purchase plan
            
            
            22
            
            
            
            
            
            70
            
            
            
            
            
            
            
            
            
            
            
            70Stock-based
                compensation
            
            
            
            
            
            
            
            
            72
            
            
            
            
            
            
            
            
            
            
            
            72Unrealized
                loss on securities available-for-sale
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (34
            )
            
            (34
            )Income
                tax effect from stock options and stockpurchase
                plan
            
            
            
            
            
            
            
            
            5
            
            
            
            
            
            
            
            
            
            
            
            5Net
                loss for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (312
            )
            
            
            
            
            (312
            )Balance,
                December 31, 2003
            
            
            29,944
            
            $
            299
            
            $
            61,778
            
            $
            -
            
            $
            80,240
            
            $
            9
            
            $
            142,326Exercise
                of stock options
            
            
            18
            
            
            1
            
            
            29
            
            
            
            
            
            
            
            
            
            
            
            30Employee
                stock purchase plan
            
            
            20
            
            
            
            
            
            78
            
            
            
            
            
            
            
            
            
            
            
            78Stock-based
                compensation
            
            
            7
            
            
            
            
            
            102
            
            
            (23
            )
            
            
            
            
            
            
            
            79







F-7





Theragenics
      Corporation and Subsidiary





CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY - Continued





For
      the three years ended December 31, 2005





(Amounts
      in thousands, except per share data)








Unrealized
                loss on securities available-for-sale
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (143
            )
            
            (143
            )Net
                loss for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (4,310
            )
            
            
            
            
            (4,310
            )Balance,
                December 31, 2004
            
            
            29,989
            
            $
            300
            
            $
            61,987
            
            $
            (23
            )
            $
            75,930
            
            $
            (134
            )
            $
            138,060Issuance
                of common stock for acquisitionof
                CP Medical
            
            
            1,840
            
            
            18
            
            
            6,083
            
            
            
            
            
            
            
            
            
            
            
            6,101Exercise
                of stock options
            
            
            112
            
            
            1
            
            
            272
            
            
            
            
            
            
            
            
            
            
            
            273Employee
                stock purchase plan
            
            
            32
            
            
            1
            
            
            89
            
            
            
            
            
            
            
            
            
            
            
            90Stock-based
                compensation shares issues
            
            
            35
            
            
            -
            
            
            120
            
            
            (120
            )
            
            
            
            
            
            
            
            -Amortization
                of share based compensation
            
            
            
            
            
            
            
            
            166
            
            
            49
            
            
            
            
            
            
            
            
            215Unrealized
                loss on securities available-for-sale
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (50
            )
            
            (50
            )Net
                loss for the year
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (29,006
            )
            
            
            
            
            (29,006
            )Balance,
                December 31, 2005
            
            
            32,008
            
            $
            320
            
            $
            68,717
            
            $
            (94
            )
            $
            46,924
            
            $
            (184
            )
            $
            115,683







The
      accompanying notes are an integral part of these consolidated
      statements.









F-8




Theragenics
        Corporation and Subsidiary
 
 CONSOLIDATED
        STATEMENTS OF CASH FLOWS
 
 Year
        ended December 31,
 
 (Amounts
        in thousands)


2005
              
              2004
              
              2003Cash
                  flows from operating activities:Net
                  loss
              
              $
              (29,006
              )
              $
              (4,310
              )
              $
              (312
              )Adjustments
                    to reconcile net loss tonet
                    cash provided by operating activities:Cumulative
                  effect of change in accounting principle, net of tax
              
              
              -
              
              
              -
              
              
              222Depreciation
                  & amortization
              
              
              6,818
              
              
              6,946
              
              
              6,553Deferred
                  income taxes
              
              
              (6,510
              )
              
              (131
              )
              
              547Income
                  tax effect from stock options and stock purchase plan
              
              
              -
              
              
              -
              
              
              5Impairment
                  of long-term assets
              
              
              28,789Other
                  non-cash restructuring charges
              
              
              3,315
              
              
              -
              
              
              -Stock-based
                  compensation
              
              
              215
              
              
              79
              
              
              72Deferred
                  rent
              
              
              (2
              )
              
              (2
              )
              
              (3
              )Provision
                  for allowances
              
              
              326
              
              
              78
              
              
              (1
              )Loss
                  on disposal of equipment
              
              
              14
              
              
              15
              
              
              3Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              (657
              )
              
              (2,015
              )
              
              987Inventories
              
              
              (873
              )
              
              (1,164
              )
              
              (790
              )Prepaid
                  expenses and other current assets
              
              
              1,527
              
              
              539
              
              
              (2,479
              )Other
                  assets
              
              
              9
              
              
              58
              
              
              (25
              )Trade
                  accounts payable
              
              
              (1,041
              )
              
              (267
              )
              
              584Accrued
                  salaries, wages and payroll taxes
              
              
              980
              
              
              31
              
              
              88Other
                  liabilities
              
              
              285
              
              
              269
              
              
              (3
              )Net
                  cash provided by operating activities
              
              
              4,189
              
              
              126
              
              
              5,448Cash
                  flows from investing activities:Purchases
                  and construction of property and equipment
              
              
              (533
              )
              
              (3,263
              )
              
              (2,542
              )Proceeds
                  from disposal of plant and property
              
              
              -
              
              
              2
              
              
              7Acquisition
                  of business, net of cash acquired
              
              
              (20,468
              )
              
              (1,000
              )
              
              (5,243
              )Purchases
                  of marketable securities
              
              
              (22,455
              )
              
              (27,624
              )
              
              (28,249
              )Maturities
                  of marketable securities
              
              
              20,527
              
              
              14,997
              
              
              18,834Net
                  cash used in investing activities
              
              
              (22,929
              )
              
              (16,888
              )
              
              (17,193
              )Cash
                  flows from financing activities:Proceeds
                  from exercise of stock options and stock purchase plan
              
              
              363
              
              
              108
              
              
              505Net
                  cash provided by financing activities
              
              
              363
              
              
              108
              
              
              505









F-9








Theragenics
      Corporation and Subsidiary





CONSOLIDATED
      STATEMENTS OF CASH FLOWS - Continued





Year
      ended December 31,





(Amounts
      in thousands)











2005
            
            2004
            
            2003Net
                decrease in cash and short-term investments
            
            $
            (18,377
            )
            $
            (16,654
            )
            $
            (11,240
            )Cash
                and short-term investments at beginning of year
            
            $
            28,450
            
            $
            45,104
            
            $
            56,344Cash
                and short-term investments at end of year
            
            $
            10,073
            
            $
            28,450
            
            $
            45,104Supplementary
                Cash Flow DisclosureInterest
                paid
            
            $
            80
            
            $
            101
            
            $
            167Income
                taxes paid (received)
            
            $
            (543
            )
            $
            21
            
            $
            1,113Non-cash
                investing and financing activities:Stock
                issued for acquisition (see Note C)
            
            $
            6,101
            
            $
            -
            
            $
            -




















The
      accompanying notes are an integral part of these consolidated
      statements.


