**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, 2006


**OR**


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


SECURITIES
      EXCHANGE ACT OF 1934


FOR
      THE
      TRANSITION PERIOD FROM _________ TO ________





COMMISSION
      FILE NO. 0-15443





**THERAGENICS
      CORPORATION****®**


(Exact
      name of registrant as specified in its charter)





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




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





Registrant’s
      telephone number, including area code:


(770)
      271-0233





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





Title
                of each class
            
            Name
                  of each exchange on
                  which
                    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 x





Indicate
      by check mark if the registrant is not required to file reports pursuant to
      Section 13 or Section 15(d) of the Exchange Act. Yes o  No x












Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days. YES x 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.





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 x        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 x





The
      aggregate market value of the common stock of the registrant held by
      non-affiliates of the registrant, as determined by reference to the closing
      price of the Common Stock as reported on the New York Stock Exchange on July
      2,
      2006, the last business day of the registrant’s most recently completed second
      fiscal quarter, was $101,049,761.




As
      of
      March 6, 2007 the number of shares of Common Stock, $.01 par value, outstanding
      was 33,241,564





Documents
      incorporated by reference: Proxy Statement for the registrant’s 2006 Annual
      Meeting of Stockholders, to be filed with the Securities and Exchange Commission
      not later than 120 days after December 31, 2006, is incorporated by reference
      in
      Part III herein.




2




**Part
      I**





**Item
      1.    BUSINESS**





***Overview***




Theragenics
      Corporation ® (the
“Company”) is a medical device company serving the cancer treatment and surgical
      markets, operating in two business segments.




In
      its
      brachytherapy seed business, the Company produces, markets and sells
      TheraSeed ® ,
      its
      premier palladium-103 prostate cancer treatment device; I-Seed, its iodine-125
      based prostate cancer treatment device; and other related products and services.
      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 majority of TheraSeed ® sales
      are channeled through one third-party distributor. The Company also sells its
      TheraSeed ® and
      I-Seed devices directly to physicians.





The
      Company’s surgical products business consists of wound closure and vascular
      access products. Wound closure includes sutures, needles and other surgical
      products with applications in, among other areas, urology, veterinary,
      cardiology, orthopedics, plastic surgery and dental. Vascular access includes
      introducers and guidewires used in the interventional radiology, interventional
      cardiology and vascular surgery markets.





The
      Company has substantially diversified its operations and revenues in recent
      years. Prior to 2003, the Company’s sole product was the palladium-103
      TheraSeed ® prostate
      cancer treatment device. In 2003, the Company began to market an iodine-125
      prostate cancer treatment device. In May 2005, the Company expanded into the
      surgical products business with the acquisition of CP Medical Corporation (“CP
      Medical”), followed by the acquisition of Galt Medical Corp. (“Galt”) in August
      2006. CP Medical and Galt comprise the Company’s surgical products business,
      which accounted for 36% of consolidated revenue in 2006, and 46% of the
      consolidated revenue in the fourth quarter of 2006. Prior to 2005, the
      brachytherapy seed business constituted 100% of the Company’s revenue.




The
      Company acquired CP Medical on May 6, 2005, for approximately $26.7 million,
      including $20.6 million in cash and the issuance of 1,840,458 shares of common
      stock valued at approximately $6.1 million. Galt
      was
      acquired on August 2, 2006, for $32.7 million (net of $2.3 million of cash
      acquired), including $29.6 million in cash and the issuance of common shares
      valued at $3.1 million.





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




***2005
      Restructuring***




The
      Company implemented a restructuring of the brachytherapy segment in August
      2005
      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 use of palladium-103 in the vascular, macular degeneration and breast
      cancer areas, and eliminated production of radiochemical products. Significant
      restructuring charges were recorded in 2005, and curtailing these activities
      allowed the Company to shrink its asset base by shutting down six cyclotrons,
      closing the Newton Terrace facility in Buford, Georgia, and closing the PSP
      facility. The objective of the restructuring was to sharpen the Company’s focus
      on its two main business segments, brachytherapy seeds and surgical products,
      as
      well as provide a more focused platform for continued diversification and
      expansion through acquisitions or other channels. Restructuring charges of
      approximately $33.4 million were recorded in 2005.




Restructuring
      activities were completed during the second quarter of 2006, and the Company
      incurred restructuring costs of $369,000 during the first half of 2006. These
      restructuring costs were primarily a result of the ongoing site exit and
      disposal costs associated with the shutting down of the Oak Ridge facility.
      The
      Company is actively marketing its interest in its Oak Ridge real estate.




The
      restructuring generated pre-tax operating expense savings in 2006, as compared
      to the Company’s run rates prior to the restructuring, of approximately $8.6
      million, including cash-based savings of $6.0 million.




3




**Description
      of the Business**





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





The
      Company operates in two segments; the brachytherapy seed segment and the
      surgical products segment.  Information
      related to revenue from external customers, measure of profit and loss by
      segment, total assets by segment, and geographic areas, is contained in Note
      M
      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 218,890 new cases of prostate cancer diagnosed and an estimated
      27,050 deaths associated with the disease in the United States during 2007.





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.




Theragenics
      produces TheraSeed ® ,
      an
      FDA-cleared device for treatment of all solid localized tumors and currently
      used principally for the treatment of prostate cancer. In the prostate
      application, TheraSeed ® devices
      are implanted throughout the prostate gland in a minimally invasive surgical
      technique, 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 ® device
      is best suited for solid localized tumors.





Management
      believes the TheraSeed ® device
      offers significant advantages over other treatment options, including reduced
      incidence of side effects such as impotence and incontinence. Recent multi-year
      clinical studies indicate that seeding offers success rates for early-stage
      prostate cancer that are comparable to or better than alternative treatment
      options and is associated with reduced complication rates. In addition,
      brachytherapy is a one-time outpatient procedure with a typical two to three
      day
      recovery period. By comparison, other treatment modalities typically require
      a
      lengthy hospital stay and recovery period.





The
      TheraSeed ® device
      is a radioactive “seed” roughly the size of a grain of rice. Each seed consists
      of biocompatible titanium that encapsulates the radioactive isotope
      palladium-103. 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 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. An
      experienced practitioner typically performs the procedure in approximately
      45
      minutes, with the patient often returning home the same day.





The
      Company also offers the I-Seed device, which is a “seed” device similar to
      TheraSeed ® ,
      except
      that it utilizes the radioactive isotope 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. While management believes
      that palladium-103 continues to have certain advantages over iodine-125,
      including (i) higher dose rates without the risk of side effects that may be
      associated with even higher dose rates; (ii) a shorter half life, which shortens
      the duration of some radiation induced side effects by two-thirds; and (iii)
      reduced radiation exposure to medical personnel in treatment follow-up, the
      offering of its I-Seed iodine product enables the Company to compete more
      effectively for those direct customers who prefer to buy both seeds from a
      single source.




4




***Treatment
      Options - Brachytherapy Seed Business***





In
      addition to brachytherapy, there are many treatment options for localized
      prostate cancer. Some therapies may be combined to address a specific cancer
      stage or patient need. The following is a summary of treatment options for
      prostate cancer other than seeding.





*Radical
      Prostatectomy* is the
      most common surgical procedure. Radical Prostatectomy (“RP”) involves the
      complete surgical removal of the prostate gland and has been used for over
      30
      years in treating early-stage, localized tumors. RP typically requires a
      three-day average hospital stay and a lengthy recovery period (generally three
      to five weeks). Possible side effects include impotence and incontinence.
      Alternative forms of radical prostatectomy include laparoscopic radical
      prostatectomy (“LRP”) and robotic radical prostatectomy (“RRP”). These forms of
      radical prostatectomy are intended to be less invasive than a traditional
      radical prostatectomy and are more complex to perform.





*External
      Beam Radiation Therapy* (“EBRT”)
      involves directing a beam of radiation at the prostate gland from outside the
      body to destroy tumorous tissue and has been a common technique for treating
      many kinds of cancer since the 1950s. Patients are usually treated five days
      per
      week in an outpatient center over a period of eight to nine weeks. Side effects
      include impotence, incontinence and rectal complications.





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
      in an attempt to more accurately aim the radiation at the prostate. Conformal
      proton radiation is another newer form of radiation therapy that uses a similar
      approach, but instead of using x-rays this technique focuses proton beams on
      the
      cancer.





*Cryosurgery* treats
      the cancer by freezing the cells with cold metal probes, destroying the
      prostate. Patients usually remain in the hospital for one to two days. Side
      effects may include soreness, swelling, impotence and incontinence.





*Ancillary
      Therapies,* primarily consisting of hormone therapy and chemotherapy, are used to slow
      the
      growth of cancer and reduce tumor size, but are generally not intended to be
      curative.





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





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





** ***Clinical
      Results - Brachytherapy Seed Business***





*Strong
      Efficacy Results* .
      Clinical data indicates that seeding offers success rates for early-stage
      prostate cancer treatment that are comparable to or better than those of RP
      or
      EBRT.





A
      twelve-year study published in the Volume 4, Issue 1 (2005) edition of the
      Journal *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% were treated with brachytherapy and 20% were treated with surgery.
      High-risk patients treated with seeding showed an 88% cure rate compared to
      a
      43% cure rate obtained from surgery at 12 years. Intermediate-risk patients
      reflected a success rate of 89% with seed therapy compared to a 58% success
      rate
      with surgery at 12 years, and for low-risk patients the success rate for seeding
      was 99% compared to a 97% success rate with surgery at 10 years.




5




An
      8-year
      study by Dr. Gregory Merrick, Dr. Kent Wallner, et al, of the Schiffler Cancer
      Center and Wheeling Jesuit Hospital, disputes a common view that men under
      the
      age of 60 should be treated with prostatectomy. The study, published in the
      British Journal of Urology, 2006, showed that men aged 54 and younger have
      a
      high probability of a good 8-year BPFS (biochemical progression-free survival)
      when treated with permanent interstitial brachytherapy, with or without
      supplemental external beam radiation therapy. For the entire group, the
      actuarial BPFS rate was 96%. For low- (57 men), intermediate- (47 men) and
      high-
      (four) risk patients, the BPFS rates were 96%, 100%, and three of four,
      respectively.





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





A
      15-year
      study by John E. Sylvester, M.D., Peter D. Grimm, D.O., John C. Blasko, M.D.,
      et
      al, of the Seattle Prostate Institute reported excellent 15-year biochemical
      control in patients treated with interstitial permanent brachytherapy combined
      with moderate-dose EBRT. The study, published in the International Journal
      of
      Radiation Oncology Biology Physics, 2007, followed a group of 223 consecutively
      treated patients with clinical T1-T3 prostate cancer. 15-year BFRS (biochemical
      relapse-free survival) of the group, treated with either Pd-103 or I-125
      brachytherapy, was 74%. Results for low-, intermediate- and high-risk patients
      were 88%, 80%, and 53%, respectively, using the Memorial Sloan-Kettering risk
      cohort analysis.





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 Drs. Datolli and Wallner published in the *International
      Journal of Radiation Oncology,*  *Biology
      and Physics* in
      September 2002 and presented at the October 2002 American Society of Therapeutic
      Radiology and Oncology (“ASTRO”) conference, confirmed the effectiveness of
      treatment with the TheraSeed ® device
      combined with EBRT in patients with aggressive cancer who previously were
      considered poor candidates for seeding. 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.





*Isotope
      Selection:* The
      following publications show that isotope selection has an effect on treatment
      outcome.





Louis
      Potters, M.D., Yijan Cao, Ph.D., et al, Memorial Sloan Kettering Cancer Center,
      published a comprehensive review of CT-based dosimetry parameters and
      biochemical control in 719 consecutive patients treated with either Pd-103
      or
      I-125 permanent prostate brachytherapy in the July, 2001 International Journal
      of Radiation Oncology Biology Physics. This review showed that there was no
      statistically significant difference in treatment outcome when the treatment
      dose was optimal. However, when the dose was less than optimal, patients
      achieved much better biochemical control and suffered fewer relapses with Pd-103
      than those treated with I-125: 83.4% freedom from failure compared to 63.8%.





A
      study
      of 5,889 patients over the course of 15 years presented at the 2006 ASTRO Annual
      meeting found that formula and isotope make a significant difference on the
      future prognosis of prostate cancer patients. Presented by Dr. Louis Potters
      of
      the New York Prostate Institute, the nomogram, or predictive model, showed
      a
      more positive outcome for a patient treated with Pd-103 compared to I-125.
      Dr.
      Potters noted that “results were compelling in that it provides a platform by
      which the medical community can distinguish how we prescribe brachytherapy
      based
      on a patient’s underlying risk.”





*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.





6





***Production
      - Brachytherapy Seed Business***





With
      the
      exception of rhodium-103 (“Rh-103”), all raw materials used in the production of
      the TheraSeed ® and
      I-Seed devices are relatively inexpensive and readily available from third
      party
      suppliers. Rh-103 is relatively expensive but readily available on the open
      market. The Company’s brachytherapy seed production does not require significant
      amounts of Rh-103. In
      addition, for reasons of quality assurance, sole source availability or cost
      effectiveness, certain components and raw materials are available only from
      sole
      suppliers.





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, or by proton bombardment of Pd-104 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.





The
      Company began production of the I-Seed product early in 2004. The Company does
      not produce the iodine-125 isotope. This isotope is relatively inexpensive
      and
      is readily available from multiple suppliers.





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) Quality System Standard,
      and is currently certified to ISO 13485:2003.





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





The
      Company sells its TheraSeed ® device
      directly to health care providers and to third party distributors through
      non-exclusive distribution agreements, and sells its I-Seed device directly
      to
      health care providers. Currently, the Company has non-exclusive distribution
      agreements with two distributors for the distribution of the
      TheraSeed ® device.
      The Company’s primary distribution agreement is in place with C. R. Bard
      (“Bard”). The terms of the distribution agreement with Bard (the “Bard
      Agreement”) provide for automatic one-year extensions of the term, unless either
      party gives notice of its intent not to renew at least twelve months prior
      to
      the end of the current term. The current term expires on December 31, 2008
      and
      will be automatically extended for one additional year unless either party
      gives
      notice of its intent not to extend by December 31, 2007. 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 Oncura, now a part of GE Healthcare, terminated
      on
      September 8, 2005. A summary of sales to significant customers
      follows:





**Percentage
                of**
              **Brachytherapy
                Product Revenue**
            ****
            **Percentage
                of**
              **Consolidated
                Revenue****2006**
            ****
            **2005**
            ****
            **2004**
            ****
            **2006**
            ****
            **2005**
            ****
            **2004**Bard
            
            
            60.2
            %
            
            61.0
            %
            
            60.1
            %
            
            38.4
            %
            
            49.0
            %
            
            59.6
            %Oncura
            
            
            0.0
            %
            
            9.6
            %
            
            20.8
            %
            
            0.0
            %
            
            7.7
            %
            
            20.6
            %





The
      Company maintains an internal brachytherapy sales force that sells the
      TheraSeed ® and
      I-seed devices
      directly to hospitals. The
      Company also expects to continue direct to consumer advertising and 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.




7




***Patents
      and Licenses; Trade Secrets - Brachytherapy Seed
      Business***





The
      Company holds a number of United States patents directed to radiation
      delivery devices for therapeutic uses, as well as certain corresponding
      international patents. The Company’s policy is to file patent applications in
      the United States and foreign countries where rights are available and when
      the
      Company believes it is commercially advantageous to do so. The Company considers
      the ownership of patents important, but not necessarily essential, to its
      brachytherapy 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 ® 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. (“Nordion”). 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 ® device.





The
      Company holds a patent for technology concerning methods for delivery of the
      TheraSphere ® device
      in the United States and several other countries. The Company exclusively
      licenses this technology to Nordion.





***Competition
      - Brachytherapy Seed Business***





The
      Company’s brachytherapy business competes in a market characterized by
      technological innovation, extensive research efforts and significant
      competition. In general, the TheraSeed ® and
      I-Seed devices compete with conventional methods of treating localized cancer,
      including, but not limited to, radical prostatectomy, which includes
      laparoscopic radical prostatectomy and robot-assisted radical prostatectomy,
      and
      external beam radiation therapy which includes intensity modulated radiation
      therapy, as well as competing permanent devices. 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 (“Pd-103”) and
      iodine-125 (“I-125”) seeds,
      which compete directly with the TheraSeed ® and
      I-Seed devices. B ard,
      Oncura (a part of GE Healthcare), North American Scientific, Inc., Coloplast
      A/S
      and others all manufacture and/or sell Pd-103 and/or I-125 brachytherapy seeds. 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 17 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) maintenance of the Company’s cancer information center, (vi)
      its direct sales force, (vii) its direct to consumer advertising programs and
      (viii) the non-exclusive distribution agreements that the Company currently
      has
      in place.




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





In
      February 2007, the Company reduced its transfer price to its two non-exclusive
      distributors by 6%, in recognition of the current competitive environment and
      new distributor strategies. At any point in time, management of Theragenics
      and/or its non-exclusive distributors may continue to change their respective
      pricing policies for the TheraSeed ® device,
      and Theragenics may change its pricing policies for the I-Seed device, in order
      to take advantage of market opportunities or respond to competitive situations.
      Responding to market opportunities and competitive situations, including but
      not
      limited to competitor selling tactics, could have an adverse effect on the
      prices of the TheraSeed ® or
      I-Seed device. Responding to market opportunities and competitive situations
      may
      also have a favorable effect on market share and volumes, while failure to
      do so
      could adversely affect market share and volumes although per unit pricing could
      possibly be maintained.