F-10
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004


NOTE
      A - ORGANIZATION AND DESCRIPTION OF BUSINESS





Theragenics
      Corporation and Subsidiary (the “Company”) is a provider of brachytherapy and
      surgical products, operating in two business segments. In Buford, Georgia,
      the
      Company operates its brachytherapy seed segment, where it manufactures and
      markets TheraSeed ® ,
      a palladium-103 based device and I-Seed, an iodine-125 based device, both used
      primarily in the minimally invasive treatment of localized prostate cancer. Physicians,
      hospitals and other healthcare providers, primarily located in the United
      States, utilize the TheraSeed ® and I-Seed devices. The TheraSeed ® device has also been approved for marketing throughout the member countries
      of
      the European Union by obtaining its CE Mark. Sales of the
      TheraSeed ® device in Europe have not been significant. The Company sells its
      TheraSeed ® and I-Seed devices directly to physicians. TheraSeed ® is also sold through a third party distributor.




Through
      its subsidiary, CP Medical Corporation (“CP Medical”), based in Portland,
      Oregon, the Company operates its wound closure and surgical products segment.
      CP
      Medical manufactures and distributes sutures, cardiac pacing cables and other
      surgical products with applications in, among other areas, urology, veterinary,
      orthopedics, dental, plastic surgery and cardiology. CP Medical sells directly
      to customers and through manufacturers’ representatives.





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 subsidiary, CP Medical. 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. Licensing fees are recognized in the periods
      to which they relate.





Shipping
      and handling costs are included in cost of sales.





4. Cash
      and Short-Term Investments





For
      purposes of reporting cash flows, cash and short-term investments include cash
      on hand, cash in banks, variable rate demand notes, treasury investments and
      U.S. obligations and commercial paper with maturities equal to or less than
      90
      days from purchase.


F-11
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004


5. Inventories





Inventories
      are stated at the lower of cost or market. Cost is determined using the
      first-in, first-out (FIFO) method. Market is replacement cost or net realizable
      value. The Company estimates reserves for inventory obsolescence based on
      management’s judgment of future realization. Inventories as of December 31, 2005
      and 2004 were comprised of the following (in thousands):







December
                31,2005
            
            2004Raw
                materials
            
            $
            2,381
            
            $
            894Work
                in progress
            
            
            531
            
            
            1,813Finished
                goods
            
            
            1,422
            
            
            121Spare
                parts and supplies
            
            
            921
            
            
            2815,255
            
            
            3,109Allowance
                for obsolete inventory
            
            
            (213
            )
            
            (113
            )Total
            
            $
            5,042
            
            $
            2,996




6.  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. Depreciation expense
      related to property and equipment charged to operations was approximately
      $6,106,000, $6,872,000 and $6,545,000 for 2005, 2004 and 2003, 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.





7.  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, plant and equipment and definite 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
                declines in demand for a product produced by an asset capable of
                producing
                only that product;•
            
            assets
                that are idled or held for sale;•
            
            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 and sum the estimated future
      cash flows. If the future undiscounted cash flows is 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


F-12
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004


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.




Impairment
      charges of $28.8 million in 2005 related to assets held for sale were recorded
      in 2005. These assets were buildings and equipment for operations that have
      been
      permanently closed in conjunction with the Company’s restructuring activities
      (See Note D). The charges represent the difference between the carrying value
      of
      the assets and the estimated fair value.





8.  Goodwill
      and Intangible Assets





The
      Company accounts for goodwill and other intangible assets in accordance with
      the
      provisions of Statement of Financial Accounting Standards (“SFAS”) No. 142, *Goodwill
      and Other Intangible Assets* .
      Under SFAS 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. Other intangible assets
      determined to have definite lives are amortized over their useful lives. The
      Company reviews these other intangible assets with definite lives for impairment
      to ensure they are appropriately valued if conditions exist that indicate the
      carrying value may not be recoverable.





9.  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.




10. Research
      and Development Costs





Research
      and development (R&D) costs are expensed when incurred.





11.  Advertising





Advertising
      costs are expensed as incurred. Advertising expense was approximately
      $3,054,000, $3,430,000 and $2,291,000 for the years ended December 31, 2005,
      2004 and 2003, respectively.


F-13
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004





12.  Earnings
      Per Share and Common Stock





Basic
      net earnings/(loss) per common share is based upon the weighted average number
      of common shares outstanding during the period. Diluted net earnings/(loss)
      per
      common share is based upon the weighted average number of common shares
      outstanding plus dilutive potential common shares, including options and awards
      outstanding during the period.





13.  Stock
      Based Compensation





The
      Company maintains various stock based compensation plans for employees and
      directors which are described more fully in Note K to these consolidated
      financial statements. The Company accounts for these plans in accordance with
      the provisions of Accounting Principles Board Opinion (“APB”) No. 25, *Accounting
      for Stock Issued to Employee* .
      Under APB 25 the intrinsic value method is used, in which compensation expense
      is recognized for the amount, if any, that the fair value of the underlying
      common stock exceeds the exercise price at the date of grant. No stock based
      compensation has been recognized for stock options issues 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
      and other equity instruments issued in exchange for goods or services with
      non-employees are accounted for based on the fair value of the consideration
      received or the fair value of the equity instruments issued, whichever is more
      readily measurable.





The
      following represents the effect on net loss and earnings per share if the
      Company had applied the fair market value recognition provisions of SFAS No.
      123, *Accounting
      for Stock Based Compensation* ,
      as amended (in thousands, except per share data):





2005
            
            2004
            
            2003Net
                loss
            
            
            As
                reported
            
            $
            (29,006
            )
            $
            (4,310
            )
            $
            (312
            )Pro
                forma
            
            
            (29,112
            )
            
            (4,799
            )
            
            (1,190
            )Basic
                net loss per common share
            
            
            As
                reported
            
            $
            (0.93
            )
            $
            (0.14
            )
            $
            (0.01
            )Pro
                forma
            
            
            (0.93
            )
            
            (0.16
            )
            
            (0.04
            )Diluted
                net loss per common share
            
            
            As
                reported
            
            $
            (0.93
            )
            $
            (0.14
            )
            $
            (0.01
            )Pro
                forma
            
            
            (0.93
            )
            
            (0.16
            )
            
            (0.04
            )





The
      weighted average fair value of the options granted during 2005, 2004, and 2003
      was $1.38, $2.77 and $2.79, respectively. The fair values were estimated using
      the Black-Scholes options-pricing model with the following weighted average
      assumptions:





2005
            
            2004
            
            2003Expected
                dividend yield
            0.0%
            
            0.0%
            
            0.0%Expected
                stock price volatility
            45.8%
            
            64.1%
            
            72.7%Risk-free
                interest rate
            3.5%
            
            3.2%
            
            3.4%Expected
                life of option (years)
            3.1
            
            5.4
            
            5.5








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


F-14
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004


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.





SFAS
      No. 123(R) (revised 2004), *Share
      Based-Payment* ,
      (“SFAS 123R”) is effective for the Company beginning January 1, 2006. SFAS 123R
      requires 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. While the Company is still evaluating the impact of SFAS
      123R, accounting for existing share-based payments in accordance with SFAS
      123R
      is not expected to have a material impact on the Company’s consolidated
      financial statements. However, future awards may have a material impact on
      the
      Company’s results of operations, depending on the number, terms, conditions and
      grant date fair value of such awards.








14.  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.