8




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.




**Surgical
      Products Business**





***Overview***





The
      Company’s surgical products segment primarily manufactures and distributes
      medical devices used for wound closure and vascular access applications.





Wound
      closure products include sutures and other surgical products with applications
      in urology, veterinary, cardiology, orthopedics, plastic surgery, and other
      fields. The wound closure market is estimated by industry sources to be a $2.0
      billion annual worldwide market, and a $1.2 billion annual market in the United
      States. The Company’s wound closure products are used to hold skin, internal
      organs, blood vessels and other tissue together, after they have been severed
      by
      injury or surgery. Wound closure products such as sutures are produced in
      various dimensions, configurations, and types of materials, depending on the
      application. The Company produces and distributes over 800 wound closure line
      items, including sterile and non-sterile products. Sutures represented
      approximately 71% of surgical products revenue in 2006. Approximately 70% of
      suture sales was in veterinary applications and 30% was in human applications
      in
      2006.





Vascular
      access products include introducers and guidewires used in interventional
      radiology, interventional cardiology and vascular surgery. The interventional
      radiology and interventional cardiology markets are estimated by industry
      sources to be in excess of $6.0 billion. The market for access devices is
      estimated to be 5% to 10% of the total market, or $300 million to $600 million.
      The Company’s introducers are used to create a conduit through which a physician
      can insert a device, such as a catheter, into a blood vessel. Such a device is
      introduced into the vasculature by first using a hypodermic needle to access
      the
      vein. A guidewire is then inserted through the needle and the needle is removed.
      The introducer, consisting of a hollow sheath and a dilator, is then inserted
      over the guide wire to expand the opening. The guidewire and dilator are then
      removed, leaving only the hollow sheath through which the catheter or other
      device is inserted. Once the device is in place, the introducer sheath is
      removed. This is typically done by splitting the introducer in half when the
      “tear away” version of the product is utilized. Introducers and guidewires are
      produced in various dimensions, configurations and types of material, depending
      upon the application. The Company produces and distributes over 200 introducer
      line items, many of which are procedure kits that, in addition to introducers
      and guidewires, may include needles, scalpels and other components. These
      products are sold sterile directly to hospitals and distributors and on an
      OEM
      basis in sterile and bulk, non-sterile configurations.





Major
      product lines in the company’s surgical products business include:





Sutures:


Sutures
      are classified as absorbable or non-absorbable; monofilament, multifilament
      or
      braided; and natural or synthetic. Absorbable or non-absorbable describes the
      sutures effective life within tissue. Absorbable sutures lose the majority
      of
      their tensile strength within 60 days after use. Non-absorbable sutures are
      resistant to living tissue and do not break down. Monofilament, multifilament
      and braided describes the structure or configuration of the suture and is based
      on the number of strands used to manufacture the product. Natural or synthetic
      describes the origin of the suture. Natural suture materials include surgical
      gut, chromic gut, and silk. Synthetic suture materials include nylon, polyester,
      stainless steel, polypropylene, polyglycolic acid, polyglactin, and
      polydioxanone.




9




Staples:


Staples
      are made from stainless steel and come in multiple sizes. Staples are a quicker
      method of wound closure than suture and are particularly effective in areas
      of
      high skin or tissue tension. Lower infection rates have been experienced with
      the use of staples for wound closure due to a lesser degree of tissue
      penetration than suture. Staplers are designed for a single use, come preloaded
      with staples, and are lightweight and disposable.





Strips
      and Tape:


Strips
      and tapes are made of paper, plastic or polyester fabric backed by an adhesive.
      Strips and tapes are easy to use and are particularly effective for small wound
      closure and for use in conjunction with other wound closure
      materials.





Glues
      and
      other surgical sealants:


Glues
      and
      sealants are easy to use and eliminate some of the difficulties associated
      with
      suture such as variances in absorption rates and tissue reaction. However they
      can cause inflammation and are not effective for use in areas of high tissue
      tension.





Needles:


Needles
      consist of specialty needles used in general surgery, including a line of
      needles and related products used in brachytherapy surgical
      procedures.





Guidewires:


Guidewires
      function as a mechanical assist for the percutaneous introduction and exchange
      of various types of plastic catheters or introducer systems into the
      vasculature. Once the catheter is in place, the guidewire is removed and serves
      no other function. Materials commonly used in the production of guidewires
      are
      stainless steel, Nitinol, precoated polytetrafluoroethylene (“ PTFE”)
      stainless steel wire, and platinum alloys. Guidewires are sold OEM on a bulk,
      non-sterile basis as well as packaged sterile for direct hospital sales. The
      Company has the technological and manufacturing capability to produce diagnostic
      and interventional guidewires, and currently offers a sterile product line
      with
      approximately 40 line items.





Micro-Introducer
      Kits:


Micro-Introducers
      are commonly called coaxial dilators and are utilized when a small entry site
      (21 gauge needle) is desirable. Micro-Introducers are introduced over a
      guidewire. These introducers are packaged in a sterile kit that includes a
      Micro-Introducer set, a 21 gauge needle and a .018” diameter guidewire. The
      standard product offerings consist of standard and stiffen variations. Various
      iterations are accomplished by using three different needle types and four
      different mandrel type guidewires. The current sterile product line consists
      of
      approximately 50 line items.





Tearaway
      Introducer Sets and Kits:


This
      product consists of a Teflon type sheath and a High Density Polyethylene
      (“HDPE”) dilator set that is introduced over a guidewire. Once that introduction
      is made the guidewire and the dilator are removed leaving the sheath in place
      as
      a vascular access. Once the definitive device (catheter) is introduced through
      the sheath, the sheath is easily split and removed leaving the desired catheter
      in place. These products are offered sterile as an introducer sheath/dilator
      set
      or as a complete introducer kit that includes a needle and a guidewire. The
      sterile product line consists of approximately 130 line items. Additionally,
      the
      components are sold on a bulk, non-sterile basis to OEM customers.





Elite
      HV TM
      Introducer Kits:


This
      product consists of a sheath that incorporates a hemostasis valve and an HDPE
      dilator. It is introduced into the vasculature as a set over a guidewire. The
      guidewire and dilator are removed leaving a “closed” vascular access system. The
      present product line consists of nine line items and is sold sterile and bulk,
      non-sterile.





10




The
      Company’s surgical products business manufactures and distributes surgical
      products under the following registered trademarks:





Monoswift®polyglycolic/caprolactone suture
              Visorb®polyglycolic acid (PGA) sutureMono-Dox®polydioxanone (PDO) suture
              CP Fiber®high strength polyethylene suturesMonomid®nylon monofilament suture
              Medbond®skin adhesivePolyamid®braided nylon suture
              X-act®skin staplersPolybond®braided polyester suture
              Elite HVTMPolypro®polypropylene monofilament suture
  ***Production
      - Surgical Products Business***




The
      Company designs, manufactures, assembles packages and distributes its products.
      Component raw materials primarily include natural and synthetic sutures, tubing,
      wire, plastic resins and other components, which are generally readily available
      from third party suppliers. Suppliers are located in the United States, as
      well
      as in Latin America, Europe, and Asia. A significant portion of the Company’s
      products in the surgical products segment is produced on an OEM basis as private
      labeled products or in a bulk, non-sterile configuration.




***Marketing
      and Major Customers - Surgical Products Business***




A
      network
      of distributors in the United States and Europe is used to market and distribute
      the Company’s surgical products. A small direct sales force is maintained for
      direct sales to healthcare providers (human use and veterinary) and group
      purchasing organizations, as well as to service the needs of distributors.
      One
      customer represented approximately 10% and 14% of surgical products revenue
      for
      2006 and 2005, respectively.




***Competition
      - Surgical Products Business***




The
      Company’s surgical products business operates primarily in the wound closure,
      interventional radiology, interventional cardiology and vascular surgery
      markets, which are 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, U.S. Surgical, a subsidiary
      of Tyco, Angiodynamics, Boston Scientific, Cook Medical, Inc., C.R. Bard, Inc.,
      Enpath Medical, Inc., Merit Medical and Terumo Medical. The Company’s surgical
      products business competes in these markets by providing custom labeled
      products, high quality, timely and cost effective products, and a high level
      of
      customer service in niche markets that are underserved by the larger suppliers.
      The Company’s surgical products business also has extensive experience and
      knowledge of the markets as well as many established relationships with
      distributors and providers.





***Patents
      and Licenses; Trade Secrets - Surgical Products
      Business***





The
      Company’s surgical products business holds several U.S. patents related to
      suture dispensing systems, suture and needle design, and vascular introducer
      system design. The Company’s policy is to file patent applications in the United
      States and foreign countries where rights are available and when the Company
      believes it is commercially advantageous to do so. The Company considers the
      ownership of patents important, but not necessarily essential, to its surgical
      products business. A strategy of confidentiality agreements and trade secret
      treatment is also utilized to protect non-patented proprietary information.





**Seasonality**





Although
      effects from seasonality cannot be identified in relation to a specific quarter
      or quarters for either business segment, 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 surgical products segments.




11





**Research
      and Development**





Research
      and development (R&D) expenses were $805,000, $3.6 million, and $9.6 million
      in 2006, 2005 and 2004, respectively. R&D expenses in 2005 and 2004 were
      related primarily to the use of palladium-103 in the peripheral vascular and
      macular degeneration programs in the brachytherapy business. These programs
      were
      curtailed in connection with the Company’s restructuring in 2005 (see *“2005
      Restructuring”* above).
      R&D expenses in the brachytherapy business are not currently expected to be
      significant in the future. R&D expenses in the surgical products business
      may increase significantly, as the Company invests in new product development
      in
      this segment. In January 2007, the Company contracted with Peter J. Fitzgerald,
      M.D. to serve as its Chief Medical Director. Dr. Fitzgerald will consult with
      the Company to identify
      opportunities, and advise on research and product development in the
      interventional cardiology, interventional radiology and wound closure markets.





**Government
      Regulation**





The
      Company’s present and future intended activities in the development, manufacture
      and sale of cancer therapy products and wound closure and vascular access
      products are subject to extensive laws, regulations, regulatory approvals and
      guidelines. Within the United States, the Company’s medical devices must comply
      with the U.S. Federal Food, Drug and Cosmetic Act, which are enforced by the
      Food and Drug Administration (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. The Company must
      also comply with the regulations of the Competent Authorities of the European
      Union for its products that have been CE Marked and are sold in the member
      nations of the European Union.





The
      Company is also required to adhere to applicable FDA regulations for Quality
      System Regulation (previously known as Good Manufacturing Practices), including
      extensive record keeping and periodic inspections of manufacturing
      facilities.





The
      Company has obtained FDA 510(k) clearances for its medical devices in the
      brachytherapy and surgical products businesses. New FDA clearances would be
      required for any modifications in such products or its labeling that could
      significantly affect the safety or effectiveness of the original
      product.





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 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.




**Employees**





As
      of
      December 31, 2006, the Company and its subsidiaries had 315 full time employees.
      None of its employees are represented by a union or a collective bargaining
      agreement, and management considers employee relations to be good.





12




**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**





We
      operate in continually changing business environments and new risk factors
      may
      emerge from time to time. We cannot predict such new risk factors, nor can
      we
      assess the impact, if any, of such new risk factors on our business or to the
      extent to which any factor or combination of factors may cause actual results
      to
      differ materially from those expressed in any forward looking statement.
      Additional risks and uncertainties not currently known to us or that we might
      currently deem to be immaterial also may adversely affect our business,
      financial condition and/or operating results.




We
      operate multiple businesses. When we refer to “brachytherapy” or the
“brachytherapy business”, we are referring to our business that produces,
      markets and sells TheraSeed ® ,
      our
      premier palladium-103 prostate cancer treatment device, I-Seed, our iodine-125
      based prostate cancer treatment device, and related products and
      services. When we refer to “surgical products” or the “surgical products
      business”, we are referring to our business that produces markets and sells
      wound closure products, disposable medical devices used for vascular access
      and
      other surgical related products.




**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 and Galt in August 2006.
      Further transactions of this nature could result in potentially dilutive
      issuance of equity securities, use of cash and/or the incurring of debt and
      the
      assumption of contingent liabilities.





Acquisitions
      entail numerous costs, challenges and risks, including difficulties in the
      assimilation of acquired operations, technologies, personnel and products and
      the retention of existing customers and strategic partners, diversion of
      management’s attention from other business concerns, risks of entering markets
      in which we have limited or no prior experience and potential loss of key
      employees of acquired organizations. Other risks include the potential strain
      on
      the combined companies’ financial and managerial controls and reporting systems
      and procedures, greater than anticipated costs and expenses related to
      integration, and potential unknown liabilities associated with the acquired
      entities. No assurance can be given as to our ability to successfully integrate
      the businesses, products, technologies or personnel acquired in past
      acquisitions or those of other entities that may be acquired in the future
      or to
      successfully develop any products or technologies that might be contemplated
      by
      any future joint venture or similar arrangement. A failure to integrate CP
      Medical, Galt or future potential acquisitions could result in our failure
      to
      achieve our revenue growth or other objectives associated with acquisitions,
      or
      recover costs associated with these acquisitions, which could affect our
      profitability or cause the market price of our common stock to fall.




13




***We
      may not realize the benefits of acquisitions.***




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





·
            integrating
                the operations and technologies of the acquired
                companies;


·
            retaining
                and assimilating the key personnel of each
                company;


·
            retaining
                existing customers of 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 acquisitions. The inability to successfully
      integrate the operations, technology and personnel of the two companies
      acquired, or any significant delay in achieving integration, could have a
      material adverse effect on the Company.




***The
      cost of acquisitions could harm our financial
      results.***




If
      the
      benefits of acquisitions do not exceed the associated costs, including costs
      related to integrating the companies acquired and dilution to our stockholders
      resulting from the issuance of shares in connection with the acquisitions,
      our
      financial results, including earnings per share, could be materially
      harmed.




***We
      are dependent on key personnel.***




We
      are
      highly dependent upon our ability to attract and retain qualified management,
      scientific and technical personnel. Therefore, our future success is dependent
      on our key employees. If the services of our chief executive or other key
      employees cease to be available, the loss could adversely affect our business
      and financial results. We carry key employee insurance for Ms. Jacobs in the
      amount of $1 million.




***Our
      stock price has been and may continue to be subject to large
      fluctuations.***




The
      trading price of our Common Stock has been and may continue to be subject to
      wide fluctuations in response to quarter-to-quarter variations in operating
      results, announcements of technological innovations, new products or
      acquisitions by us or our competitors, developments with respect to patents
      or
      proprietary rights, general conditions in the medical device and surgical
      products industries, or other events or factors. In addition, the stock market
      can experience extreme price and volume fluctuations, which can particularly
      affect the market prices of technology companies and which can be unrelated
      to
      the operating performance of such companies. Average daily trading volume in
      our
      Common Stock is not significant and can cause significant price fluctuations.
      Specific factors applicable to the Company or broad market fluctuations may
      materially adversely affect the market price of our Common Stock. We have
      experienced significant fluctuations in our stock price and share trading volume
      in the past and may continue to do so.




***We
      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 support any increases in 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.




14




Manufacturing
      or quality control problems may arise in any of the Company’s businesses 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.




Surgical
      product components are obtained from suppliers located in the United States,
      as
      well as in Latin America, Europe, and Asia. While we believe there is adequate
      access to alternative suppliers, any disruption in supply could have a material
      adverse effect on our business, financial condition and results of operations.




The
      Company operates three primary production facilities, each of which manufactures
      unique products. If an event occurred that resulted in damage to one or more
      of
      our production facilities, we may be unable to produce the relevant products
      at
      previous levels or at all. In addition, for reasons of quality assurance, sole
      source availability or cost effectiveness, certain components and raw materials
      are available only from a sole supplier. Due to the FDA’s and other stringent
      regulations regarding the manufacture of our products, we may not be able to
      quickly establish replacement sources for certain component materials. Any
      interruption in manufacturing, or in the ability to obtain raw materials and
      component supplies, could have a material adverse effect on our
      business.




***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, 2006, the Company’s medical devices have 510(k) clearance from
      the FDA for commercial distribution in the United States. FDA and other
      governmental approvals and clearances are subject to continual review, and
      later
      discovery of previously unknown problems could result in restrictions on a
      product’s marketing or withdrawal of the product from the market. The commercial
      distribution in the United States of new medical devices developed by 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 medical devices
      are not approved, the use or sale of such medical devices will require approvals
      by government agencies comparable to the FDA. The process of obtaining such
      approvals can be lengthy, expensive and uncertain. There can be no assurance
      that the necessary approvals for the marketing of 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 to previously approved medical devices or their labeling
      that
      could significantly affect the safety or effectiveness of the original products.
      Under the FDA’s regulatory scheme, the decision whether to seek 510(k) clearance
      for a modified device is left to the manufacturer in the first instance, and
      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 scientific device for safety and effectiveness,
      may be required for future products or for future modifications to the Company’s
      existing medical devices.