Available-for-sale
      securities consist of (in thousands):




December
                31,2005
            
            
            
            
            
            2004Amortized
              Cost
            
            Gross
              Unrealized
              Loss
            
            Estimated
              Fair
              Value
            
            Amortized
              Cost
            
            Gross
              Unrealized
              Loss
            
            Estimated
              Fair
              ValueState
                and municipal securities
            
            $
            5,485
            
            $
            (39
            )
            $
            5,446
            
            $
            4,726
            
            $
            (8
            )
            $
            4,718U.S.
                government and agency securities
            
            
            3,107
            
            
            (14
            )
            
            3,093
            
            
            6,994
            
            
            (46
            )
            
            6,948Corporate
                and other securities
            
            
            27,127
            
            
            (131
            )
            
            26,996
            
            
            22,225
            
            
            (80
            )
            
            22,145Total
            
            $
            35,719
            
            $
            (184
            )
            $
            35,535
            
            $
            33,945
            
            $
            (134
            )
            $
            33,811





The
      estimated fair value of marketable securities by contractual maturity at
      December 31, 2005, is as follows (in thousands):





Due
                in one year or less
            
            $
            27,377Due
                after one year through five years
            
            $
            8,158





NOTE
      C - ACQUISITION OF CP MEDICAL





On
      May 6, 2005, the Company acquired all of the outstanding common stock of CP
      Medical Corporation (“CP Medical”) for approximately $26.7 million, including
      $20.6 million in cash and 1,840,458 shares of common stock valued at
      approximately $6.1 million. Common shares issued were valued based on their
      average market price over the 20 day period from March 28,


F-15
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004


2005
      to April 22, 2005. CP Medical is a manufacturer and distributor of innovative
      wound closure and other medical products such as sutures, cardiac pacing cables,
      brachytherapy needles and supplies, and other surgical products. These products
      have applications in urology, veterinary, cardiology, plastic surgery, dental,
      orthopedics, and other fields. This acquisition establishes a new growth
      platform for the Company within the field of medical devices and serves to
      diversify the Company’s product offerings within its brachytherapy business.
      Consolidated results of operations include the results of operations of CP
      Medical from the date of acquisition.





The
      acquisition was recorded under the provisions of 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. Actual allocations of goodwill and other identified assets
      and liabilities may change during the allocation period, generally one year
      from
      the date of acquisition. Following is a summary of the fair value of the assets
      acquired and liabilities assumed (in thousands):








Fair
                value
            
            Amortization
              life
                of
              intangible
                assetsCurrent
                assets
            
            $
            4,565
            
            
            -Equipment
            
            
            314
            
            
            -Goodwill
            
            
            15,792
            
            
            IndefiniteTrade
                names
            
            
            1,700
            
            
            IndefiniteCustomer
                relationships
            
            
            3,500
            
            
            9
                yearsNon-compete
                agreements
            
            
            1,269
            
            
            1-5
                yearsDeveloped
                technology
            
            
            360
            
            
            7
                yearsPatents
            
            
            31
            
            
            17
                yearsCurrent
                liabilities
            
            
            (857
            )
            
            -Net
                assets acquired
            
            $
            26,674




The
      weighted average life of intangible assets subject to amortization is 7.9 years.
      The goodwill acquired is expected to be deductible for income tax
      purposes.





The
      following unaudited pro forma summary combines the Company’s results with those
      of CP Medical as if the acquisition had occurred on January 1, 2004. Certain
      adjustments have been made to reflect the impact of the purchase transaction,
      primarily consisting of amortization of certain intangible assets and a
      reduction in interest income as a result of cash used in the acquisition. These
      pro forma results have been prepared for comparative purposes only and are
      not
      necessarily indicative of what would have occurred had the acquisition been
      made
      as of January 1, 2004, nor are they necessarily indicative of results that
      may
      occur in the future (in thousands, except per share data):





Pro
                FormaYear
                Ended December 31,2005
            
            2004Revenue
            
            $
            47,961
            
            $
            42,702Net
                loss
            
            
            (29,019
            )
            
            (4,139
            )Net
                loss per share, basic and diluted
            
            $
            (0.91
            )
            $
            (.13
            )





F-16
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004


NOTE
      D - RESTRUCTURING





On
      August 11, 2005, the Company announced a restructuring that resulted in the
      closure of the Plasma Separation Process (“PSP”) facility
      in
      Oak Ridge, Tennessee, ended the research and development activities related
      to
      the vascular, macular degeneration and breast cancer areas, and eliminated
      production of radiochemical products. All of these activities were within the
      Company’s brachytherapy seed business segment. Curtailing these activities
      allowed the Company to shrink its asset base by shutting down six cyclotrons,
      closing its Newton Terrace facility in Buford, Georgia, and closing its PSP
      facility in Oak Ridge, Tennessee. The objective of the restructuring is to
      sharpen the Company’s focus on its two business segments; brachytherapy seeds
      and CP Medical products, as well as provide a more focused platform for
      continued diversification and expansion through acquisitions and other
      channels.





As
      a result, restructuring charges of $33.4 million were recorded in 2005. These
      restructuring charges were comprised of one time, non-cash impairment charges
      totaling $28.8 million, which were related to impairment of long-lived assets
      including the PSP equipment and facilities in Oak Ridge, Tennessee, the Newton
      Terrace facility in Buford, Georgia, and six cyclotrons and related facilities;
      other one time, non-cash charges of $3.3 million, including write off of
      inventory, other assets and contract termination costs related to the Oak Ridge
      land lease; and $1.3 million of severance, site exit and disposal costs and
      other expenses. Completion of the restructuring will take a period of months,
      and the Company expects to incur additional pre-tax restructuring expenses
      of
      $1.4 million to $1.6 million in 2006. These future charges are expected to
      primarily relate to on-going site exit and disposal costs and will be expensed
      as incurred.





A
      schedule of certain information related to these restructuring charges follows
      (in thousands):





Total
                amount
              expected
                to
              be
                incurred
            
            Amount
              incurred
                in
              2005
            
            Cumulative
              amount
                incurred
              through
              December
                31, 2005Impairment
                of long-lived assets
            
            $
            28,789
            
            $
            28,789
            
            $
            28,789Write
                off of inventory and other assets
            
            
            1,757
            
            
            1,757
            
            
            1,757Contract
                termination costs
            
            
            1,495
            
            
            1,495
            
            
            1,495Severance
                costs
            
            
            919
            
            
            889
            
            
            889Site
                exit and disposal costs
            
            
            2,000
            
            
            357
            
            
            357Other
            
            
            122
            
            
            102
            
            
            102$
            35,082
            
            $
            33,389
            
            $
            33,389





A
      reconciliation of liabilities attributable to the restructuring follows (in
      thousands):





Accrual
                at
              December
                31,
              2004
            
            Charged
                to
              expenses
            
            Other
            
            Payments
            
            Accrual
                at
              December
                31,
              2005Contract
                termination costs
            
            $
            -
            
            $
            1,495
            
            $
            72
            
            $
            7
            
            $
            1,560Severance
            
            
            -
            
            
            889
            
            
            -
            
            
            359
            
            
            530Site
                exit and disposal activities
            
            
            -
            
            
            357
            
            
            -
            
            
            357
            
            
            -Other
            
            
            -
            
            
            102
            
            
            -
            
            
            102
            
            
            -




Contract
      termination costs relate to the land lease at the Oak Ridge, Tennessee facility.
      This represents a liability for costs that will continue to be incurred through
      the remaining term of that lease agreement without economic benefit to the
      Company, measured at its fair value when the Company ceased using the facility
      in August 2005. $72,000 was previously recorded as deferred rent attributable
      to
      the land lease. Additionally, $23,000 of the accrual at December 31, 2005 is
      classified as other current liabilities in the accompanying consolidated balance
      sheet at December 31, 2005, representing the current portion of the liability
      due.