Certain
      of the Company’s medical devices have also been approved for marketing
      throughout the member countries of the European Union by obtaining appropriate
      CE Marks. As a result of receiving CE Marks, 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 brachytherapy 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.




15




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 from
      obtaining, or affect the timing of, future regulatory approvals. Failure to
      comply with applicable regulatory requirements could result in, among other
      things, significant fines, suspension of approvals, seizures or recalls of
      products, operating restrictions or criminal prosecution and materially
      adversely affect the Company’s business, financial condition and results of
      operations.




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




Through
      April 2005, virtually all of the Company’s revenues were generated from the
      brachytherapy seed market. The growth of our surgical products business has
      reduced our dependence on the brachytherapy business. However, there is no
      assurance that we can continue to successfully diversify our business, and
      a
      lack of diversification or over reliance on any one of our businesses can be
      a
      risk.




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




The
      Company competes in markets characterized by technological innovation, extensive
      research efforts and significant competition. New developments in technology
      may
      have a material adverse effect on the development or sale of 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, caring for wounds, providing vascular access, and addressing
      other surgical procedures that are similar to, or compete with, the Company’s
      brachytherapy products, surgical 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.***




Our
      brachytherapy business is also subject to intense competition within the
      brachytherapy seed market. C.R. Bard, Inc., Oncura (a part of GE Healthcare),
      North American Scientific, Inc., Coloplast A/S and others all manufacture and/or
      sell Pd-103 and/or I-125 brachytherapy seeds. Our surgical products business
      competes with other suppliers of wound closure and vascular access products.
      Many of these competitors, including Bard, Ethicon, Inc., a Johnson &
Johnson company, U.S. Surgical, a division of Tyco Healthcare Group LP, Angiodynamics,
      Boston Scientific, Cook Medical, Inc., Enpath Medical, Inc., Merit Medical
      and
      Terumo Medical have
      substantially greater financial, technical, sales, marketing and other
      resources, as well as greater name recognition and a larger customer base,
      than
      Theragenics. Additionally, many companies located outside of the United States,
      in particular in Asia, produce and supply similar surgical products. These
      companies may have access to substantially lower costs of production.
      Accordingly, such competitors or future competitors may be able to respond
      more
      quickly to new or emerging technologies and changes in customer requirements
      or
      to devote greater resources to the development, promotion and sale of their
      products than us. As a result, we may be at a disadvantage when competing with
      these larger companies. If we fail to compete effectively, our business,
      financial condition and results of operations may be adversely
      affected.




16




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




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 2007. 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*** ***our
      brachytherapy and surgical product*** ***s,
      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 market access to
      potential customers. Some of the entities with which we have relationships
      to
      help market and distribute our products also produce or distribute products
      that
      directly compete with our products. In particular, C.R. Bard, one of our primary
      competitors, is also a distributor of our TheraSeed ® product.
      Sales to Bard represented 60% of brachytherapy product revenue in 2006. 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, 2008, and will be automatically extended for one
      additional year unless either party gives notice of its intent not to extend
      by
      December 31, 2007. There is no assurance that this distribution agreement will
      be extended and if it is not, how much unit volume being sold through Bard
      will
      be able to be retained.




A
      significant portion of our surgical products revenue is derived from our
      relationships with dealers and distributors. There is no assurance 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.




***Doctors
      and hospitals may not adopt our products and technologies at levels sufficient
      to sustain our business or to achieve our desired growth
      rate.***




To
      date,
      we have attained only limited penetration of the total potential market for
      our
      products. Our future growth and success depends upon creating broad awareness
      and acceptance of our products by doctors, hospitals and freestanding clinics,
      as well as patients. This will require substantial marketing and educational
      efforts, which will be costly and may not be successful. The target customers
      for our products may not adopt these technologies or may adopt them at a rate
      that is slower than desired. In addition, potential customers who decide to
      utilize any of our devices may later choose to purchase competitors’ products.
      Important factors that will affect our ability to attain broad market acceptance
      of our products include:




·
            doctor
                and/or patient awareness and acceptance of our
                products;




·
            the
                real or perceived effectiveness and safety of our
                products;




17




·
            the
                relationship between the cost of our products and the real or perceived
                medical benefits of our products;




·
            the
                relationship between the cost of our products and the financial benefits
                to our customers using our products, which will be greatly affected
                by the
                coverage of, and reimbursement for, our products by governmental
                and
                private third-party payors; and




·
            market
                perception of our ability to continue to grow our business and develop
                enhanced products.




Failure
      of our products to gain broad market acceptance could cause our revenues to
      decline and our business to suffer.




***Evolving
      regulation of corporate governance and public disclosure may result in
      additional expenses and continuing uncertainty.***




Changing
      laws, regulations and standards relating to corporate governance and public
      disclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations and
      NYSE rules are creating uncertainty for public companies, and are particularly
      burdensome for smaller public companies such as Theragenics. 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.




***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. There can be no assurance that rights under patents held
      by
      or licensed to the Company will provide it with competitive advantages that
      others will not independently develop similar products or design around or
      infringe the patents or other proprietary rights owned by or licensed to 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.




18




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 and policies of other third
      party payors.***




Medicare
      covers a substantial percentage of the patients treated for prostate cancer
      in
      the United States, and consequently, the costs for prostate cancer treatment
      are
      subject to Medicare’s prescribed rates of reimbursement. The utilization of
      TheraSeed ® ,
      I-Seed
      and many of the products in our surgical products business may be influenced
      by
      Medicare’s reimbursement levels, and the policies of other third party payors,
      which can change periodically. Unfavorable reimbursement levels and confusion
      regarding potential changes in Medicare have adversely affected sales of our
      brachytherapy products in the past, and could do so in the future.





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 our brachytherapy
      or other products, (ii) that health administration authorities outside of the
      United States will provide reimbursement at acceptable levels, if at all or
      (iii) that any such reimbursement will be continued at rates that will enable
      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
      umbrella liability policies with limits of $25 million per occurrence and 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.




***If
      we do not comply with laws and regulations relating to our use of hazardous
      materials, we may incur substantial liabilities.***




We
      use
      hazardous materials and chemicals in our manufacturing operations. We are
      required to comply with increasingly rigorous laws and regulations governing
      environmental protection and workplace safety, including requirements governing
      the handling, storage and disposal of hazardous substances and the discharge
      of
      materials into the environment generally. Although, we believe that we handle,
      store and dispose of these materials in a manner that complies with state and
      federal regulations, the risk of accidental contamination or injury exists.
      In
      the event of an accident, we could be held liable for decontamination costs,
      other clean-up costs and related damages or liabilities. To help minimize these
      risks, we employ a full-time Environmental Health and Safety Officer and, when
      appropriate, we utilize outside professional services organizations to help
      us
      evaluate environmental regulations and monitor our compliance with such
      regulations **.** In
      addition, the Company procures insurance specifically designed to mitigate
      environmental liability exposures.





***Litigation
      may harm our business or otherwise distract our
      management.***




Substantial,
      complex or extended litigation could cause us to incur large expenditures and
      distract our management, and could result in significant monetary or equitable
      judgments against us.  For example, lawsuits by employees, patients,
      customers, licensors, licensees, suppliers, business partners, distributors,
      stockholders, or competitors could be very costly and could substantially
      disrupt our business.  Disputes from time to time with such companies or
      individuals are not uncommon, and we cannot assure that we will always be able
      to resolve such disputes out of court or on terms favorable to us.




19




***Defects
      in, or misuse of, our products, or any detrimental side effects that result
      from
      the use of our products, could result in serious injury or death and could
      require costly recalls or subject us to costly and time-consuming product
      liability claims. This could harm future sales and require us to pay substantial
      damages.***




TheraSeed ® and
      I-Seed deliver a highly concentrated and confined dose of radiation directly
      to
      the prostate from within the patient’s body. Surrounding tissues and organs are
      typically spared excessive radiation exposure. Our wound closure and vascular
      access products are also utilized directly on patients. It is an inherent risk
      of the industries in which we operate that we might be sued in a situation
      where
      one of our products results in, or is alleged to result in, a personal injury
      to
      a patient, health care provider, or other user. Although we believe that
      a s
      of the
      current date we have
      adequate insurance to address anticipated potential liabilities associated
      with
      product liability, any unforeseen product liability, exposure in excess of,
      or
      outside the scope of, such insurance coverage could adversely affect our
      operating results. Any such claim brought against us, with or without merit,
      could result in significant damage to our business.




The
      FDA’s
      medical device reporting regulations require us to report any incident in which
      our products may have caused or contributed to a death or serious injury, or
      in
      which our products malfunctioned in a way that would be likely to cause or
      contribute to a death or serious injury if the malfunction reoccurred. Any
      required filing could result in an investigation of our products and possibly
      subsequent regulatory action against us if it is found that one of our products
      caused the death or serious injury of a patient.




Because
      of the nature of our products, the tolerance for error in the design,
      manufacture or use of our products may be small or nonexistent. If a product
      designed or manufactured by us is defective, whether due to design or
      manufacturing defects, or improper assembly, use or servicing of the product
      or
      other reasons, the product may need to be recalled, possibly at our expense.
      Furthermore, the adverse effect of a product recall might not be limited to
      the
      cost of the recall. For example, a product recall could cause applicable
      regulatory authorities to investigate us as well as cause our customers to
      review and potentially terminate their relationships with us. Recalls,
      especially if accompanied by unfavorable publicity or termination of customer
      contracts, could cause us to suffer substantial costs, lost revenues and a
      loss
      of reputation, each of which could harm our business. Products as complex as
      our
      planning and dose calculation software systems may also contain undetected
      software errors or defects when they are first introduced or as new versions
      are
      released. Our products may not be free from errors or defects even after they
      have been tested, which could result in the rejection of our products by our
      customers and damage to our reputation, as well as lost revenue, diverted
      development resources and increased support costs. We may also be subject to
      claims for damages related to any errors in our products.




Although
      a number of the surgical products are Class II devices subject to certain
      special controls by the FDA, many of the products are Class I devices, meaning
      that the FDA considers these products to present minimal potential for harm
      to
      the user. Nonetheless, if there is an error in the design, manufacture or use
      of
      any of these products, there remains a risk of recall, rejection of our product
      by our customers, damage to our reputation, lost revenue, diverted development
      of resources and increased support costs. We may also be subject to claims
      for
      damages related to any error in such products.




***We
      may require additional capital in the future and we may be unable to obtain
      capital on favorable terms or at all.***




Although
      we expect our existing capital resources and future operating cash flows to
      be
      sufficient for the foreseeable future, certain events, such as operating losses
      could significantly reduce our remaining cash, cash equivalents and investments
      in marketable securities. Furthermore, we may require additional capital for
      research and development, the purchase of other businesses, technologies or
      products. Our capital requirements will depend on numerous factors, including
      the time and cost involved in expanding production capacity, the cost involved
      in protecting our proprietary rights and the time and expense involved in
      completing product development programs.




We
      have a
      Credit Agreement with a financial institution that expires October 31, 2009
      and provides for revolving borrowings of up to $40.0 million 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 subsidiaries (subject to certain limited exceptions) in
      the
      event certain events of default occur under the Credit Agreement. The Credit
      Agreement contains representations and warranties, as well as affirmative,
      reporting and negative comments, 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.




20




***If
      we are unable to develop new enhancements and new generations, we may be unable
      to retain our existing customers or attract new
      customers.***




Rapid
      and
      significant technological change in products offered as well as enhancements
      to
      existing products and surgical techniques coupled with evolving industry
      standards and new product introductions characterize the market for our
      brachytherapy, wound closure and vascular access products. Many of our
      brachytherapy and surgical products are technologically innovative and require
      significant planning, design, development and testing. These activities require
      significant capital commitments and investment. If we are unable to raise needed
      capital on favorable terms or at all, we may be unable to maintain our
      competitive advantage in the marketplace.




New
      product developments in the healthcare industry are inherently risky and
      unpredictable. These risks include:


·
            failure
                to prove feasibility; ·
            time
                required from proof of feasibility to routine
                production; ·
            timing
                and cost of 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 surgical 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 surgical products. 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.





**Item
      1B. Unresolved Staff Comments.**





None.





**Item
      2.    Properties**





The
      executive offices of the Company are located in Buford, Georgia, in a facility
      that the Company owns. Approximately 144,000 square feet of manufacturing and
      development facilities in the brachytherapy seed business are also located
      in
      Buford, Georgia, and are owned by the Company. Approximately 68,000 square
      feet
      of space in leased facilities in the surgical products business are located
      in
      Portland, Oregon, and Garland, Texas.





The
      Company also owns approximately 32 acres in Buford, Georgia on which its
      executive offices and facilities for its brachytherapy seed business are
      located. Included in these 32 acres, 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 its Company-owned 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 (See *“2005
      Restructuring”* above
      and *Item
      7* - *“Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations”* ).





21




Approximately
      19,800 square feet of production, warehouse and office space located in
      Portland, Oregon, is leased for our surgical products business from an entity
      controlled by the former owner of CP Medical, who is currently an officer and
      stockholder of Theragenics. Monthly payments of approximately $14,000 are due
      under this lease through April 2010.





All
      of
      the Company’s owned and leased space is well maintained and suitable for the
      operations conducted in it.





**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 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 was voluntarily dismissed in 2006 with no financial
      settlement due.





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 2006.





22




**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 for each quarterly period in 2006 and 2005 are as
      follows:




**High**
            
            **Low****2006**
              First
                Quarter
            
            $3.90
            
            $
                3.01Second
                Quarter
            
            3.50
            
            2.90Third
                Quarter
            
            3.62
            
            2.83Fourth
                Quarter
            
            3.36
            
            2.60**2005**
              First
                Quarter
            
            $4.08
            
            $
                3.04Second
                Quarter
            
            3.89
            
            3.13Third
                Quarter
            
            3.58
            
            2.78Fourth
                Quarter
            
            3.20
            
            2.75




As
      of
      March 6, 2007, the closing price of the Company’s Common Stock was $4.46 per
      share. Also, as of that date, there were approximately 486 holders of
      record of the Company’s Common Stock. The number of record holders does not
      reflect the number of beneficial owners of the Company’s Common Stock for whom
      shares are held by depositary trust companies, brokerage firms and
      others.





The
      Company has a Stockholder Rights Plan (the “Rights Plan”), which contains
      provisions designed to protect the Company’s stockholders. Pursuant to the
      Rights Plan, each share of the Company’s Common Stock contains a share purchase
      right (a “Right”). The Rights expire in February 2017, and do not become
      exercisable unless certain events occur including the acquisition of, or
      commencement of a tender offer for, 20% or more of the outstanding Common Stock.
      In the event certain triggering events occur, including the acquisition of
      20%
      or more of the outstanding Common Stock, each Right that is not held by the
      20%
      or more stockholders will entitle its holder to purchase additional shares
      of
      Common Stock at a substantial discount to then current market prices. The Rights
      Plan and the terms of the Rights, which are set forth in a Rights Agreement
      between the Company and Computershare Investor Services LLC, as Rights Agent,
      could add substantially to the cost of acquiring the Company, and consequently
      could delay or prevent a change in control of the Company.





**Dividend
      Policy**





The
      Company has 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.




23




**Year
                  Ended December 31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(Amounts
                  in thousands, except per share data)**
                **Statement
                  of Earnings Data:**Product
                  sales
              
              **$**
              **53,076**
              
              $
              43,693
              
              $
              33,030
              
              $
              35,393
              
              $
              41,512Licensing
                  fees
              
              
              **1,020**
              
              
              577
              
              
              308
              
              
              187
              
              
              352Total
                  revenue
              
              
              **54,096**
              
              
              44,270
              
              
              33,338
              
              
              35,580
              
              
              41,864Cost
                  of sales
              
              
              **27,752**
              
              
              23,763
              
              
              14,122
              
              
              15,628
              
              
              14,677Gross
                  profit
              
              
              **26,344**
              
              
              20,507
              
              
              19,216
              
              
              19,952
              
              
              27,187Selling,
                  general and administrative
              
              
              **19,951**
              
              
              19,652
              
              
              17,619
              
              
              13,788
              
              
              12,845Amortization
                  of purchased intangibles
              
              
              **1,371**
              
              
              500
              
              
              —
              
              
              —
              
              
              —Research
                  and development
              
              
              **805**
              
              
              3,632
              
              
              9,583
              
              
              7,467
              
              
              6,538Restructuring
                  expenses
              
              
              **369**
              
              
              33,390
              
              
              —
              
              
              —
              
              
              —(Gain)
                  loss on sale of assets
              
              
              **(201**
              **)**
              
              14
              
              
              15
              
              
              —
              
              
              —Operating
                  profit (loss)
              
              
              **4,049**
              
              
              (36,681
              )
              
              (8,001
              )
              
              (1,303
              )
              
              7,804Other
                  income, net
              
              
              **1,104**
              
              
              1,281
              
              
              1,149
              
              
              894
              
              
              897Net
                  earnings (loss) before income tax and cumulative effect of change
                  in
                  accounting principle
              
              
              **5,153**
              
              
              (35,400
              )
              
              (6,852
              )
              
              (409
              )
              
              8,701Income
                  tax expense (benefit)
              
              
              **(1,712**
              **)**
              
              (6,394
              )
              
              (2,542
              )
              
              (319
              )
              
              3,145Earnings
                  (loss) before cumulative effect of change in accounting
                  principle
              
              
              **6,865**
              
              
              (29,006
              )
              
              (4,310
              )
              
              (90
              )
              
              5,556Cumulative
                  effect of change in accounting principle, net of tax
              
              
              **—**
              
              
              —
              
              
              —
              
              
              (222
              )
              
              —Net
                  earnings (loss)
              
              **$**
              **6,865**
              
              $
              (29,006
              )
              $
              (4,310
              )
              $
              (312
              )
              $
              5,556Earnings
                  (loss) per common shareBasic:Earnings
                  (loss) before cumulative effect of change in accounting
                  principle
              
              **$**
              0.21
              
              $
              (0.93
              )
              $
              (0.14
              )
              $
              (0.00
              )
              $
              0.19Cumulative
                  effect of change in accounting principle, net of tax
              
              
              —
              
              
              —
              
              
              —
              
              
              (0.01
              )
              
              —Net
                  earnings (loss)
              
              **$**
              0.21
              
              $
              (0.93
              )
              $
              (0.14
              )
              $
              (0.01
              )
              $
              0.19Diluted:Earnings
                  (loss) before cumulative effect of change in accounting
                  principle
              
              **$**
              0.21
              
              $
              (0.93
              )
              $
              (0.14
              )
              $
              (0.00
              )
              $
              0.19Cumulative
                  effect of change in accounting principle, net of tax
              
              
              —
              
              
              —
              
              
              —
              
              
              (0.01
              )
              
              —Net
                  earnings (loss)
              
              **$**
              0.21
              
              $
              (0.93
              )
              $
              (0.14
              )
              $
              (0.01
              )
              $
              0.19





Weighted
      average common shares


Basic
            
            
            **32,452**
            
            
            31,273
            
            
            29,971
            
            
            29,902
            
            
            29,746Diluted
            
            
            **32,540**
            
            
            31,273
            
            
            29,971
            
            
            29,902
            
            
            29,994




**December
                  31,****2006**
              
              **2005**
              
              **2004**
              
              **2003**
              
              **2002****(In
                  thousands)****Balance
                  Sheet Data:**Cash
                  and short-term investments
              
              **$**
              **18,258**
              
              $
              10,073
              
              $
              28,450
              
              $
              45,104
              
              $
              56,344Marketable
                  securities
              
              
              **14,722**
              
              
              35,535
              
              
              33,811
              
              
              21,327
              
              
              11,977Property,
                  plant and equipment, net
              
              
              **30,901**
              
              
              32,766
              
              
              70,215
              
              
              73,372
              
              
              74,050Total
                  assets
              
              
              **146,244**
              
              
              122,064
              
              
              148,678
              
              
              152,789
              
              
              151,395Long-term
                  debt, including current installments
              
              
              **7,500**
              
              
              —
              
              
              —
              
              
              —
              
              
              —Contract
                  termination liability, including current installments
              
              
              **1,537**
              
              
              1,560
              
              
              —
              
              
              —
              
              
              —Shareholders’
                  equity
              
              **$**
              **126,141**
              
              $
              115,683
              
              $
              138,060
              
              $
              142,326
              
              $
              142,090




24




**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, operating in two business segments. In its brachytherapy
      seed
      business, the Company produces, markets and sells TheraSeed ® ,
      its
      premier palladium-103 prostate cancer treatment device; I-Seed, its iodine-125
      based prostate cancer treatment device; and other related products and services.
      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 majority of TheraSeed ® sales
      are channeled through third-party distributors. The Company also sells its
      TheraSeed ® and
      I-Seed devices directly to physicians.





The
      Company’s surgical products business consists of wound closure and vascular
      access products. Wound closure includes sutures, needles and other surgical
      products with applications in, among other areas, urology, veterinary,
      cardiology, orthopedics, plastic surgery and dental. Vascular access includes
      introducers and guidewires used in the interventional radiology, interventional
      cardiology and vascular surgery markets.





The
      Company has substantially diversified its operations and revenues in recent
      years. Prior to 2003, the Company’s sole product was the palladium-103
      TheraSeed ® prostate
      cancer treatment device. In 2003, the Company began to market an iodine-125
      based I-Seed prostate cancer treatment product. In May 2005, the Company
      expanded into the surgical products business with the acquisition of CP Medical
      Corporation (“CP Medical”), followed by the acquisition of Galt Medical Corp.
      (“Galt”) in August 2006. CP Medical and Galt comprise the Company’s surgical
      products business, which accounted for 36% of consolidated revenue in 2006,
      and
      46% of consolidated revenue in the fourth quarter of 2006. Prior to May 2005,
      the brachytherapy seed business constituted 100% of the Company’s revenue.




CP
      Medical was acquired on May 6, 2005, for $26.7 million, including $20.6 million
      in cash and the issuance of common shares valued at $6.1 million. Galt was
      acquired on August 2, 2006, for $32.7 million (net of $2.3 million of cash
      acquired), including $29.6 million in cash and the issuance of common shares
      valued at $3.1 million. The Company borrowed $7.5 million under its $40.0
      million credit facility in connection with the Galt acquisition. The Company’s
      consolidated results of operations include the results of CP Medical and Galt
      subsequent to their respective dates of 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.





***Restructuring***




The
      Company implemented a restructuring of the brachytherapy segment in August
      2005
      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 use of palladium-103 in the vascular, macular degeneration and breast
      cancer areas, and eliminated production of radiochemical products (the “2005
      Restructuring”). Curtailing these activities allowed the Company to shrink its
      asset base by shutting down six cyclotrons, closing the Newton Terrace facility
      in Buford, Georgia, and closing the PSP facility. The objective of the
      restructuring was to sharpen the Company’s focus on its two main business
      segments, brachytherapy seeds and surgical 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.




The
      Company completed activities associated with the 2005 Restructuring during
      2006.
      Restructuring costs of $369,000 in 2006 were associated with the site exit
      and
      disposal activities related to the shutting down of the Oak Ridge facility.
      The
      Company is actively marketing its interest in its Oak Ridge real estate. Assets
      held for sale of $3.4 million are included in the accompanying consolidated
      balance sheet at December 31, 2006.




25




The
      restructuring generated pre-tax operating expense savings in 2006, as compared
      to the Company’s run rates prior to the restructuring, of approximately $8.6
      million, including cash-based savings of $6.0 million.




The
      Company recognized gains on the sale of assets of $201,000 in 2006. The
      significant portion of these gains was in the brachytherapy business, and
      represented the sale of equipment idled by the restructuring. The Company was
      not able to sell its leasehold interest in the PSP equipment due to its highly
      specialized use, its sensitive security classification, and its export control
      regulations. As a result, the PSP equipment was returned to the Department
      of
      Energy during 2006.




***Results
      of Operations***





*Year
      Ended December 31, 2006, Compared to Year Ended December 31,
      2005*




***Revenue***




Following
      is a summary of revenue by segment (in thousands):




**Year
                  ended December 31,****2006**
              ****
              **2005**
              ****
              **Change
                  (%)**BrachytherapyContinuing
                  revenue
              
              $
              34,480
              
              $
              36,372
              
              
              (5.2
              %)One-time
                  license fees
              
              
              400
              
              
              —
              
              
              n/aTotal
                  brachytherapy
              
              
              34,880
              
              
              36,372
              
              
              (4.1
              %)Surgical
                  products
              
              
              19,372
              
              
              7,921
              
              
              144.6
              %Intersegment
                  eliminations
              
              
              (156
              )
              
              (23
              )
              
              578.3
              %Consolidated
              
              $
              54,096
              
              $
              44,270
              
              
              22.2
              %




Revenue
      in the 2006 periods includes $400,000 of one-time license fee revenue in the
      brachytherapy business related to the license of the Company’s
      TheraSphere ® product.
      Under the terms of the license agreement, this one-time fee was due upon the
      licensee receiving the CE Mark and European registration for
      TheraSphere ® in
      certain European countries, which was recorded in the third quarter. The
      licensing agreement provides for continuing fees from European and U.S. product
      sales of TheraSphere ® ,
      though
      continuing license fees are not expected to be significant in the near future.




Other
      increases in revenue in the 2006 periods were a result of increases in the
      surgical products segment. 2006 includes revenue from Galt, which was acquired
      in August 2006, and a full year of operations of CP Medical, which was acquired
      in May 2005.




Excluding
      the one-time license fee revenue, brachytherapy sales decreased 5.2% in 2006
      from 2005. This decrease primarily reflects softness in sales to our main
      distributor, which decreased 6% in 2006. Decreases from the loss of another
      distributor in late 2005 were partially offset by increases in direct sales
      during the 2006. The Company maintains its own internal brachytherapy sales
      force that sells TheraSeed ® and
      I-Seed directly to hospitals and physicians. Direct sales increased from 29%
      of
      brachytherapy product revenue in 2005 to 39% in 2006. The average selling price
      of the TheraSeed ®  device
      during 2006 was comparable to 2005.




26




The
      Company has two non-exclusive distribution agreements in place for the
      distribution of the TheraSeed ®  device.
      The primary distribution agreement is with C. R. Bard (“Bard”), which is
      effective through December 31, 2008 (the “Bard Agreement”). Sales to Bard
      represented approximately 60% of brachytherapy product revenue in 2006. 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, 2008, and will be automatically extended for one additional year
      unless either party gives notice of its intent not to extend by December 31,
      2007. The Company also has a non-exclusive distribution agreement in place
      with
      a second distributor, though revenue generated from the second distributor
      was
      not material in 2006 and is not expected to be material in 2007. Prior to 2006,
      the Company also had a non-exclusive distribution agreement in place with
      Oncura, currently a part of GE Healthcare (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.




In
      recognition of competitive marketplace pressures and new distributor strategies,
      the Company reduced the per unit transfer price under which it sells its TheraSeed ®  device
      to
      its distributors by 6%, effective February 1, 2007. A reduction in transfer
      price will reduce gross margins on sales to these distributors at a fixed level
      of unit volumes. However, manufacturing costs in the Company’s brachytherapy
      segment contains a significant fixed cost component. Accordingly, any
      appreciable increases in sales unit volumes to distributors could have the
      impact of increasing overall gross margins. Therefore, the effect of a pricing
      reduction to distributors on gross margins and profitability is ultimately
      dependent upon the performance of the Company’s distributors, and their ability
      to increase unit volumes.




In
      addition to the impact of the disappointing performance by our largest
      distributor and the termination of the Oncura Agreement, management believes
      that the brachytherapy industry continues to be affected by competition from
      alternative therapies, declining prices for iodine-125 and palladium-103 seeds,
      competitors’ selling tactics and the effects of consolidation in the industry.
      Potential future Medicare reimbursement policies can also continue to affect
      the
      brachytherapy market. In December 2006 Congress enacted the Tax Relief and
      Healthcare Act of 2006 (the “Act”), which retains the “pass-through” status of
      reimbursement for brachytherapy seeds for 2007, and requires that a separate
      reimbursement code be established for stranded seeds. Stranded seeds are
      becoming a larger portion of the Company’s brachytherapy business. The Company
      believes that fixed reimbursement rates for seeds will be implemented beginning
      in 2008, (see “ *Medicare
      Developments* ”
below)
      and that this and other factors can be expected to lead to continued pricing
      pressure from hospitals and other health care providers. Accordingly,
      Theragenics and/or its non-exclusive distributors may continue to change their
      respective pricing policies for the TheraSeed ® device
      and Theragenics may change its pricing policy with respect to I-seed in order
      to
      take advantage of market opportunities or respond to competitive situations.
      Responding to market opportunities and competitive situations could have an
      adverse effect on average selling prices. Responding to market opportunities
      and
      competitive situations can also have could have a favorable effect or prevent
      an
      unfavorable effect on market share and volumes. Conversely, the Company or
      its
      non-exclusive distributors could individually and independently decide to
      maintain per unit pricing under certain competitive situations that could
      adversely affect current or potential market share and volumes.




27





***Operating
      Income and costs and expenses***




Following
      is a summary of operating income by segment (in thousands):




**Year
                  ended December 31,****2006**
              ****
              **2005**
              ****
              **Change
                  ($)**BrachytherapyOperating
                  income (loss)
              
              $
              2,122
              
              $
              (38,111
              )
              $
              40,233One-time
                  license fees
              
              
              (400
              )
              
              —
              
              
              (400
              )Restructuring
                  related items
              
              
              170
              
              
              33,390
              
              
              (33,220
              )Other
                  severance
              
              
              —
              
              
              731
              
              
              (731
              )Brachytherapy
                  excluding special items
              
              
              1,892
              
              
              (3,990
              )
              
              5,882Surgical
                  Products
              
              
              1,955
              
              
              1,430
              
              
              525Intersegment
                  eliminations
              
              
              (28
              )
              
              —
              
              
              (28
              )Operating
                  income (loss)Consolidated
              
              $
              4,049
              
              $
              (36,681
              )
              $
              40,730Consolidated
                  excluding special items
              
              $
              3,819
              
              $
              (2,560
              )
              $
              6,379




Operating
      income excluding special items is a non-GAAP financial measure used by
      management in its analysis of the Company’s operating performance. Because of
      the significance of the restructuring, the one-time license fee revenue, and
      the
      other severance costs, we believe presentation of financial measures excluding
      the impact of these items provides supplemental information that is helpful
      to
      an understanding of the operating results of the Company’s businesses and
      period-to-period comparisons of performance. Non-GAAP financial measures should
      be considered in addition to, but not as a substitute for, the Company’s
      reported GAAP results.




Operating
      income excluding special items in the brachytherapy segment improved in 2006
      primarily due to cost savings generated from the 2005 restructuring, which
      significantly reduced costs of manufacturing and research and development.
      Gross
      margins on product sales in the brachytherapy business were 51.5% in 2006,
      with
      costs of manufacturing totaling $16.4 million. Gross margins in the
      brachytherapy seed business are dependent on sales levels, due to the high
      fixed
      cost component of the business. The cost of manufacturing expenses experienced
      in 2006 is representative of what management expects going forward.
      Brachytherapy operating income before special items in 2006 also improved from
      2005 as a result of a reduction in direct to consumer activities, decreases
      in advertising, and decreases in legal expenses.




Operating
      income in the surgical products segment increased by $525,000 in 2006 over
      2005,
      reflecting the acquisition of Galt in August 2006, and the inclusion of CP
      Medical for the entire year in 2006. Gross margins in the surgical products
      business were 40.9% in 2006, with costs of manufacturing totaling $11.5 million.
      As a component of gross margin, costs of manufacturing included $407,000 of
      non-cash charges related to the purchase accounting for Galt that will not
      recur
      in 2007. Another $170,000 of non-cash charges were included in selling, general,
      and administrative expenses related to Galt purchase accounting that will not
      recur in 2007. Operating income for 2006 also reflected higher personnel and
      other costs to support increased capacity and anticipated future growth, and
      higher professional fees resulting from Sarbanes-Oxley related compliance costs.
      The Company expects to continue to invest in infrastructure to support growth
      in
      its surgical products business.




28




Research
      and development expenses declined significantly in the brachytherapy business
      in
      2006 due to the restructuring and the discontinuance of the clinical trials
      and
      research programs underway at the time the restructuring was implemented.
      Looking forward, the only activity expected for these programs is the follow
      up
      of all patients previously treated in the brachytherapy related clinical trials
      in accordance with the FDA-approved protocol for those trials.




In
      the
      first quarter of 2007 the Company contracted with Peter J. Fitzgerald, M.D.
      to
      serve as its Chief Medical Director. Dr.
      Fitzgerald will consult with the Company to identify
      opportunities, and advise on research and product development in the
      interventional cardiology, interventional radiology and wound closure markets.
      Research and development expenses may increase significantly in future periods
      over the 2006 levels as investments are made in product development to address
      growth opportunities in the surgical products business.




***Other
      income/expense***




Interest
      income was comparable between the 2006 and 2005 periods. Higher interest rates
      and yields were offset by a decrease in invested funds due to cash used for
      the
      CP Medical and Galt acquisitions. 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 interest income
      to
      fluctuate accordingly.




Interest
      and financing costs increased from $160,000 in 2005 to $419,000 in 2006. The
      increase is a result of the $7.5 million in borrowings under the Company’s $40.0
      million credit facility in August 2006. Interest on outstanding borrowings
      is
      payable at LIBOR plus 1%, which was an effective rate of 6.3% at December 31,
      2006. The Company expects to maintain borrowings under its credit facility
      to
      provide flexibility for future strategic initiatives and diversification.
      Accordingly, interest expense is expected to increase in future periods due
      to
      these outstanding borrowings and as a result of any future borrowings to support
      expansion programs and strategic opportunities for growth and diversification.
      Interest expense will also be impacted by increases or decreases in the
      effective interest rate on the borrowings.