Severance
      costs are vested in accordance with the terms of the severance agreements.
      Additional severance may be earned based on the period of time affected
      employees remain during the shut down period. Any additional severance will
      be
      expensed in the period in which it is earned.





Site
      exit and disposal activities are related to the Oak Ridge facility and are
      expensed as incurred.





Assets
      held for sale of approximately $3.4 million at December 31, 2005, represents
      the
      estimated fair market value of the Oak Ridge related equipment and facilities
      to
      be disposed of related to the restructuring.





F-17
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004




NOTE
        E - GOODWILL AND INTANGIBLE ASSETS
 
 Goodwill
        and trade names are assigned to reporting units and are not amortized. At
        December 31, 2005, goodwill consists of $15,792,000 related to CP Medical
        and
        the Company’s wound closure and medical products segment, and $2,578,000 related
        to its I-Seed production line within the brachytherapy seed business. Other
        intangible assets include $1,700,000 of trade names assigned to CP Medical.
        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. Such tests include comparing
        the
        fair value of the reporting unit with its carrying value, including goodwill
        and
        other intangible assets that are not amortized. Impairment assessments are
        performed primarily using discounted cash flow analyses and the assumptions
        used
        in these analyses are consistent with the Company’s internal planning. The
        Company completed its annual impairment assessments in the fourth quarter
        of
        2005 after its annual forecasting and budgeting process, and determined that
        goodwill and other intangible assets were not impaired.




Changes
      in the carrying amount of goodwill are as follows (in thousands):





CP
                Medical
            
            I-Seed
              Production
                Line
            
            TotalBalance,
                January 1, 2003
            
            $
            -
            
            $
            -
            
            $
            -Goodwill
                acquired during year
            
            
            -
            
            
            1,578
            
            
            1,578Balance,
                December 31, 2003
            
            
            -
            
            
            1,578
            
            
            1,578Final
                progress payment for I-Seed line
            
            
            -
            
            
            1,000
            
            
            1,000Balance,
                December 31, 2004
            
            
            -
            
            
            2,578
            
            
            2,578Goodwill
                acquired during year
            
            
            15,792
            
            
            -
            
            
            15,792Balance,
                December 31, 2005
            
            $
            15,792
            
            $
            2,578
            
            $
            18,370




















Other
      intangibles assets include the following (in thousands):




December
                31,2005
            
            2004
            
            Amortization
              LifeTrade
                names
            
            $
            1,700
            
            $
            -
            
            
            indefiniteCustomer
                relationships
            
            
            3,500
            
            
            -
            
            
            9
                yearsNon-compete
                agreements
            
            
            1,269
            
            
            -
            
            
            1-5
                yearsDeveloped
                technology
            
            
            360
            
            
            -
            
            
            7
                yearsLoan
                fees, patents and other
            
            
            290
            
            
            259
            
            
            3-19
                years7,119
            
            
            259Accumulated
                amortization
            
            
            731
            
            
            173$
            6,388
            
            $
            86





At
      December 31, 2005, the weighted average life of intangible assets subject to
      amortization was 8.1 years. Amortization expense related to intangible assets
      was $557,000, $24,000 and $24,000 in the years ended December 31, 2005, 2004
      and
      2003, respectively, and is included in selling, general and administrative
      expenses in the accompanying consolidated statements of operations and
      comprehensive loss.


F-18
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004





As
      of December 31, 2005, future approximate aggregate amortization expense for
      intangible assets subject to amortization is as follows (in thousands):





Year
                Ending
              December
                31,2006
            
            $
            7282007
            
            
            6872008
            
            
            6822009
            
            
            6822010
            
            
            523Beyond
            
            
            1,386$
            4,688





F-19
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004





NOTE
      F - SEGMENT REPORTING




*Segment
      Reporting*


The
      Company operates in two segments, the brachytherapy seed segment and the CP
      Medical wound closure and medical products segment. The brachytherapy seed
      segment is comprised of the Company’s TheraSeed ® and I-Seed products as well as related products and services. CP Medical is
      a
      manufacturer and distributor of wound closure and other medical products sold
      in
      the professional surgical and veterinary fields. The following tables provide
      certain information for these segments (in thousands):





Year
                Ended December 31,2005
            
            2004
            
            2003RevenueBrachytherapy
                seed
            
            $
            36,372
            
            $
            33,338
            
            $
            35,580CP
                Medical
            
            
            7,898
            
            
            -
            
            
            -$
            44,270
            
            $
            33,338
            
            $
            35,580Restructuring
                expensesBrachytherapy
                seed
            
            $
            33,390
            
            $
            -
            
            $
            -CP
                Medical
            
            
            -
            
            
            -
            
            
            -$
            33,390
            
            $
            -
            
            $
            -Operating
                income (loss)Brachytherapy
                seed
            
            $
            (38,097
            )
            $
            (7,986
            )
            $
            (1,303
            )CP
                Medical
            
            
            1,430
            
            
            -
            
            
            -$
            (36,667
            )
            $
            (7,986
            )
            $
            (1,303
            )Capital
                expenditures,excluding
                acquisitionof
                businessBrachytherapy
                seed
            
            $
            335
            
            $
            3,263
            
            $
            2,542CP
                Medical
            
            
            198
            
            
            -
            
            
            -$
            533
            
            $
            3,263
            
            $
            2,542Depreciation
                and amortizationBrachytherapy
                seed
            
            $
            6,281
            
            $
            6,946
            
            $
            6,553CP
                Medical
            
            
            537
            
            
            -
            
            
            -$
            6,818
            
            $
            6,946
            
            $
            6,553





Intersegment
      revenue was not significant in 2005.













F-20
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004








Segment
      information related to significant assets and liabilities follows (in
      thousands):








December
                31,2005
            
            2004Identifiable
                assetsBrachytherapy
                seed
            
            $
            120,485
            
            $
            148,678CP
                Medical
            
            
            29,191
            
            
            -Intersegment
                eliminations
            
            
            (27,612
            )
            
            -$
            122,064
            
            $
            148,678GoodwillBrachytherapy
                seed
            
            $
            2,578
            
            $
            2,578CP
                Medical
            
            
            15,792
            
            
            -$
            18,370
            
            $
            2,578Other
                intangible assetsBrachytherapy
                seed
            
            $
            29
            
            $
            86CP
                Medical
            
            
            6,359
            
            
            -$
            6,388
            
            $
            86








Information
      regarding revenue by geographic regions follows (in thousands):





Year
                Ended December 31,2005
            
            2004
            
            2003United
                States
            
            $
            43,136
            
            $
            33,338
            
            $
            35,580Europe
            
            
            764
            
            
            -
            
            
            -Other
                foreign countries
            
            
            370
            
            
            -
            
            
            -$
            44,270
            
            $
            33,338
            
            $
            35,580





Foreign
      sales relate to CP Medical and are attributed to countries based on location
      of
      the customer. All of the Company’s long-lived assets are located within the
      United States.