***Income
      tax benefit***




The
      Company recognized an income tax benefit of $1.7 million in 2006. This net
      benefit was a result of recognizing income tax expense of $1.9 million, offset
      by a benefit resulting from the release of $3.6 million of the deferred tax
      asset valuation allowance in the fourth quarter.




Mainly
      as
      a result of the 2005 Restructuring, the Company had operating loss carryforwards
      and other future deductible temporary differences that resulted in a net
      deferred tax asset of $6.8 million at December 31, 2005. Because of the recent
      history of operating losses, the uncertainty of projecting future taxable income
      sufficient to recognize these deferred tax assets, and management’s belief that
      the Company had to establish a track record of returning to sustained
      profitability, a valuation allowance for the full amount of the net
      deferred tax asset was recorded at that time. In the third quarter of 2006,
      $2.9
      million of deferred income tax liability arising from fair value adjustments
      in
      purchase accounting related to the acquisition of Galt were recorded as a
      reduction of the allowance for the net deferred tax asset and a reduction in
      the
      goodwill arising from the transaction.





Several
      events occurred in the fourth quarter of 2006, indicating to management that
      the
      Company had sufficiently demonstrated a track record of sustained profitability,
      and management concluded that it was more likely than not that the significant
      portion of the deferred tax asset would be realized. Management considered,
      among other things, the following factors: the fourth quarter was the Company’s
      fourth consecutive quarter of profitability, marking the first time since 2002
      where the Company was profitable in all four quarters of a fiscal year; the
      cost
      savings recognized from the 2005 restructuring exceeded expectations after
      a
      full fiscal year of operations; the Tax Relief and Health Care Act of 2006
      was
      passed by Congress and became law in December 2006, which provided important
      safeguards to protect 2007 reimbursement for brachytherapy seeds, as well as
      addressed some longer term reimbursement issues and eliminated some of the
      market uncertainty in brachytherapy; and the growth and performance of the
      surgical products segment further diversified the entire business, with 46%
      of
      fourth quarter revenue generated by the surgical products segment. Based on
      these and other factors, $3.6 million of the deferred tax asset valuation
      allowance (out of a total remaining allowance of $3.8 million) was released
      in
      2006. The remaining allowance of $239,000 relates primarily to certain state
      net
      operating loss carryforwards for which the Company believes it is more likely
      than not that the benefit will not be realized. Beginning in 2007, the Company
      expects to report income as being fully taxed at rates of approximately 38%
      to
      40%. However, actual future tax rates can be affected by, among other things,
      changes in tax regulations, changes in tax rates, changes in the tax
      jurisdictions in which the Company must file income tax returns, and many other
      items that affect the taxability and deductibility of the Company’s revenue and
      expenses and for which we cannot currently predict.




29




***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 in the
      surgical products business 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 were a result of the
      efforts of the Company’s direct sales force and its direct to consumer
      advertising programs.





In
      addition to direct brachytherapy sales, the Company sold through two
      distributors in 2005. The Company distributed through Bard under an agreement
      that was in place for all of 2005. The Company also distributed through Oncura,
      currently a part of GE Healthcare (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. Sales to Oncura during the year ended
      December 31, 2005 declined by 50% compared to 2004.





Licensing
      fees revenue represents licensing payments for the Company’s
      TheraSphere ® technology.





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 the surgical products
      segment. 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.





Selling,
      general and administrative 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 in the surgical products business,
      plus approximately $1.1 million of severance related expenses not associated
      with the restructuring. These increases were partially offset by a decrease
      in
      advertising.




Research
      and development 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.




30




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.





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 had a net
      deferred tax asset of approximately $6.8 million at December 31, 2005. The
      recent history of operating losses incurred by the Company resulted in a
      valuation allowance recorded for the full amount of the net deferred tax assets
      at December 31, 2005, 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.





***Critical
      Accounting Policies***




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




*Property,
      plant and equipment.* Property, plant and equipment are recorded at cost and depreciated on a
      straight-line basis over the estimated useful lives of such assets. The
      Company’s estimates can result in differences from the actual useful lives of
      certain assets. The significant portion of equipment is comprised of the
      Company’s cyclotrons, utilized in the brachytherapy business. As of December 31,
      2006, 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 estimates used for depreciation for
      reasonableness. If the Company determines that the useful life of property,
      plant or equipment should be shortened or lengthened, depreciation expense
      would
      be adjusted accordingly for the remaining useful lives of the identified
      assets.




Management
      assesses the impairment of its depreciable assets whenever events or
      circumstances indicate that such assets might be impaired. In the event the
      expected undiscounted future cash flow attributable to the asset is less than
      the carrying value of the asset, an impairment loss equal to the excess of
      the
      asset’s carrying value over its fair value is recorded. 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 or assets held for sale could change in the
      future.




*Goodwill.* The
      Company has $36.2 million of goodwill associated with its surgical products
      business and $2.6 million of goodwill associated with its brachytherapy
      business. 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, and the second
      step of the impairment test is unnecessary. If book value exceeds fair
      value, the second step of the impairment test is performed to measure the amount
      of impairment loss, if any. For this step the implied fair value of the goodwill
      is compared with the book value of the goodwill. If the carrying amount of
      the
      goodwill exceeds the implied fair value of the goodwill, an impairment loss
      would be recognized in an amount equal to that excess. Any loss recognized
      cannot exceed the carrying amount of goodwill. After an impairment loss is
      recognized, the adjusted carrying amount of goodwill is its new accounting
      basis. Subsequent reversal of a previously recognized impairment loss is
      prohibited once the measurement of that loss is completed.




31




The
      Company performs an annual goodwill impairment assessment during the fourth
      quarter. Management also makes judgments about goodwill whenever events or
      changes in circumstances indicate that impairment in the value of goodwill
      recorded on our balance sheet may exist. The timing of an impairment test may
      result in charges to our statements of income in the current reporting period
      that could not have been reasonably foreseen in prior periods. In order to
      estimate the fair value of goodwill, Management typically makes various
      assumptions about the future prospects for the reporting unit that the asset
      relates to, considers market factors specific to that reporting unit and
      estimates future cash flows to be generated by that reporting unit. Assumptions
      used in these assessments are consistent with the Company’s internal planning.
      The most recent assessment was performed in the fourth quarter of 2006 and
      the
      Company 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 and returns.* 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 uncollectible or subject to return. Accounts
      receivable are reduced by this allowance. Specifically, Management analyzes
      accounts receivable in relation to current economic trends, changes in our
      customer payment history, and changes in sales returns history in establishing
      this allowance. The accounts receivable balance, net of the provision for trade
      accounts receivables allowance of $617,000, was approximately $7.6 million
      as of
      December 31, 2006.




*Share-based
      compensation.*  In
      February 2006, the Compensation Committee of the Board of Directors approved
      the
      issuance of 104,000 performance restricted stock units to executive officers,
      which vest on December 31, 2008 (the “2006 Performance Restricted Stock Units”).
      The number of common shares issuable upon vesting of the 2006 Performance
      Restricted Stock Units 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
      Compensation Committee. The grant date fair value of the 2006 Performance
      Restricted Stock Units was based on the fair value of the underlying common
      stock and is recognized over the three-year requisite service period. For the
      portion of the 2006 Performance Restricted Stock Units containing performance
      conditions, the grant date fair value is adjusted each period for the number
      of
      shares ultimately expected to be issued. For the portion of the 2006 Performance
      Restricted Stock Units subject to discretionary performance conditions, the
      grant date has not been established and accordingly, the fair value of the
      award
      is updated each period for changes in the fair value of the underlying common
      stock. T o
      the
      extent that the underlying fair value of the Company’s common stock varies
      significantly, and/or the number of shares issuable is determined, the Company
      may record additional compensation expense or adjust previously recognized
      compensation expense.




*Accounting
      for income taxes.* Our
      judgments, assumptions and estimates relative to the current provision for
      income tax take into account current tax laws and our interpretation of current
      tax laws. Management must make assumptions, judgments and estimates to determine
      our tax provision and our deferred income tax assets and liabilities, including
      the valuation allowance to be recorded against a deferred tax asset. Actual
      operating results and the underlying amount and category of income
      in future years could differ materially from our current assumptions,
      judgments and estimates of recoverable net deferred taxes.




Management
      periodically evaluates the recoverability of the Company’s deferred tax assets
      and recognizes the tax benefit only as reassessment demonstrates that they
      are
      realizable. At such time, if it is determined that it is more likely than not
      that the deferred tax assets are realizable, the valuation allowance is
      adjusted. In 2005, a $6.8 million net deferred tax asset arose primarily as
      a
      result of the existence of operating losses and other deductible temporary
      differences related to the Company’s 2005 Restructuring. At that time, a
      valuation allowance for the entire amount of the net deferred tax asset was
      established due to uncertainties surrounding its realizability. In the third
      quarter of 2006, $2.9 million of deferred income tax liabilities arising from
      fair value adjustments in purchase accounting related to the acquisition of
      Galt
      were recorded as a reduction of the allowance. During the fourth quarter of
      2006, the Company determined it was more likely than not that a significant
      portion of these deferred tax assets would be realized and released
      $3.6 million of the valuation allowance. Factors considered by management
      in the fourth quarter of 2006 included, among other things, the Company’s
      performance for the year which included four consecutive quarters of
      profitability, a full fiscal year of realization of the cost savings associated
      with the 2005 restructuring which exceeded the expected cost savings, certain
      changes in federal laws and policies occurring in December 2006 related to
      Medicare reimbursement of brachytherapy seeds, and the continued successful
      diversification of the Company’s business through its surgical products segment.
      The remaining allowance of $239,000 relates primarily to certain state net
      operating loss carryforwards for which the Company believes it is more likely
      than not that the benefit will not be realized.




32




Management
      evaluates the realizability of the deferred tax assets and assesses the need
      for
      the valuation allowance each reporting period. In the future if, based on the
      facts and circumstances surrounding the Company’s ability to generate adequate
      future taxable income, it becomes more likely than not that some or all of
      the
      deferred tax asset will not be realized, the valuation allowance may be required
      to be increased.





**Commitments
      and Other Contractual Obligations**




Contractual
      Obligations




The
      Company leases equipment and production, warehouse, office and other space
      under
      non-cancelable leases that expire at various dates through April 2011. The
      Company also has $7.5 million of borrowings outstanding under its Credit
      Agreement. Approximate minimum payments of these obligations are as follows
      (amounts in thousands):




Obligation
              
              **Payments
                  due by period****Total**
              ****
              **2007**
              ****
              **2008**
              ****
              **2009**
              ****
              **2010**
              ****
              **2011**
              ****
              **Thereafter**Operating
                  lease obligationsRental
                  space and equipment
              
              $
              1,292
              
              $
              353
              
              $
              357
              
              $
              302
              
              $
              186
              
              $
              94
              
              $
              —Production,
                  office and warehouse space - related party (1)
              
              
              566
              
              
              169
              
              
              169
              
              
              169
              
              
              59
              
              
              —
              
              
              —Total
                  operating lease obligations
              
              
              1,858
              
              
              522
              
              
              526
              
              
              471
              
              
              245
              
              
              94Long-term
                  debt (2)
              
              
              7,500
              
              
              —
              
              
              —
              
              
              7,500
              
              
              —
              
              
              —
              
              
              —Interest
                  on long-term debt (3)
              
              
              1,340
              
              
              473
              
              
              473
              
              
              394
              
              
              —
              
              
              —
              
              
              —Total
              
              $
              10,698
              
              $
              995
              
              $
              999
              
              $
              8,365
              
              $
              245
              
              $
              94
              
              $
              —





(1)
            The
                surgical products business 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 $14,000 are due under this lease through April
                2010.


(2)
            Outstanding
                borrowings under the Company’s $40.0 million credit facility are due
                October 31, 2009


(3)
            Interest
                on outstanding borrowings under credit facility at the December 31,
                2006
                effective rate of 6.3%





Contract
      Termination Liability




A
      contract termination liability of $1,537,000 (including $24,000 classified
      as
      short term) included in the accompanying consolidated balance sheet at December
      31, 2006, 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. 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 principal maturities of
      obligations under this lease are as follows: 2007, $24,136; 2008, $26,269;
      2009,
      $28,591; 2010, $31,119; 2011, $33,869; beyond, $1,393,404.




33


Other





The
      Company has a letter of credit outstanding under the Credit Agreement as of
      December 31, 2006 totaling approximately $876,000. This letter of credit is
      related to asset retirement liabilities of long-lived assets.




***Liquidity
      and Capital Resources***





The
      Company had cash, short-term investments and marketable securities of $33.0
      million at December 31, 2006, compared to $45.6 million at December 31, 2005.
      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 $29.6 million
      in cash paid in the acquisition of Galt (see “Overview” above), offset by $10.0
      million in cash generated from operations and $7.5 million in borrowings under
      the Company’s Credit Agreement.





Working
      capital was $58.3 million and $60.3 million at December 31, 2006 and 2005,
      respectively. The Company also has a Credit Agreement with a financial
      institution that provides for borrowings of up to $40.0 million, including
      a
      $5.0 million sub-limit for letters of credit, which expires on October 31,
      2009.
      Borrowings of $7.5 million were outstanding under the Credit Agreement at
      December 31, 2006. Interest is payable quarterly at LIBOR plus 1% (effective
      rate of 6.3% at December 31, 2006) for outstanding borrowings. The Company
      also
      has a letter of credit totaling $876,000 outstanding under the Credit Agreement,
      representing decommission funding required by the Georgia Department of Natural
      Resources. The Credit Agreement is unsecured, but provides for a lien to be
      established on substantially all of the assets of the Company (subject to
      certain exceptions) in the event certain events of default occur under the
      Credit 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.





Cash
      provided by operations was $10.0 million for the year ended December 31, 2006,
      compared to $4.2 million in 2005. Cash provided by operations consists of net
      earnings/loss, plus non-cash expenses such as depreciation, amortization,
      deferred income taxes, and changes in balance sheet items such as accounts
      receivable, inventories, prepaid expenses and payables. Inventories increased
      approximately $1.1 million primarily due to increases in sales volume in the
      surgical products business. Accounts receivable decreased approximately $764,000
      primarily due to a reduction in sales volume in the brachytherapy business.





Capital
      expenditures totaled $733,000 and $533,000 during 2006 and 2005, respectively.
      Capital expenditures are expected to increase in order to support continued
      growth in the surgical products business.





In
      August
      2006 the Company acquired Galt for approximately $32.7 million, including $29.6
      million in cash and $3.1 million in common stock. In May 2005 the Company
      acquired 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 2007 for increased support for growth and research and
      development in the surgical products business, and in the pursuit of additional
      diversification efforts such as the purchase of technologies, products or
      companies.





Cash
      provided by financing activities was $7.6 million and $363,000 in 2006 and
      2005,
      respectively. During 2006 the Company borrowed $7.5 million under its $40.0
      million Credit Agreement. Cash provided by financing activities in 2005
      consisted 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.




34




***Medicare
      Developments***




The
      Medicare Prescription Drug, Improvement and Modernization Act of 2003 (“MMA”),
      which went into effect on January 1, 2004, contained brachytherapy provisions
      requiring 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). The MMA also directed the U.S.
      Government Accountability Office (“GAO”) to conduct a study examining future
      payment policies for brachytherapy seeds. The GAO published its report on July
      25, 2006, concluding that the Centers for Medicare and Medicaid Services
      (“CMS”), the regulatory body that sets Medicare reimbursement policies, could
      establish separate prospective payment rates effective in 2007 for palladium-103
      brachytherapy seeds/sources (such as TheraSeed ® )
      and
      iodine-125 seeds/sources using Medicare’s hospital outpatient data. On November
      1, 2006, CMS posted a final rule with payment rates for brachytherapy seeds
      for
      Medicare’s hospital outpatient prospective payment system (“OPPS”) for calendar
      year 2007. The use of prospective payment rates will fix the per seed rate
      at
      which hospitals will be reimbursed. From 2004 through 2006, hospitals were
      reimbursed at the per seed purchased cost. The Company believed that CMS’
approach to determining the reimbursement rate for brachytherapy seeds was
      fundamentally flawed. For example, CMS did not stratify cost data on differing
      seed configurations, such as loose versus “stranded” seeds. Accordingly, the
      Company continued to work with policy makers in an effort to rectify the
      shortcomings it believed to be contained in the new CMS rule.




In
      December 2006, Congress enacted the Tax Relief and Health Care Act of 2006,
      which extends and refines the Medicare safeguards initially enacted by Congress
      in 2003 for brachytherapy seeds administered in the hospital outpatient setting.
      The President signed the legislation on December 20, 2006. The new legislation
      supercedes the final rule published by CMS on November 1, 2006 by extending
      the
      current reimbursement policies for brachytherapy seeds through the end of 2007,
      ensuring that the Medicare program does not implement potentially restrictive
      caps on reimbursement during that period. In addition, the new legislation
      recognizes that prostate cancer patients must have meaningful access to stranded
      brachytherapy seeds, which increasingly are used in clinical practice to further
      enhance the safety and efficacy of treatment. The legislation establishes a
      permanent requirement for Medicare to use separate codes for the reimbursement
      of stranded brachytherapy devices, beginning no later than July 1, 2007.
      Stranded seeds are becoming a larger portion of Theragenics’ brachytherapy
      business. This important provision should allow reimbursement rules to recognize
      the value of this important clinical configuration even after 2007.