F-21
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004





NOTE
      G - DISTRIBUTION AGREEMENT AND MAJOR CUSTOMERS





*Distribution
      Agreement*





The
                Company sells its TheraSeed® and I-Seed devices directly to
                health care providers. Currently, the Company also has a non-exclusive
                distribution agreement in place with C.R. Bard (“Bard”) for distribution
                of the TheraSeed® device (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 term
                expires on December 31, 2007, and will be automatically extended
                for one
                additional year unless either party gives notice of its intent not
                to
                extend by December 31, 2006. 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. A
                distribution agreement with Medi-Physics, Inc. (formerly d/b/a Nycomed
                Amersham and part of Oncura, referred to herein as “Oncura”) terminated on
                September 8, 2005 (see Note J).





*Major
      Customers*





Sales
      to Bard and Oncura represented approximately 71% and 81% of brachytherapy
      product revenue in 2005 and 2004, respectively. In 2003, sales to Bard, Oncura
      and two other distributors represented approximately 81% of brachytherapy
      product revenue. Bard is the only customer to represent more than 10% of
      brachytherapy product revenue in each of the last three years, and was the
      only
      customer to represent more than 10% of brachytherapy product revenue in
      2005.





Accounts
      receivable from Bard represented approximately 52% of brachytherapy accounts
      receivable at December 31, 2005. At December 31, 2004, Bard and Oncura
      represented approximately 74% of brachytherapy accounts receivable, with each
      exceeding 10%.





One
      customer represented approximately 14% of CP Medical revenue for 2005, and
      24%
      of CP Medical accounts receivable at December 31, 2005.








NOTE
      H - INCOME TAXES





The
      income tax provision (benefit) consisted of the following:





Year
                ended December 31,(in
                thousands)
            
            2005
            
            2004
            
            2003CurrentFederal
            
            $
            -
            
            $
            (2,248
            )
            $
            (804
            )State
            
            
            116
            
            
            (163
            )
            
            (62
            )116
            
            $
            (2,411
            )
            $
            (866
            )DeferredFederal
            
            $
            (5,699
            )
            $
            (148
            )
            $
            500State
            
            
            (811
            )
            
            17
            
            
            47$
            (6,510
            )
            $
            (131
            )
            $
            547Income
                tax benefit
            
            $
            (6,394
            )
            $
            (2,542
            )
            $
            (319
            )




F-22
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004











The
      Company’s temporary differences are summarized as follows (in
      thousands):






December
                31,2005
            
            2004Deferred
                tax assets:Property
                and equipment impairment
            
            $
            388
            
            $
            -Net
                operating loss carryforwards
            
            
            4,461
            
            
            -Non-deductible
                accruals and allowances
            
            
            808
            
            
            127Inventories
            
            
            310
            
            
            172Stock
                compensation
            
            
            383
            
            
            338Asset
                retirement obligation
            
            
            223
            
            
            202Credits
            
            
            377
            
            
            343Other
            
            
            95
            
            
            83Gross
                deferred tax assets
            
            
            7,045
            
            
            1,265Deferred
                tax liabilities:Property
                and equipment
            
            
            -
            
            
            (7,671
            )Goodwill
                and intangible assets
            
            
            (289
            )
            
            -Other
            
            
            -
            
            
            (104
            )Gross
                deferred tax liabilities
            
            
            (289
            )
            
            (7,775
            )Valuation
                allowance
            
            
            (6,756
            )
            
            -Net
                deferred tax (liability)
            
            $
            -
            
            $
            (6,510
            )




The
      net deferred tax liability is classified in the accompanying consolidated
      balance sheets as follows (in thousands):





December
                31,2005
            
            2004Current
                deferred tax asset
            
            $
            -
            
            $
            410Long-term
                deferred tax liability
            
            
            -
            
            
            (6,920
            )Net
                deferred tax liability
            
            $
            -
            
            $
            (6,510
            )





As
      a result of operating losses in recent years and the restructuring in 2005,
      the
      Company has a net deferred tax asset of approximately $6.8 million at December
      31, 2005. Due to the recent history of operating losses and uncertainties
      surrounding the projection of future taxable income sufficient to recognize
      these deferred tax assets, a valuation allowance for the full amount of the
      deferred tax asset has been recorded. The valuation allowance for any deferred
      tax asset is evaluated each reporting period.


F-23
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004














A
      reconciliation of the statutory federal income tax rate and the effective tax
      rate follows:





2005
            
            2004
            
            2003Tax
                at applicable federal rates
            
            
            (35.0
            )%
            
            (35.0
            )%
            
            (35.0
            )%State
                tax, net of federal income tax
            
            
            (2.0
            )
            
            (2.0
            )
            
            (2.0
            )Deferred
                tax asset valuation allowance
            
            
            18.9
            
            
            -
            
            
            -Tax
                exempt interest
            
            
            (0.3
            )
            
            (1.7
            )
            
            (52.0
            )Other
            
            
            0.3
            
            
            1.6
            
            
            11.0(18.1
            )%
            
            (37.1
            )%
            
            (78.0
            )%




The
      Company has net operating loss carryforwards of approximately $3.1 million
      that
      expire in 2024 and $10.3 million that expire in 2025. The Company also has
      research and development tax credit carryforwards of approximately $237,000
      which expire by 2025 and alternative minimum tax credit carryforwards of
      approximately $140,000.





NOTE
      I - CREDIT AGREEMENT





The
      Company executed a Credit Agreement with a financial institution which expires
      October 29, 2006 and provides for revolving borrowings of up to $40.0 million,
      including a $5.0 million sub-limit for letters of credit. Interest on
      outstanding borrowings is payable at the rate of interest periodically
      designated by the financial institution as its base rate, or, at the option
      of
      the Company, interest may accrue at a LIBOR based rate, plus an applicable
      margin which is subject to quarterly adjustment. Interest on base rate loans
      is
      payable monthly, while interest on LIBOR loans is payable on the last day of
      the
      applicable one, two or three month interest period.




The
      Credit Agreement is unsecured, but provides for a “springing lien” to be
      established on substantially all of the assets of the Company (subject to
      certain exceptions) in the event certain events of default occur under the
      Credit Agreement. The Credit Agreement contains representations and warranties,
      as well as affirmative, reporting and negative covenants, customary for
      financings of this type. Among other things, certain provisions of the Credit
      Agreement limit the incurrence of additional debt and require the maintenance
      of
      certain financial ratios. The Company was in compliance with these debt
      covenants at December 31, 2005.





The
      Company has letters of credit outstanding under the Credit Agreement as of
      December 31, 2005 for approximately $933,000. These letters of credit are
      related to asset retirement liabilities of long-lived assets, as well as a
      utility deposit to the City of Oak Ridge, Tennessee.




The
        letters of credit are subject to terms identical to those of borrowings under
        the Credit Agreement.


F-24
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004





NOTE
      J - COMMITMENTS AND CONTINGENCIES





Licensing
      Agreement





The
      Company holds a worldwide exclusive license from the University of Missouri
      for
      the use of technology patented by the University, used in the Company’s
      TheraSphere ® product. The licensing agreement provides for the payment of royalties based
      on
      the level of sales and on lump sum payments received pursuant to a licensing
      agreement with Nordion International, Inc. (see below).





The
      Company has granted certain of its geographical rights under the licensing
      agreement with the University of Missouri to Nordion International, Inc., a
      Canadian company that is a producer, marketer and supplier of radioisotope
      products and related equipment. Under the Nordion agreement, the Company is
      entitled to licensing fees for each geographic area in which Nordion receives
      new drug approval. The Company will also be entitled to a percentage of revenues
      earned by Nordion as royalties under the agreement. Royalties from this
      agreement are recorded as “Licensing fees” in the accompanying consolidated
      statements of operations.





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 April 2010. Approximate
      minimum lease payments under the leases are as follows: 2006, $361,000; 2007,
      $345,000; 2008, $343,000; 2009, $283,000; 2010, $57,000.




CP
      Medical leases production, warehouse and office space from an entity controlled
      by the former owner of CP Medical, who is currently an officer and stockholder
      of Theragenics. Monthly payments of approximately $13,600 are due under this
      lease through April 2010 and are included in the above lease
      commitments.


Rent
      expense was approximately $453,000, $366,000 and $289,000 for the years ended
      December 31, 2005, 2004 and 2003, respectively, including rent expense of
      approximately $109,000 in 2005 under the related party leases referred to
      above.





The
      contract termination liability of approximately $1,537,000 included in the
      accompanying consolidated balance sheet at December 31, 2005, consists of the
      present value of future payments due under the Company’s Oak Ridge land lease,
      using a discount rate of 8.5%. This represents a liability for costs that will
      continue to be incurred through the remaining term of that lease agreement
      without economic benefit to the Company, measured at its fair value when the
      Company ceased using its Oak Ridge facility in August 2005, and recorded in
      connection with the Company’s restructuring in August 2005 (see Note D). The
      land lease requires


F-25
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004


monthly
      payments of $12,824 through April 2029, adjusted every five years beginning
      in
      2010 for changes in the Consumer Price Index. Future maturities of obligations
      under this lease are as follows: 2006, $22,176; 2007, $24,136; 2008, $26,269;
      2009, $28,591; 2010, $31,119; beyond, $1,427,273.





Contingencies




In
      January 1999, the Company and certain of its officers and directors were named
      as defendants in certain securities actions alleging violations of the federal
      securities laws, including Sections 10(b), 20(a) and Rule 10b-5 of the
      Securities and Exchange Act of 1934, as amended. These actions were consolidated
      into a single action in the U.S. District Court for the Northern District of
      Georgia. The amended complaint generally alleged that the defendants made
      certain misrepresentations and omissions in connection with the performance
      of
      the Company during the class period and sought unspecified damages. In July
      2004, the consolidated federal securities class action was settled for an amount
      within the remaining limits of the Company’s directors and officers’ liability
      insurance. The Company was not required to make any financial contribution
      toward the settlement and the federal securities case was officially over as
      of
      November 1, 2004.





On
      May 14, 1999 a stockholder of the Company filed a derivative complaint in the
      Delaware Court of Chancery purportedly on behalf of the Company, alleging that
      certain directors breached their fiduciary duties by engaging in the conduct
      that was alleged in the consolidated federal class action complaint. The
      derivative lawsuit is still pending, and its status is currently being
      reevaluated in light of the settlement of the securities class action
      lawsuit.





The
      Company and one of its distributors, Oncura, had been arbitrating claims arising
      in connection with the non-exclusive distribution agreement between the parties
      (the “Oncura Agreement”). On April 9, 2005, the arbitration was settled by
      mutual consent of the parties. As part of the settlement, each party dropped
      the
      claims it had been arbitrating against the other and the parties agreed to
      advance the termination of the Oncura Agreement to September 8, 2005.





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
      K - STOCK BASED COMPENSATION AND SHAREHOLDERS’
      EQUITY





The
      Company provides stock-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, 2005 there were 2,573,138
      options and restricted stock rights outstanding and 175,124 shares of Common
      Stock remaining available for issuance under the Company’s equity incentive
      plans.





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. On May 11, 2004, the Board of Directors approved
      the
      vesting of all options with an exercise price greater


F-26
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004


than
      the closing price of the Company’s stock on May 11, 2004. This acceleration was
      approved in anticipation of the issuance of Statement of Financial Accounting
      Standards No. 123R, and resulted in 352,000 of previously unvested options
      immediately becoming vested. Each of these options had exercise prices greater
      than the closing price of the Company’s stock on May 11, 2004 and, accordingly,
      this acceleration did not result in any charge to the Company’s results of
      operations.





Stock
      option transactions for each of the three years in the period ended December
      31,
      2005, are summarized below (shares in thousands):





2005
            
            2004
            
            2003Shares
            
            Weighted
              average
              exercise
              price
            
            Shares
            
            Weighted
              average
              exercise
              price
            
            Shares
            
            Weighted
              average
              exercise
              priceOutstanding,
                beginning of year
            
            
            2,500
            
            $
            9.67
            
            
            2,535
            
            $
            9.54
            
            
            2,778
            
            $
            9.53Granted
            
            
            72
            
            
            3.95
            
            
            33
            
            
            4.81
            
            
            30
            
            
            4.34Exercised
            
            
            (128
            )
            
            2.55
            
            
            (18
            )
            
            1.63
            
            
            (155
            )
            
            2.80Forfeited
            
            
            (11
            )
            
            4.67
            
            
            (50
            )
            
            2.69
            
            
            (118
            )
            
            16.73Outstanding,
                end of year
            
            
            2,433
            
            $
            12.56
            
            
            2,500
            
            $
            9.67
            
            
            2,535
            
            $
            9.54







The
      following table summarizes information about stock options outstanding at
      December 31, 2005 (shares in thousands):





Options
                Outstanding
            
            Options
                ExercisableRange
                of
              exercise
                prices
            
            Number
              outstanding
            
            Weighted-
              average
              remaining
              contractual
              life
            
            Weighted-
              average
              exercise
              price
            
            Number
              exercisable
            
            Weighted-
              average
              exercise
              price$
                3.95 - $ 5.40
            
            
            509
            
            
            7.3
            
            $
            4.74
            
            
            369
            
            $
            4.91$
                6.88 - $11.75
            
            
            1,407
            
            
            4.3
            
            
            8.56
            
            
            1,407
            
            
            8.56$16.56
                - $26.63
            
            
            517
            
            
            2.1
            
            
            19.31
            
            
            517
            
            
            19.312,433
            
            
            5.2
            
            $
            12.56
            
            
            2,293
            
            $
            12.77





The
      Company follows the practice of recording amounts received upon the exercise
      of
      certain options by crediting common stock and additional paid-in capital. The
      Company realizes an income tax benefit from the exercise of certain stock
      options and the exercise and early disposition of the shares acquired via
      certain other stock options. This benefit results in a reduction to income
      taxes
      payable and an increase to additional paid-in capital.











F-27
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004





Restricted
      Stock Issued to Non-Officer Directors





In
      2003 and 2004, the Company issued 7,000 shares of restricted stock annually
      to
      non-officer directors as a portion of director compensation which vested one
      year after issuance. In 2005, the Board of Directors approved a change in
      director compensation effective January 1, 2005 that eliminated the granting
      of
      stock options and increased the number of restricted shares granted annually
      to
      each non-officer director to the lesser of 5,000 restricted shares or the number
      of shares calculated by dividing $50,000 by the closing market price of the
      Company’s common stock on the last business day preceding the date of the annual
      meeting, such shares to be granted on the date of the annual meeting. On May
      10,
      2005, the Company issued an aggregate of 35,000 restricted shares under this
      new
      director compensation program. These restricted shares vest ratably over three
      years.





Amortization
      of share-based compensation related to restricted shares issued to non-officer
      directors is included in selling, general and administrative expenses in the
      accompanying consolidated statements of operations and totaled approximately
      $50,000, $4,000 and $30,000 in 2005, 2004 and 2003, respectively.