The
      Tax
      Relief and Healthcare Act of 2006 requires the establishment of a separate
      reimbursement code for stranded seeds, and Medicare will continue to reimburse
      hospitals at the per seed purchased cost (as defined in the Medicare rules)
      during 2007. The Company expects reimbursement rates for brachytherapy seeds
      will be fixed based on isotope beginning in 2008. If implemented in 2008 or
      thereafter, prospective rates can be expected to lead to an increase in pricing
      pressure from hospitals, which could adversely affect our brachytherapy revenue.





Medicare
      rules governing coding of brachytherapy seeds/sources and the procedures
      required to implant seeds are significantly influenced by public policy. They
      have undergone significant changes during the past few years, are expected
      to undergo changes again in 2008, and can undergo additional changes in the
      future. The Company believes that Medicare reimbursement policies 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. 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.




35




***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, the 2005
      restructuring’s expected operating expense savings and associated cash savings,
      contribution of the Company’s surgical products business to consolidated sales,
      net income, future growth, results in general, plans and strategies for
      continuing 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, including risks associated with new product development cycles,
      effectiveness and execution of marketing and sales programs of Theragenics
      and
      its non-exclusive distributors, third-party distribution agreements, competitive
      conditions and selling tactics of the Company’s competitors, the impact of
      changes in third-party (including CMS) reimbursement, changes in product pricing
      by Theragenics or other brachytherapy seed producers, changes in cost of
      materials used in production processes (especially as related to isotope
      production), continued acceptance of products by the market, continued demand
      for palladium-103, integration of Galt and CP Medical into the Theragenics
      organization, capitalization on opportunities for growth within the Company’s
      surgical products business, ability to recognize benefits from areas of shared
      expertise, competition within the medical device industry, development and
      growth of new applications within the markets for vascular access, wound
      closure, brachytherapy and more broadly, medical devices, competition from
      companies within vascular access, wound closure and medical device markets,
      competition from other methods of treatment, ability to execute on acquisition
      opportunities on favorable terms and successfully integrate any acquisitions,
      and other factors including the risks identified in Part II, Item 1A of this
      Annual Report on Form 10-K. All forward looking statements and cautionary
      statements included in this document are made as of the date hereof 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.





***Recent
      Accounting Pronouncements***




******In
      September
      2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting
      Bulletin 108,*Considering
      the Effects of Prior Year Misstatements when Quantifying Misstatements in
      Current Year Financial Statement*(“SAB
      108”). SAB 108 provides interpretive guidance on how the effects of the
      carryover or reversal of prior year misstatements should be considered in
      quantifying a current year misstatement. The SEC staff believes that registrants
      should quantify errors using both a balance sheet and an income statement
      approach and evaluate whether either approach results in quantifying a
      misstatement that, when all relevant quantitative and qualitative factors are
      considered, is material. On December 31, 2006, the Company adopted SAB 108.
      The
      adoption of SAB 108 did not impact the financial statements.




In
      June 2006, the Financial Accounting Standards Board (“FASB”) issued
      Interpretation No. 48, *Accounting
      for Uncertainty in Income Taxes* ,
      (“FIN
      48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in a company’s financial statements in accordance with FASB Statement No. 109, *Accounting
      for Income Taxes* .
      FIN 48
      requires a company to determine whether it is more likely than not that a tax
      position will be sustained upon examination based upon the technical merits
      of
      the position. If the more-likely-than-not threshold is met, a company must
      measure the tax position to determine the amount to recognize in the financial
      statements. FIN 48 is effective for the Company beginning January 1, 2007.
      While
      the Company is still evaluating the impact of this statement, it does not
      currently believe it will have a material impact on its financial statements




In
      September 2006, the FASB issued Statement of Financial Accounting Standards
      No.
      157, Fair Value Measurements, (“SFAS 157”). SFAS 157 defines fair value,
      establishes a framework for measuring fair value in generally accepted
      accounting principles, and expands disclosures about fair value measurements.
      SFAS 157 does not require any new fair value measurements. SFAS 157 is effective
      for the Company beginning January 1, 2008. The Company is still evaluating
      the
      impact of this statement and its potential impact on its financial statement
      has
      not been determined.




36




***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.


**2006**
                
                **2005****First**
                    **Qtr**
                
                
                **Second**
                  **Qtr**
                
                
                **Third****Qtr**
                
                
                **Fourth****Qtr**
                
                
                **First****Qtr**
                
                
                **Second****Qtr**
                
                
                **Third****Qtr**
                
                
                **Fourth**
                  **Qtr****(Amounts
                    in thousands, except per share data)**Total
                    revenue
                
                $
                12,394
                
                $
                12,590
                
                $
                14,320
                
                $
                14,792
                
                $
                9,539
                
                $
                11,372
                
                $
                12,002
                
                $
                11,357Cost
                    of product sales
                
                
                6,055
                
                
                6,480
                
                
                7,263
                
                
                7,954
                
                
                4,794
                
                
                6,244
                
                
                6,833
                
                
                5,891Gross
                    profit
                
                
                6,339
                
                
                6,110
                
                
                7,057
                
                
                6,838
                
                
                4,745
                
                
                5,128
                
                
                5,169
                
                
                5,466Selling,
                    general and administrative
                
                
                5,347
                
                
                5,378
                
                
                4,552
                
                
                4,674
                
                
                4,501
                
                
                5,789
                
                
                4,226
                
                
                5,136Amortization
                    of purchased intangibles
                
                
                188
                
                
                187
                
                
                471
                
                
                525
                
                
                —
                
                
                124
                
                
                188
                
                
                188Research
                    and development
                
                
                239
                
                
                179
                
                
                206
                
                
                181
                
                
                1,407
                
                
                1,143
                
                
                823
                
                
                258Restructuring
                    expenses
                
                
                306
                
                
                63
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                32,915
                
                
                475Gain
                    (loss) on sale of assets
                
                
                201
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                —
                
                
                (2
                )
                
                (12
                )Other
                    income
                
                
                325
                
                
                390
                
                
                209
                
                
                180
                
                
                330
                
                
                292
                
                
                290
                
                
                367Net
                    earnings (loss) before income taxes
                
                
                785
                
                
                693
                
                
                2,037
                
                
                1,638
                
                
                (833
                )
                
                (1,636
                )
                
                (32,695
                )
                
                (236
                )Income
                    tax expense (benefit)
                
                
                10
                
                
                260
                
                
                380
                
                
                (2,362
                )
                
                (337
                )
                
                (600
                )
                
                (5,457
                )
                
                —Net
                    earnings(loss)
                
                $
                775
                
                $
                433
                
                $
                1,657
                
                $
                4,000
                
                $
                (496
                )
                $
                (1,036
                )
                $
                (27,238
                )
                $
                (236
                )Earnings
                    per common share:Basic
                
                $
                0.02
                
                $
                0.01
                
                $
                0.05
                
                $
                0.12
                
                $
                (0.02
                )
                $
                (0.03
                )
                $
                (0.85
                )
                $
                (0.01
                )Diluted
                
                $
                0.02
                
                $
                0.01
                
                $
                0.05
                
                $
                0.12
                
                $
                (0.02
                )
                $
                (0.03
                )
                $
                (0.85
                )
                $
                (0.01
                )Weighted
                    average shares outstanding:Basic
                
                
                32,052
                
                
                32,077
                
                
                32,752
                
                
                33,041
                
                
                30,014
                
                
                31,213
                
                
                31,915
                
                
                32,027Diluted
                
                
                32,085
                
                
                32,120
                
                
                32,822
                
                
                33,125
                
                
                30,014
                
                
                31,213
                
                
                31,915
                
                
                32,027


37




**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. Borrowings of $7.5 million and letters of credit
      totaling approximately $876,000 were outstanding under the terms of the
      Company’s $40.0 million credit facility as of December 31, 2006. Interest on
      outstanding borrowings is payable monthly at LIBOR plus 1% (effective rate
      of
      6.3% as of December 31, 2006).





**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, 2006, the end of
      the
      period covered by this annual report.





**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 the Company
      have
      been detected. Therefore, even those systems determined to be effective can
      provide only reasonable assurance with respect to financial statement
      preparation and presentation. ****




38




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, 2006 has excluded Galt Medical Corp.
      (“Galt”). Galt was acquired by the Company in August 2006 and constituted 8.2%
      of consolidated revenue for the year ended December 31, 2006 and 25.0% of
      consolidated assets as of December 31, 2006.




Management
      assessed the effectiveness of the Company’s internal control over financial
      reporting as of December 31, 2006. 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, 2006, 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, 2006 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.





**Remediation
      of Material Weakness at CP Medical**




As noted under Item 9A in Management’s Report on Internal Control over Financial
      Reporting in our Annual Report on Form 10-K for the year ended December 31,
      2005, CP Medical was excluded from the scope of our assessment over the
      effectiveness of internal controls over financial reporting as of December
      31,
      2005. However, during the course of integrating the operations of CP Medical
      in
      2005, material weaknesses in internal control specifically related to inventory
      accounting were identified, 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 ineffective 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. During 2006 we have implemented corrective systems and procedures
      designed to remediate the material weaknesses in internal controls over
      inventory at CP Medical, including the following:




·
            a
                controller possessing greater knowledge and experience was
                hired;




·
            full
                physical inventory counts are performed
                quarterly;




·
            differences
                in the physical counts and the computerized inventory records are
                identified, reconciled and differences are
                recorded;




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




·
            inventory
                unit costing is reviewed for accuracy;




·
            formally
                documented procedures for inventory movement have been developed
                and
                implemented; and




·
            additional
                experienced accounting personnel have been hired to improve capabilities
                in the accounting department at CP
                Medical.




As of December 31, 2006, we have fully remediated the material weaknesses in
      internal control over financial reporting related to inventory at CP
      Medical.




**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 quarter ended December 31, 2006 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.




39




Report
      of Independent Registered Public Accountants - Internal Controls Over Financial
      Reporting




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 Subsidiaries (the “Company”) maintained effective
      internal control over financial reporting as of December 31, 2006 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 Galt Medical Corp. (“Galt”) from its assessment of
      internal controls over financial reporting as of December 31, 2006 because
      it
      was acquired by the Company in August 2006. We have also excluded Galt from
      our
      audit of internal control over financial reporting. Galt is a wholly-owned
      subsidiary whose total assets and total revenues represent 25.0% and 8.2%,
      respectively, of the related consolidated financial statement amounts as of
      and
      for the year ended December 31, 2006.





In
      our
      opinion, management’s assessment that the Company maintained effective internal
      control over financial reporting as of December 31, 2006, 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,
      2006, based on criteria established in *Internal
      Control — Integrated Framework* issued
      by the COSO.




40




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, 2006 and 2005, and the related consolidated statements of
      operations and comprehensive earnings (loss), shareholders’ equity, and cash
      flows for each of the three years in the period ended December 31, 2006 and
      our
      report dated March 7, 2007 expressed an unqualified opinion on those
      consolidated financial statements.





/s/
              GRANT THORNTON
              LLPAtlanta,
              GeorgiaMarch 7, 2007




41




**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
      on
      May 25, 2006. 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 and Related
      Stockholder Matters***





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





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





***** Except
      as
      set forth above, **** the
      information called for by Items 10, 11, 12, 13 and 14 is omitted from this
      Report and is incorporated by reference to the definitive Proxy Statement to
      be
      filed by the Company not later than 120 days after December 31, 2006, 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.




42




**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 Stock4.2
              See
                  Exhibit 10.3610.1
              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
              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)10.5
              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)10.5A
              Borrower
                  Party Joinder Agreement dated May 6, 2005 among CP Medical Corporation,
                  the Company, and Wachovia Bank, National Association, successor
                  by merger
                  to SouthTrust Bank, amending the Credit Agreement dated as of August
                  12,
                  2005 between the Company and SouthTrust Bank (incorporated by reference
                  to
                  Exhibit 10.4 of the Company’s report on Form 10-Q for the quarterly period
                  ended July 3, 2005)10.5B
              Amendment
                  to Credit Agreement dated August 11, 2005 among CP Medical Corporation,
                  the Company, and Wachovia Bank, National Association, successor
                  by merger
                  to SouthTrust Bank, amending the Credit Agreement dated October
                  29, 2003
                  between the Company and SouthTrust Bank (incorporated by reference
                  to
                  Exhibit 10.6 of the Company’s report on Form 10-Q for the quarterly period
                  ended July 3, 2005)10.5C
              Third
                  Amendment to Credit Agreement by and among Theragenics Corporation,
                  CP
                  Medical Corporation and Wachovia Bank, National Association, successor
                  by
                  merger to SouthTrust Bank, dated June 29, 2006 (incorporated by
                  reference
                  to Exhibit 10.1 of the Company’s Form 8-K filed July 3,
                  2006)10.6
              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)10.7
              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)10.8
              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)10.9
              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)10.10
              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)




43
 10.11
                  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)10.12
                  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)10.12A
                  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)10.12B
                  Amendment
                      to Employment Agreement dated August 8, 2006, between Theragenics
                      Corporation and M. Christine Jacobs*(incorporated
                      by reference to Exhibit 10.3 of the Company’s report on Form 10-Q for the
                      quarterly period ended July 2, 2006)10.13
                  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)10.13A
                  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)10.13B
                  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)10.13C
                  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)10.13D
                  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)10.13E
                  Fifth
                      Amendment to Executive Employment Agreement for Bruce W. Smith*
                      (incorporated by reference to Exhibit 10.15E of the Company’s report on
                      Form 10-K for the year ended December 31, 2005)10.14
                  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)10.14A
                  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)10.14B
                  Amendment
                      to Employee Employment Agreement for Michael O’Bannon* (incorporated by
                      reference to Exhibit 10.16B of the Company’s report on Form 10-K for the
                      year ended December 31, 2005)10.15
                  Forms
                      of Option Award for grants prior to 2007* (incorporated by
                      reference to
                      Exhibit 10.22 of the Company’s report on Form 10-K for the year ended
                      December 31, 2004)10.16
                  Advisor
                      to the President Agreement dated November 20, 2006 with John
                      Herndon*10.17
                  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)


44




10.18
              Form
                  of Restricted Stock Agreement for directors as of May 2005* (incorporated
                  by reference to Exhibit 10.1 of the Company’s report on Form 10-Q for the
                  quarterly period ended July 3, 2005)10.19
              Form
                  of Performance Restricted Stock Rights Agreement used in 2004 and
                  2005*
                  (incorporated by reference to Exhibit 10.2 of the Company’s report on Form
                  10-Q for the quarterly period ended July 3, 2005)10.19A
              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)10.20
              Form
                  of Restricted Stock Rights Agreement* for 2004 grants (incorporated
                  by
                  reference to Exhibit 10.3 of the Company’s report on Form 10-Q for the
                  quarterly period ended July 3, 2005)10.21
              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)10.22
              Form
                  of Performance Restricted Stock Rights Agreement* for 2006 grants
                  (incorporated by reference to Exhibit 10.1 of the Company's Form
                  8-K filed
                  February 22, 2006)10.23
              Theragenics
                  Corporation Incentive Stock Option Award* (incorporated by reference
                  to
                  Exhibit 10.1 of the Company’s Form 8-K dated February 20,
                  2007)10.24
              Restricted
                  Stock Award Pursuant to the Theragenics Corporation 2006 Stock
                  Incentive
                  Plan* (incorporated by reference to Exhibit 10.2 of the Company’s Form 8-K
                  dated February 20, 2007)10.25
              Theragenics
                  Corporation 2007 Long-Term Cash Incentive Plan* (incorporated by
                  reference
                  to Exhibit 10.3 of the Company’s Form 8-K dated February 20, 2007)10.26
              Additional
                  Compensation Information*10.27
              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)10.28
              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)10.29
              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)10.30
              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)10.31
              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)10.32
              Theragenics
                  Corporation 2006 Stock Incentive Plan* (incorporated by reference
                  to
                  Appendix A to the Company’s definitive proxy statement for its May 9, 2006
                  annual meeting of stockholders filed with the Securities and Exchange
                  Commission on March 27, 2006).10.32A
              First
                  Amendment to Theragenics Corporation 2006 Stock Incentive Plan*
                  (incorporated by reference to Exhibit 18.1 on Form 8-K filed November
                  13,
                  2006)10.33
              Stock
                  Purchase Agreement by and among Theragenics Corporation, James
                  R. Eddings,
                  as Sellers’ Representative, those shareholders and holders of Company
                  Stock Derivatives of Galt Medical Corp. listed on Schedule 1 thereto,
                  dated August 2, 2006 (incorporated by reference to Exhibit 2.1
                  of Form 8-K
                  filed on August 8, 2006)10.34
              Employment
                  Agreement between Galt Medical Corp. and James R. Eddings, dated
                  as of
                  August 2, 2006 * (incorporated by reference to Exhibit 10.1 of
                  Form 8-K
                  filed on August 8, 2006)10.35
              Registration
                  Rights Agreement between Theragenics Corporation and James R. Eddings,
                  as
                  Sellers’ Representative, dated as of August 2, 2006 (incorporated by
                  reference to Exhibit 10.2 of Form 8-K filed on August 8,
                  2006).