Restricted
      Stock Rights Issued to Employees





In
      August 2004, the Board of Directors granted an aggregate of 48,000 restricted
      stock rights to executive officers which vested on December 31, 2005 and in
      August 2005 the Board of Directors granted 10,000 restricted stock rights to
      a
      newly appointed executive officer that vest on December 31, 2006. Each right
      represents one share of common stock to be issued upon vesting, provided that
      the officer remains in the Company’s employ until vesting. The rights
      immediately vest upon a change in control.





The
      Board of Directors has also approved the issuance of performance restricted
      stock rights to executive officers as long-term incentives (the “Performance
      Stock Rights”). Under the original terms of these long-term incentives, the
      number of shares issuable upon vesting of each Performance Stock Right will
      depend on the Company’s stock price appreciation plus dividends paid (total
      shareholder return, or “TSR”) relative to the TSR of an industry peer group
      based on a fixed schedule over a three year period. Each Performance Stock
      Right
      represents the right to a minimum of 0.30 of a share of common stock and a
      maximum of 2 shares of common stock, provided the employee remains in the
      Company’s employ as of the vesting date. Performance Restricted Stock Rights
      may, but will not necessarily, be prorated for executive managers who commence
      participation in this long-term incentive plan subsequent to the grant date.
      The
      Performance Stock Rights become fully vested at the target achievement level,
      which is a ratio of 1 share for each right, upon a change in control. If the
      executive terminates employment under certain circumstances, or dies or becomes
      disabled, the employee will be entitled to a pro rata number of shares measured
      at the end of the performance period.





Under
      Statement of Financial Accounting Standard No. 123R, *Share-Based
      Payment* ,
      (SFAS No. 123R), which is effective for the Company effective January 1, 2006,
      the Company’s Performance Stock Rights based on TSR would be considered to be
      based on a “market condition”, as defined in SFAS No. 123R. Under SFAS No. 123R,
      valuation of share based payments with market conditions require a complex
      valuation methodology that would be unduly costly for a company the size of
      Theragenics. In view of this potentially significant administrative cost
      associated with valuing the Company’s outstanding Performance Stock Rights under
      SFAS No. 123R, in November 2005 the Board of Directors revised
      the


F-28
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004


outstanding
      Performance Stock Rights held by current executive officers. The revision
      includes termination of the performance cycle for measuring TSR under the
      outstanding Performance Stock Rights held by current executive officers as
      of
      December 31, 2005. As a result, the number of shares to be issued upon vesting
      was determined based on TSR through December 31, 2005. Vesting remains
      conditioned on continued employment through the original term of the award,
      subject to acceleration in certain events as set forth in the original award.
      Terms of Performance Stock Rights outstanding and held by former employees
      were
      not changed, and continue to be subject to a minimum of 0.30 and maximum of
      2
      shares per Performance Stock Right, based on TSR.





Based
      on the revisions to the Performance Stock Rights held by current executive
      officers, a summary of common shares issuable under Performance Stock Rights
      outstanding at December 31, 2005 follows:




Vesting
                Date
            
            Minimum
            
            MaximumDecember
                31, 2006
            
            13,052
            
            24,116December
                31, 2007
            
            26,750
            
            29,586





Amortization
      of Restricted Stock Rights and Performance Stock Rights issued to employees
      is
      included in selling, general and administrative expenses in the accompanying
      consolidated statements of operations and totaled approximately $166,000 and
      $75,000 and in 2005 and 2004, respectively.





In
      February 2006, the Board of Directors approved the issuance of 104,000
      Performance Restricted Stock Rights to executive officers which vest on December
      31, 2008. The number of common shares issuable upon vesting of each Performance
      Stock Right is subject to a minimum of 31,200 shares and a maximum of 208,000
      shares, and will be 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 Board of Directors.








Stock
      Options Issued to Non-Employees





During
      1998, the Company issued 100,000 stock options to an individual for medical
      and
      cancer consulting services. The Company recorded consulting expenses based
      on
      the estimated fair value of the options at the grant date over the consulting
      term of five years. Consulting expenses related to this agreement were
      approximately $42,000 in 2003, the final year of vesting.


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 expire in February 2007 and do not become exercisable unless a group
        acquires or announces a tender or exchange offer for 15% or more of the
        Company’s 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 shareholders will entitle
        its
        holder to purchase additional shares of Common Stock at a substantial discount
        to then current market prices.











F-29
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004





NOTE
      L - EARNINGS/(LOSS) PER SHARE





Loss
      per common share was computed as follows:






(in
                thousands, except per share data)
            
            Year
                ended December 31,2005
            
            2004
            
            2003Net
                loss
            
            $
            (29,006
            )
            $
            (4,310
            )
            $
            (312
            )Weighted
                average common shares outstanding
            
            
            31,273
            
            
            29,971
            
            
            29,902Incremental
                common shares issuable from stock options and awards
            
            
            -
            
            
            -
            
            
            -Weighted
                average common shares outstanding assuming dilution
            
            
            31,273
            
            
            29,971
            
            
            29,902Basic
                loss per share
            
            $
            (0.93
            )
            $
            (0.14
            )
            $
            (0.01
            )Diluted
                loss per share
            
            $
            (0.93
            )
            $
            (0.14
            )
            $
            (0.01
            )





The
      diluted loss per share does not include the effect of stock options and awards
      as their impact would be anti-dilutive. Stock options and awards totaling
      100,000, 95,000 and 77,000 common equivalent shares for the years ended December
      31, 2005, 2004 and 2003, respectively, were not included in the computation
      of
      diluted loss per share for those years.





NOTE
      M - EMPLOYEE BENEFIT PLAN





401(k)
      Savings Plan





The
      Company and its subsidiary 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 $91,000, $168,000 and $49,000 in 2005, 2004
      and 2003, respectively.








Employee
      Stock Purchase Plan





The
      Theragenics Corporation Employee Stock Purchase Plan (the 2 ESPP 2 )
      allows eligible employees the right to purchase common stock on a quarterly
      basis at the lower of 85% of the market price at the beginning or end of each
      quarterly offering period. As of December 31, 2005 and 2004, there were 79,000
      and 111,000 shares of common stock reserved and un-issued for the ESPP,
      respectively, and 121,000 and 89,000 shares had been issued under the plan,
      respectively.











F-30
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004


NOTE
      N - ASSET RETIREMENT OBLIGATIONS





In
      September 2001, the FASB issued Statement of Financial Accounting Standards
      No.
      143, *Accounting
      for Asset Retirement Obligations* (SFAS No. 143), which was effective for the Company’s 2003 fiscal year. Under
      SFAS No. 143, a future retirement obligation relating to future
      decommissioning costs of the Company’s equipment and buildings is recorded at
      present value by discounting the Company’s estimated future asset retirement
      obligation using the Company’s estimated credit-adjusted borrowing rate. The
      offset to the liability is capitalized as part of the carrying amount of the
      related long-lived asset. The asset retirement obligation (ARO) has been
      recorded in the accompanying consolidated balance sheets and will be adjusted
      to
      fair value over the estimated useful lives of the assets as an accretion
      expense.