45






10.36
              Rights
                  Agreement dated February 14, 2007 between the Company and Computershare
                  Investor Services LLC (incorporated by reference to Exhibit 99.1
                  of the
                  Company’s registration statement on Form 8-A/A filed February 16,
                  2007)21.1
              Subsidiaries
                  of Registrant23.1
              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.


46




**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 8, 2007
                Buford,
                  Georgia






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





**Name**
            
            **Title**
            
            **Date**/s/ M.
                Christine JacobsM.
                Christine Jacobs
            
            Chief
                Executive Officer
              (Principal
                Executive Officer)
              President
                and Director
            
            3/8/07/s/
Francis
                J. TaralloFrancis
                J. Tarallo
            
            Chief
                Financial Officer (Principal Financial
              and
                Accounting Officer) and Treasurer
            
            3/8/07/s/
Orwin
                L. CarterOrwin
                L. Carter
            
            Director
                and Chairman of the Board
            
            3/8/07/s/
Otis
                W. Brawley, M.D.Otis
                W. Brawley, M.D.
            
            Director
            
            3/8/07/s/
Luther
                T. GriffithLuther
                T. Griffith
            
            Director
            
            3/8/07/s/
John
                V. HerndonJohn
                V. Herndon
            
            Director
            
            3/8/07/s/
Peter
                A. A. SaundersPeter
                A. A. Saunders
            
            Director
            
            3/8/07




47





**THERAGENICS
      CORPORATION** **®**





**TABLE
      OF CONTENTS**







**Page**REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
            F-2CONSOLIDATED
                FINANCIAL STATEMENTSConsolidated
                Balance Sheets - December 31, 2006 and 2005
            F-3Consolidated
                Statements of Operations and Comprehensive Earnings (Loss) for each
                of the
                three years in the period ended December 31, 2006
            F-5Consolidated
                Statements of Shareholders’ Equity for each of the three years in the
                period ended December 31, 2006
            F-7Consolidated
                Statements of Cash Flows for each of the three years in the period
                ended
                December 31, 2006
            F-9NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS
            F-11REPORT
                OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON SCHEDULE
            S-1Schedule
                II - Valuation and Qualifying Accounts for each of the three years
                in the
                period ended December 31, 2006
            S-2




F-1





Report
      of Independent Registered Public Accountants




Board
      of
      Directors and Shareholders of


Theragenics
      Corporation





We
      have
      audited the accompanying consolidated balance sheets of Theragenics Corporation
      (a Delaware corporation) and Subsidiaries (the “Company”) as of December 31,
      2006 and 2005, and the related consolidated statements of operations and
      comprehensive earnings (loss), shareholders’ equity, and cash flows for each of
      the three years in the period ended December 31, 2006. 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, 2006 and 2005, and the consolidated results of its operations
      and its consolidated cash flows for each of the three years in the period ended
      December 31, 2006, in conformity with accounting principles generally accepted
      in the United States of America.





As
      discussed in Note B to the Consolidated Financial Statements, the Company
      adopted Statement of Financial Accounting Standards No. 123R, *Share-Based
      Payment,* effective
      January 1, 2006.





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, 2006, 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 7, 2007, 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 LLPAtlanta,
                Georgia
              March
                7, 2007




F-2


Theragenics
      Corporation and Subsidiaries





CONSOLIDATED
      BALANCE SHEETS





December
      31,





(Amounts
      in thousands, except per share data)




ASSETS


**2006**
                ****
                **2005**CURRENT
                    ASSETSCash
                    and short-term investments
                
                $
                18,258
                
                $
                10,073Marketable
                    securities
                
                
                14,722
                
                
                35,535Trade
                    accounts receivable, less allowance of $617 in 2006 and $517
                    in
                    2005
                
                
                7,556
                
                
                7,622Inventories
                
                
                7,433
                
                
                5,042Deferred
                    income tax asset
                
                
                7,798
                
                
                —Prepaid
                    expenses and other current assets
                
                
                3,478
                
                
                2,720Assets
                    held for sale
                
                
                3,400
                
                
                3,433Total
                    current assets
                
                
                62,645
                
                
                64,425PROPERTY,
                    PLANT AND EQUIPMENT - AT COSTBuildings
                    and improvements
                
                
                22,374
                
                
                21,793Machinery
                    and equipment
                
                
                36,732
                
                
                35,271Office
                    furniture and equipment
                
                
                924
                
                
                70160,030
                
                
                57,765Less
                    accumulated depreciation
                
                
                30,155
                
                
                25,96029,875
                
                
                31,805Land
                    and improvements
                
                
                822
                
                
                822Construction
                    in progress
                
                
                204
                
                
                13930,901
                
                
                32,766OTHER
                    ASSETSGoodwill
                
                
                38,824
                
                
                18,370Other
                    intangible assets
                
                
                13,762
                
                
                6,388Other
                
                
                112
                
                
                11552,698
                
                
                24,873Total
                    Assets
                
                $
                146,244
                
                $
                122,064




F-3




Theragenics
        Corporation and Subsidiaries
  CONSOLIDATED
        BALANCE SHEETS - Continued
  December
        31,
  (Amounts
        in thousands, except per share data)
  LIABILITIES
        AND SHAREHOLDERS’ EQUITY
  **2006**
              
              **2005**CURRENT
                  LIABILITIESAccounts
                  payable
              
              $
              1,768
              
              $
              1,488Accrued
                  salaries, wages and payroll taxes
              
              
              1,512
              
              
              1,659Other
                  current liabilities
              
              
              1,101
              
              
              1,025Total
                  current liabilities
              
              
              4,381
              
              
              4,172LONG
                  TERM LIABILITIESLong-term
                  debt
              
              
              7,500
              
              
              —Deferred
                  income taxes
              
              
              6,148
              
              
              —Contract
                  termination liability
              
              
              1,513
              
              
              1,537Decommissioning
                  retirement
              
              
              561
              
              
              672Total
                  long term liabilities
              
              
              15,722
              
              
              2,209COMMITMENTS
                  AND CONTINGENCIES
              
              
              —
              
              
              —SHAREHOLDERS’
                  EQUITYCommon
                  stock - authorized 100,000 shares of $.01 par value; issued and
                  outstanding, 33,096 in 2006 and 32,008 in 2005
              
              
              331
              
              
              320Additional
                  paid-in capital
              
              
              72,103
              
              
              68,717Deferred
                  compensation
              
              
              —
              
              
              (94
              )Retained
                  earnings
              
              
              53,789
              
              
              46,924Accumulated
                  other comprehensive loss
              
              
              (82
              )
              
              (184
              )Total
                  shareholders’ equity
              
              
              126,141
              
              
              115,683$
              146,244
              
              $
              122,064




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




F-4




Theragenics
        Corporation and Subsidiaries
 
 CONSOLIDATED
        STATEMENTS OF OPERATIONS
 AND
        COMPREHENSIVE EARNINGS (LOSS)
 
 Year
        ended December 31,
 
 (Amounts
        in thousands, except per share data)
  **2006**
                ****
                **2005**
                ****
                **2004**RevenueProduct
                    sales
                
                $
                53,076
                
                $
                43,693
                
                $
                33,030Licensing
                    fees
                
                
                1,020
                
                
                577
                
                
                30854,096
                
                
                44,270
                
                
                33,338Cost
                    of sales
                
                
                27,752
                
                
                23,763
                
                
                14,122Gross
                    profit
                
                
                26,344
                
                
                20,507
                
                
                19,216Operating
                    expensesSelling,
                    general and administrative
                
                
                19,951
                
                
                19,652
                
                
                17,619Amortization
                    of purchased intangibles
                
                
                1,371
                
                
                500
                
                
                —Research
                    and development
                
                
                805
                
                
                3,632
                
                
                9,583Restructuring
                    expenses
                
                
                369
                
                
                33,390
                
                
                —(Gain)
                    loss on sale of assets
                
                
                (201
                )
                
                14
                
                
                1522,295
                
                
                57,188
                
                
                27,217Earnings
                    (loss) from operations
                
                
                4,049
                
                
                (36,681
                )
                
                (8,001
                )Other
                    income (expense)Interest
                    income
                
                
                1,541
                
                
                1,429
                
                
                1,209Interest
                    and financing costs
                
                
                (419
                )
                
                (160
                )
                
                (171
                )Other
                
                
                (18
                )
                
                12
                
                
                1111,104
                
                
                1,281
                
                
                1,149Earnings
                    (loss) before income taxes
                
                
                5,153
                
                
                (35,400
                )
                
                (6,852
                )Income
                    tax benefit
                
                
                (1,712
                )
                
                (6,394
                )
                
                (2,542
                )NET
                    EARNINGS (LOSS)
                
                $
                6,865
                
                $
                (29,006
                )
                $
                (4,310
                )
 
 F-5


Theragenics
      Corporation and Subsidiaries





CONSOLIDATED
      STATEMENTS OF OPERATIONS


AND
      COMPREHENSIVE EARNINGS (LOSS) - Continued





Year
      ended December 31,





(Amounts
      in thousands, except per share data)


**2006**
            ****
            **2005**
            ****
            **2004******NET
                EARNINGS (LOSS) PER SHAREBasic
            
            $
            0.21
            
            $
            (0.93
            )
            $
            (0.14
            )Diluted
            
            $
            0.21
            
            $
            (0.93
            )
            $
            (0.14
            )WEIGHTED
                AVERAGE SHARESBasic
            
            
            32,452
            
            
            31,273
            
            
            29,971Diluted
            
            
            32,540
            
            
            31,273
            
            
            29,971COMPREHENSIVE
                EARNINGS (LOSS)Net
                earnings (loss)
            
            $
            6,865
            
            $
            (29,006
            )
            $
            (4,310
            )Comprehensive
                earnings (loss), net of taxesReclassification
                adjustment for realized loss included in net earnings
            
            
            39
            
            
            —
            
            
            —Unrealized
                gain (loss) on securities available for sale, net of taxes
            
            
            63
            
            
            (50
            )
            
            (143
            )Total
                comprehensive earnings (loss)
            
            $
            6,967
            
            $
            (29,056
            )
            $
            (4,453
            )




The
        accompanying notes are an integral part of these consolidated financial
        statements.
  F-6


Theragenics
      Corporation and Subsidiaries


CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY


For
      the
      three years ended December 31, 2006





(Amounts
      in thousands, except per share data)




**Common
                  Stock****Number
                  of**
                **Shares**
              
              **Par**
                **value**
                **$0.01**
              
              **Additional**
                **paid-in**
                **capital**
              
              **Deferred
                  compensation**
              
              **Retained
                  earnings**
              
              **Accumulated**
                **other**
                **comprehensive**
                **income**
              
              **Total**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
              
              
              —
              
              
              —
              
              
              —
              
              
              78Share
                  based compensation
              
              
              7
              
              
              —
              
              
              102
              
              
              (23
              )
              
              —
              
              
              —
              
              
              79Unrealized
                  loss on securities available-for-sale
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (143
              )
              
              (143
              )Net
                  loss for the year
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (4,310
              )
              
              —
              
              
              (4,310
              )Balance,
                  December 31, 2004
              
              
              29,989
              
              $
              300
              
              $
              61,987
              
              $
              (23
              )
              $
              75,930
              
              $
              (134
              )
              $
              138,060Issuance
                  of common stock for acquisition of CP Medical
              
              
              1,840
              
              
              18
              
              
              6,083
              
              
              —
              
              
              —
              
              
              —
              
              
              6,101Exercise
                  of stock options
              
              
              112
              
              
              1
              
              
              272
              
              
              —
              
              
              —
              
              
              —
              
              
              273Employee
                  stock purchase plan
              
              
              32
              
              
              1
              
              
              89
              
              
              —
              
              
              —
              
              
              —
              
              
              90Issuance
                  of restricted shares
              
              
              35
              
              
              —
              
              
              120
              
              
              (120
              )
              
              —
              
              
              —
              
              
              —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




F-7


Theragenics
        Corporation and Subsidiaries
 CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY - Continued
 For
        the
        three years ended December 31, 2006
 
 (Amounts
        in thousands, except per share data)
 
 **Common
                  Stock****Number
                  of**
                **Shares**
              
              **Par**
                **value**
                **$0.01**
              
              **Additional**
                **paid-in**
                **capital**
              
              **Deferred
                  Compensation**
              
              **Retained
                  earnings**
              
              **Accumulated**
                **other**
                **comprehensive**
                **income**
              
              **Total**Balance,
                  December 31, 2005
              
              
              32,008
              
              $
              320
              
              $
              68,717
              
              $
              (94
              )
              $
              46,924
              
              $
              (184
              )
              $
              115,683Adoption
                  of SFAS 123R
              
              
              —
              
              
              —
              
              
              (94
              )
              
              94
              
              
              —
              
              
              —
              
              
              —Issuance
                  of restricted units and restricted shares
              
              
              80
              
              
              1
              
              
              (1
              )
              
              —
              
              
              —
              
              
              —
              
              
              —Issuance
                  of common stock for acquisition of Galt
              
              
              978
              
              
              10
              
              
              3,042
              
              
              —
              
              
              —
              
              
              —
              
              
              3,052Employee
                  stock purchase plan
              
              
              30
              
              
              —
              
              
              77
              
              
              —
              
              
              —
              
              
              —
              
              
              77Share
                  based compensation
              
              
              —
              
              
              —
              
              
              362
              
              
              —
              
              
              —
              
              
              —
              
              
              362Reclassification
                  adjustment for realized loss included in net earnings,
                net
                  of tax
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              39
              
              
              39Unrealized
                  gain on securities available-for-sale, net of tax
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              63
              
              
              63Net
                  earnings for the year
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              6,865
              
              
              —
              
              
              6,865Balance,
                  December 31, 2006
              
              
              33,096
              
              $
              331
              
              $
              72,103
              
              $
              —
              
              $
              53,789
              
              $
              (82
              )
              $
              126,141




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




F-8


Theragenics
      Corporation and Subsidiaries





CONSOLIDATED
      STATEMENTS OF CASH FLOWS





Year
      ended December 31,





(Amounts
      in thousands)




**2006**
            
            **2005**
            
            **2004**Cash
                flows from operating activities:Net
                earnings (loss)
            
            $
            6,865
            
            $
            (29,006
            )
            $
            (4,310
            )Adjustments
                to reconcile net earnings (loss) to net cash provided by operating
                activities:Depreciation
                & amortization
            
            
            6,029
            
            
            6,818
            
            
            6,946Deferred
                income taxes
            
            
            (1,935
            )
            
            (6,510
            )
            
            (131
            )Impairment
                of long-term assets
            
            
            —
            
            
            28,789
            
            
            —Other
                non-cash restructuring charges
            
            
            —
            
            
            3,315
            
            
            —Stock-based
                compensation
            
            
            362
            
            
            215
            
            
            79Deferred
                rent
            
            
            (24
            )
            
            (2
            )
            
            (2
            )Provision
                for allowances
            
            
            517
            
            
            326
            
            
            78Decommissioning
                retirement liability
            
            
            (111
            )
            
            —
            
            
            —(Gain)
                loss on sale of equipment
            
            
            (201
            )
            
            14
            
            
            15Realized
                loss on sale of marketable securities
            
            
            39
            
            
            —
            
            
            —Changes
                in assets and liabilities:Accounts
                receivable
            
            
            764
            
            
            (657
            )
            
            (2,015
            )Inventories
            
            
            (1,113
            )
            
            (873
            )
            
            (1,164
            )Prepaid
                expenses and other current assets
            
            
            (745
            )
            
            1,527
            
            
            539Other
                assets
            
            
            27
            
            
            9
            
            
            58Trade
                accounts payable
            
            
            (41
            )
            
            (1,041
            )
            
            (267
            )Accrued
                salaries, wages and payroll taxes
            
            
            (342
            )
            
            980
            
            
            31Other
                liabilities
            
            
            (125
            )
            
            285
            
            
            269Net cash provided by operating activities
            
            
            9,966
            
            
            4,189
            
            
            126Cash
                flows from investing activities:Purchases
                and construction of property and equipment
            
            
            (733
            )
            
            (533
            )
            
            (3,263
            )Proceeds
                from sale of equipment
            
            
            234
            
            
            —
            
            
            2Acquisition
                of business, net of cash acquired
            
            
            (29,656
            )
            
            (20,468
            )
            
            (1,000
            )Purchases
                of marketable securities
            
            
            (9,699
            )
            
            (22,455
            )
            
            (27,624
            )Maturities
                of marketable securities
            
            
            24,535
            
            
            20,527
            
            
            14,997Proceeds
                from sales of marketable securities
            
            
            5,961
            
            
            —
            
            
            —Net
                cash used in investing activities
            
            
            (9,358
            )
            
            (22,929
            )
            
            (16,888
            )Cash
                flows from financing activities:Proceeds
                from long-term debt
            
            
            7,500
            
            
            —
            
            
            —Proceeds
                from exercise of stock options and stock purchase plan
            
            
            77
            
            
            363
            
            
            108Net
                cash provided by financing activities
            
            
            7,577
            
            
            363
            
            
            108




F-9


Theragenics
      Corporation and Subsidiaries





CONSOLIDATED
      STATEMENTS OF CASH FLOWS - Continued





Year
      ended December 31,





(Amounts
      in thousands)




**2006**
            ****
            **2005**
            ****
            **2004**Net
                increase (decrease) in cash and short-term
                investments
            
            $
            8,185
            
            $
            (18,377
            )
            $
            (16,654
            )Cash
                and short-term investments at beginning of year
            
            
            10,073
            
            
            28,450
            
            
            45,104Cash
                and short-term investments at end of year
            
            $
            18,258
            
            $
            10,073
            
            $
            28,450Supplementary
                Cash Flow DisclosureInterest
                paid
            
            $
            419
            
            $
            80
            
            $
            101Income
                taxes paid (received)
            
            $
            281
            
            $
            (543
            )
            $
            21Non-cash
                investing and financing activities:Stock
                issued for acquisition
            
            $
            3,052
            
            $
            6,101
            
            $
            —




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




F-10


Theragenics
      Corporation and Subsidiaries


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2006 and 2005




NOTE
        A -
        ORGANIZATION AND DESCRIPTION OF BUSINESS
 
 Theragenics
        Corporation (the “Company”) is a medical device company serving the cancer
        treatment and surgical markets, operating in two business segments. In its
        brachytherapy seed business, the Company produces, markets and sells
        TheraSeed ® ,
        its
        premier palladium-103 prostate cancer treatment device, I-Seed, its iodine-125
        based prostate cancer treatment device, and related products and
        services. The Company’s surgical products business consists of wound
        closure and vascular access products. Wound closure includes sutures, needles
        and other surgical products with applications in, among other areas, urology,
        veterinary, cardiology, orthopedics, plastic surgery and dental. Vascular
        access
        includes introducers and guidewires used in the interventional radiology,
        interventional cardiology and vascular surgery markets.
 