At
      January 1, 2003 the Company adopted SFAS No. 143 and recognized an initial
      ARO
      of approximately $478,000 and net capitalized costs of $126,000. The impact
      of
      adopting the Statement was recognized as a cumulative effect of change in
      accounting principle in the amount of $353,000 ($222,000 after income taxes).
      The Company has recognized an increase in the ARO of approximately $77,000,
      $34,000 and $36,000 for the years ended December 31, 2005, 2004 and 2003,
      respectively, representing the accretion expense. An increase of $45,000 was
      also recognized in the ARO during 2005 related to the restructuring.
      Approximately $30,000, $13,000 and $13,000 in amortization expense was
      recognized related to the capitalized cost for the years ended December 31,
      2005, 2004 and 2003, respectively.





NOTE
      O - RELATED PARTY TRANSACTIONS





CP
      Medical leases production, warehouse and office space from an entity owned
      by
      the President of CP Medical. See Note J.





An
      officer and director of the Company was a director of a vendor that provides
      radiation measurement services to Theragenics until May 2004. Theragenics paid
      this vendor approximately $32,000 and $37,000 during 2004 and 2003,
      respectively, for these services.




The
      same officer and director of the Company was a director of the American
      Cardiovascular Research Institute (ACRI) for a portion of 2003. ACRI performed
      animal studies related to the Company’s research initiatives. Theragenics paid
      ACRI approximately $51,000 and $60,000 during 2004 and 2003, respectively,
      for
      these animal studies.





The
      same officer is related to the principal of an outside consultant, Medical
      Equities, which provides real estate advisory services. Theragenics paid this
      consultant approximately $5,000 in 2003 for these services.














F-31
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004











NOTE
      P - QUARTERLY FINANCIAL DATA (UNAUDITED)





The
      following summarizes certain quarterly results of operations (in thousands,
      except per share data):








Year
                ended December 31, 2005:
            
            Quarter
                endedApril
                3
            
            July
                3
            
            October
                2
            
            December
                31Net
                revenue
            
            $
            9,539
            
            $
            11,372
            
            $
            12,002
            
            $
            11,357Gross
                profit
            
            
            4,745
            
            
            5,128
            
            
            5,169
            
            
            5,466Restructuring
                expenses
            
            
            -
            
            
            -
            
            
            32,915
            
            
            475Net
                loss
            
            
            (496
            )
            
            (1,036
            )
            
            (27,238
            )
            
            (236
            )Net
                loss per common shareBasic
            
            $
            (0.02
            )
            $
            (0.03
            )
            $
            (0.85
            )
            $
            (0.01
            )Diluted
            
            $
            (0.02
            )
            $
            (0.03
            )
            $
            (0.85
            )
            $
            (0.01
            )Year
                ended December 31, 2004:
            
            Quarter
                endedApril
                4
            
            July
                4
            
            October
                3
            
            December
                31Net
                revenue
            
            $
            7,953
            
            $
            8,646
            
            $
            8,283
            
            $
            8,456Gross
                profit
            
            
            4,555
            
            
            5,179
            
            
            5,001
            
            
            4,481Net
                loss
            
            
            (966
            )
            
            (934
            )
            
            (1,122
            )
            
            (1,289
            )Net
                loss per common shareBasic
            
            $
            (0.03
            )
            $
            (0.03
            )
            $
            (0.04
            )
            $
            (0.04
            )Diluted
            
            $
            (0.03
            )
            $
            (0.03
            )
            $
            (0.04
            )
            $
            (0.04
            )











NOTE
      Q - RECENTLY ISSUED ACCOUNTING STANDARDS




The
      following accounting standards are effective for the Company beginning January
      1, 2006:




SFAS
      No. 123 (R), *Share-Based
      Payments,* which
      replaces the prior SFAS No. 123, *Accounting
      for Stock-based Compensation* ,
      and supersedes APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* .
      See Note B-13 to these consolidated financial statements.




SFAS
      No. 151, *Inventory
      Costs, an amendment of ARB No. 43, Chapter 4* .
      SFAS No. 151 clarifies the accounting for abnormal amounts of idle facility
      expense, freight, handling costs, and wasted materials and requires that such
      items be recognized as current-period charges regardless of whether they meet
      the “so abnormal” criterion outlined in ARB No. 43. In addition, SFAS
      No. 151 requires that allocation of fixed production overhead to the cost
      of conversion be based on normal capacity of the production facilities. SFAS
      No. 151 is not expected to have a material impact on the Company’s
      consolidated financial statements.




F-32
 Theragenics
          Corporation and Subsidiary
 NOTES
          TO CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2005 and 2004









SFAS
      No. 153, *Exchanges
      of Nonmonetary Assets, an amendment of APB Opinion No. 29* (“SFAS 153”). SFAS No. 153 eliminates the exception from fair value measurement
      for nonmonetary exchanges of similar productive assets and replaces it with
      an
      exception for exchanges that do not have commercial substance. SFAS
      No. 153 is not expected to have a material impact on the Company’s
      consolidated financial statements.





Financial
      Accounting Standards Board Staff Position (FSP) No. 115-1, *The
      Meaning of Other-Than-Temporary Impairment and Its Application to Certain
      Investments* ,
      an amendment to SFAS No. 115, *Accounting
      for Certain Investments Held in Debt and Equity Securities.* FSP
      No. 115-1 provides guidance on determining when an investment is considered
      impaired, evaluating whether that impairment is other than temporary, and
      recognizing the impairment loss. The FSP also addresses the accounting and
      disclosure for debt securities subsequent to the recognition of an
      other-than-temporary impairment. FSP No. 115-1 is not expected to have a
      material impact on the Company’s consolidated financial statements.


























F-33

















**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**








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 consolidated financial statements of
      Theragenics Corporation and Subsidiaries referred to in our report dated March
      13, 2006, which is included in the annual report to security holders and
      incorporated by reference in Part II of this form.  Our report on the
      consolidated financial statements includes an explanatory paragraph, which
      discusses the adoption of Statement of Financial Accounting Standard No. 143,
      Accounting for Asset Retirement Obligations, effective January 1, 2003, as
      discussed in Note N to the Consolidated Financial Statements. Our audit was
      conducted for the purpose of forming an opinion on the basic financial
      statements taken as a whole.  The Schedule II is presented for purposes of
      additional analysis and is not a required part of the basic financial
      statements.  This schedule has been subjected to the auditing procedures
      applied in the audit of the basic financial statements and,
      in our opinion, is fairly stated in all material respects in relation to the
      basic financial statements taken as a whole.





/s/
      GRANT THORNTON LLP





Atlanta,
      Georgia


March
      13, 2006











S-1


Theragenics
      Corporation and Subsidiary





SCHEDULE
      II - VALUATION AND QUALIFYING ACCOUNTS





For
      each of the three years in the period ended December 31, 2005


(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, 2005Allowance
                  for doubtfulaccounts
                  receivable
              
              $
              177
              
              $
              278
              
              $
              76
              (b)
              $
              14
              (a)
              $
              517Year
                  ended December 31, 2004Allowance
                  for doubtfulaccounts
                  receivable
              
              $
              118
              
              $
              59
              
              $
              0
              
              $
              0
              
              $
              177Year
                  ended December 31, 2003Allowance
                  for doubtfulaccounts
                  receivable
              
              $
              147
              
              $
              106
              
              $
              0
              
              $
              135
              (a)
              $
              118





(a)
            -
                write-off of uncollectible amounts


(b)
            -
                acquisition of CP Medical














S-2