 NOTE
        B -
        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 A
        summary
        of the significant accounting policies consistently applied in the preparation
        of the accompanying financial statements follows:
 
 1. Consolidation
 
 These
        consolidated financial statements include the accounts of the Company and
        its
        wholly owned subsidiaries, CP Medical Corporation (“CP Medical”) and Galt
        Medical Corp. (“Galt”) 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.
 
 5. Marketable
        Securities and Fair Value of Financial Instruments
 
 The
        Company’s financial instruments include cash, cash equivalents and marketable
        securities. The carrying value of cash and cash equivalents approximates
        fair
        value due to the relatively short period to maturity of the instruments.
        Marketable securities, which consist primarily of high-credit quality corporate
        and municipal obligations, are classified as available-for-sale and are reported
        at fair value based upon quoted market prices, with unrealized gains or losses
        excluded from earnings and included in other comprehensive income, net of
        applicable taxes. The cost of marketable securities sold is determined using
        the
        specific identification method.
  F-11
 Theragenics
          Corporation and Subsidiaries
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006 and 2005
 Available-for-sale
        securities consist of (in thousands):
  **December
                  31,**
              ********
              **2006**
              ****
              **2005**
              ********
              **Amortized**
                **Cost**
              ****
              **Gross**
                **Unrealized**
                **Loss**
              ****
              **Estimated**
                **Fair**
                **Value**
              ****
              **Amortized**
                **Cost**
              ****
              **Gross**
                **Unrealized**
                **Loss**
              ****
              **Estimated**
                **Fair**
                **Value**State
                  and municipal securities
              
              $
              352
              
              $
              (3
              )
              $
              349
              
              $
              5,485
              
              $
              (39
              )
              $
              5,446U.S.
                  government and agency securities
              
              
              2,000
              
              
              (1
              )
              
              1,999
              
              
              3,107
              
              
              (14
              )
              
              3,093Corporate
                  and other securities
              
              
              12,500
              
              
              (126
              )
              
              12,374
              
              
              27,127
              
              
              (131
              )
              
              26,996Total
              
              $
              14,852
              
              $
              (130
              )
              $
              14,722
              
              $
              35,719
              
              $
              (184
              )
              $
              35,535
 
 The
        estimated fair value of marketable securities by contractual maturity at
        December 31, 2006, is as follows (in thousands):
 
 Due
                  in one year or less
              
              $
              6,477Due
                  after one year through five years
              
              $
              7,136Due
                  after five years
              
              $
              1,109
 
 
 6. Accounts
        Receivable and Allowance for Doubtful Accounts and Returns
 
 Trade
        accounts receivable are stated at the amount the Company expects to collect
        and
        do not bear interest. The Company’s accounts receivable arises from sales in
        their various markets. The Company maintains an allowance for doubtful accounts
        based upon the review of accounts receivable aging and management’s estimate of
        the expected collectibility of accounts receivable. The collectibility of
        trade
        receivable balances is regularly evaluated based on a combination of factors
        such as customer credit-worthiness, past transaction history with the customer,
        current economic industry trends, and changes in customer payment terms.
        If it
        is determined that a customer will be unable to fully meet its financial
        obligation, such as in the case of a bankruptcy filing or other material
        events
        impacting its business, a specific reserve for bad debt is recorded to reduce
        the related receivable to the amount expected to be recovered.
 
 7. Inventories
 
 Inventories
        are stated at the lower of cost or market. Cost is determined using the
        first-in, first-out (FIFO) method. Market is replacement cost or net realizable
        value. The Company estimates reserves for inventory obsolescence based on
        management’s judgment of future realization. Inventories consist of the
        following (in thousands):
  **December
                  31,**
              ********
              **2006**
              ****
              **2005**Raw
                  materials
              
              $
              4,409
              
              $
              2,381Work
                  in progress
              
              
              950
              
              
              531Finished
                  goods
              
              
              1,608
              
              
              1,422Spare
                  parts and supplies
              
              
              935
              
              
              9217,902
              
              
              5,255Allowance
                  for obsolete inventory
              
              
              (469
              )
              
              (213
              )Total
              
              $
              7,433
              
              $
              5,042
 
 F-12
 Theragenics
          Corporation and Subsidiaries
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006 and 2005
  8. Property,
          Equipment, and Depreciation
 
 Property
        and equipment are recorded at historical cost. Depreciation is provided for
        in
        amounts sufficient to relate the cost of depreciable assets to operations
        over
        their estimated service lives on a straight-line basis. Depreciation expense
        related to property and equipment charged to operations was approximately
        $4,195,000, $6,106,000 and $6,872,000 for 2006, 2005 and 2004, 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.
 
 9. Impairment
        of Long-Lived Assets
 
 Pursuant
        to Statement of Financial Accounting Standards (“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
          adverse change in legal factors or in the business climate
 · significant
          declines in demand for a product produced by an asset capable of producing
          only
          that product;
 · assets
          that are idled or held for sale;
 · assets
          that are likely to be divested
  The
        impairment review requires the Company to estimate future undiscounted cash
        flows associated with an asset or group of assets. If the future undiscounted
        cash flows are less than the carrying amount of the asset, the Company must
        estimate the fair value of the asset. If the fair value of the asset is below
        the carrying value, then  the
        difference will be written-off. Estimating future cash flows requires the
        Company to make judgments regarding future economic conditions, product demand
        and pricing. Although the Company believes its estimates are appropriate,
        significant differences in the actual performance of the asset or group of
        assets may materially affect the Company’s asset values and results of
        operations.
  Impairment
        charges of $28.8 million related to assets held for sale were recorded in
        2005.
        These assets consisted of buildings and equipment for operations that have
        been
        permanently closed in conjunction with the Company’s 2005 restructuring
        activities. The charges represent the difference between the carrying value
        of
        the assets and their estimated fair value.
 
 10. Goodwill
        and Intangible Assets
 
 The
        Company accounts for goodwill and other intangible assets in accordance with
        the
        provisions of SFAS No. 142, *Goodwill
        and Other Intangible Assets* .
        Under
        SFAS No. 142, goodwill and intangible assets with indefinite lives are not
        amortized. The Company tests such goodwill and other intangible assets with
        indefinite lives for impairment annually, or more frequently if events or
        circumstances indicate that an asset might be impaired. 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.
 
 F-13
 Theragenics
          Corporation and Subsidiaries
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006 and 2005
  11. Income
        Taxes
 
 The
        Company accounts for income taxes using the asset and liability method. Under
        this method, deferred tax assets and liabilities are recognized for the future
        tax consequences attributable to differences between the financial statement
        carrying amounts of existing assets and liabilities and their respective
        tax
        bases. Deferred tax assets and liabilities are measured using enacted tax
        rates
        applied to taxable income. The effect on deferred tax assets and liabilities
        of
        a change in tax rates is recognized in income in the period that includes
        the
        enactment date. A valuation allowance is provided for deferred tax assets
        when
        it is more likely than not that the asset will not be realized.
  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.  Share
        Based Compensation
  The
        Company adopted SFAS No. 123R, *Share-Based
        Payment* (“SFAS
        123R”), effective January 1, 2006. SFAS No. 123R revises SFAS No. 123, *Accounting
        for Stock-Based Compensation* (“SFAS
        123”), and supersedes Accounting Principles Board Opinion No. 25, *Accounting
        for Stock Issued to Employees* (“APB
        25”). SFAS No. 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. The Company has adopted SFAS No. 123R
        using
        the modified prospective application, which applies to new awards and to
        awards
        modified, repurchased, or cancelled after January 1, 2006. Additionally,
        compensation cost for the portion of awards for which the requisite service
        has
        not been rendered that are outstanding as of January 1, 2006 is recognized
        as
        the requisite service is rendered, based on their grant date fair value as
        calculated for the pro forma disclosures required under SFAS No. 123.
        Accordingly, financial results for prior periods have not been restated.
        Previously, the Company accounted for share based payments in accordance
        with
        APB 25. In accordance with APB 25, compensation cost was recorded for restricted
        stock and stock unit awards and recognized over the vesting periods of the
        awards. No compensation had been recognized for stock options issued to
        employees and directors, as all options granted had an exercise price at
        least
        equal to the market value of the underlying common stock at the date of grant.
 
 Stock
        options outstanding at January 1, 2006 for which the requisite service period
        had not been rendered were not significant. Restricted stock and stock unit
        awards were previously recorded using fair value in a manner substantially
        equivalent to the accounting required under SFAS No. 123R. Accordingly, the
        adoption of SFAS No. 123R did not have a material effect on the Company’s
        results of operations, earnings per share or cash flows in 2006.
 
 14. Research
        and Development Costs
 
 Research
        and development (R&D) costs are expensed as incurred.
 
 15.  Advertising
 
 Advertising
        costs are expensed as incurred, and totaled approximately $2,447,000, $3,054,000
        and $3,430,000 for the years ended December 31, 2006, 2005 and 2004,
        respectively.
  F-14
 Theragenics
          Corporation and Subsidiaries
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006 and 2005
 
 16. Reclassifications
 
 Certain
        amounts have been reclassified in the 2005 and 2004 financial statements
        in
        order to conform to the 2006 presentation.
  17. Recently
        Issued Accounting Standards
 
 In
        September 2006, the Securities and Exchange Commission (“SEC”) issued Staff
        Accounting Bulletin 108, *Considering
        the Effects of Prior Year Misstatements when Quantifying Misstatements in
        Current Year Financial Statement* (“SAB
        108”). SAB 108 provides interpretive guidance on how the effects of the
        carryover or reversal of prior year misstatements should be considered in
        quantifying a current year misstatement. The SEC staff believes that registrants
        should quantify errors using both a balance sheet and an income statement
        approach and evaluate whether either approach results in quantifying a
        misstatement that, when all relevant quantitative and qualitative factors
        are
        considered, is material. On December 31, 2006, the Company adopted SAB 108.
        The
        adoption of SAB 108 did not impact the financial statements.
  In
        June
        2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation
        No. 48, *Accounting
        for Uncertainty in Income Taxes* ,
        (“FIN
        48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
        in a company’s financial statements in accordance with SFAS Statement No. 109, *Accounting
        for Income Taxes* .
        FIN 48
        requires a company to determine whether it is more likely than not that a
        tax
        position will be sustained upon examination based upon the technical merits
        of
        the position. If the more-likely-than-not threshold is met, a company must
        measure the tax position to determine the amount to recognize in the financial
        statements. FIN 48 is effective for the Company beginning January 1, 2007.
        While
        the Company is still evaluating the impact of this statement, it does not
        currently believe it will have a material impact on its financial statements
  In
        September 2006, the FASB issued SFAS No. 157, *Fair
        Value Measurements* ,
        (“SFAS
        157”). SFAS No. 157 defines fair value, establishes a framework for measuring
        fair value in generally accepted accounting principles, and expands disclosures
        about fair value measurements. SFAS 157 does not require any new fair value
        measurements. SFAS 157 is effective for the Company beginning January 1,
        2008.
        The Company is still evaluating the impact of this statement and its potential
        impact on its financial statement has not been determined.
  NOTE
        C -
        ACQUISITIONS
  The
        Company accounts for acquisitions under the purchase method of accounting,
        in
        accordance with SFAS No. 141, *Business
        Combinations* .
        Accordingly, the purchase price is allocated based on the fair values of
        the
        assets acquired and liabilities assumed at the date of acquisition, with
        the
        excess of the purchase price over the fair value of the net assets acquired
        recorded as goodwill. Results of operations of acquired companies are included
        subsequent to the acquisition date.
  F-15
 Theragenics
          Corporation and Subsidiaries
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006 and 2005
 CP
        Medical
  The
        Company acquired all of the outstanding common stock of CP Medical on May
        6,
        2005. The total purchase price, including transaction costs, was 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
        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 established 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. Following is a summary of the fair value
        of
        the assets acquired and liabilities assumed (in thousands):
  **Fair
                  value**
              ****
              **Amortization**
                **life**
                **of
                  intangible**
                **assets**Current
                  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.
  Galt
  The
        Company acquired all of the outstanding common stock and other equity interests
        of Galt on August 2, 2006. The total purchase price, including transaction
        costs, was approximately $32.7 million (net of cash acquired of approximately
        $2.3 million). The purchase price was paid $29.6 million in cash and the
        issuance of 978,065 shares of common stock valued at approximately $3.1 million.
        Galt develops, manufactures and markets disposable medical devices utilized
        for
        vascular access, primarily serving the interventional radiology, interventional
        cardiology and vascular surgery markets. Galt’s current products include
        guidewires, micro-introducer kits and tear-away introducer sets and kits,
        and
        hemostasis valved introducer kits and sets. This transaction further diversifies
        Theragenics’ medical device and surgical businesses and leverages the Company’s
        existing strengths within these markets.
  Following
        is a summary of the fair value of the assets acquired and liabilities assumed
        (in thousands):
  **Fair
                  value**
              ****
              **Amortization**
                **life**
                **of
                  intangible**
                **assets**Current
                  assets
              
              $
              2,937
              
              
              —Property
                  and equipment
              
              
              1,597
              
              
              —Goodwill
              
              
              20,454
              
              
              IndefiniteTrade
                  name
              
              
              900
              
              
              IndefiniteCustomer
                  relationships
              
              
              5,100
              
              
              7.5
                  yearsNon-compete
                  agreements
              
              
              1,700
              
              
              3-4
                  yearsDeveloped
                  technology
              
              
              900
              
              
              14
                  yearsBacklog
              
              
              170
              
              
              3
                  mosCurrent
                  liabilities
              
              
              (717
              )
              
              —Deferred
                  income tax liability
              
              
              (333
              )
              
              —Net
                  assets acquired
              
              $
              32,708
  The
        weighted average life of intangible assets subject to amortization is 7.3
        years.
        The intangible assets acquired, including goodwill, are not expected to be
        deductible for income tax purposes.
  F-16
 Theragenics
          Corporation and Subsidiaries
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006 and 2005
 $2.9
        million of deferred income tax liability arising from fair value adjustments
        in
        purchase accounting related to the acquisition of Galt were recorded as a
        reduction of the allowance for the Company’s net deferred tax asset and a
        reduction in the goodwill arising from the transaction. The deferred income
        tax
        liability of $333,000 recorded in the purchase allocation above relates to
        the
        fair value of the trade name acquired, for which the income tax basis is
        zero
        and for which the timing of the deduction for financial reporting purposes
        cannot be determined.
  Pro
        Forma Information
  The
        following unaudited pro forma summary combines the Company’s results with those
        of the acquired companies as if the acquisitions had occurred at the beginning
        of the calendar year of the period presented. This unaudited pro forma
        information is not intended to represent or be indicative of the Company’s
        consolidated results of operations or financial condition that would have
        been
        reported had the acquisitions been completed as of the beginning of the calendar
        year presented, and should not be taken as indicative of the Company’s future
        consolidated results of operations or financial condition (in thousands,
        except
        per share data):
 **Year
                    Ended December 31,****2006**
                
                **2005**Revenue
                
                $
                60,086
                
                $
                55,063Net
                    earnings (loss)
                
                $
                7,685
                
                $
                (28,481
                )Earnings
                    per shareBasic
                
                $
                .23
                
                $
                (0.87
                )Diluted
                
                $
                .23
                
                $
                (0.87
                )
 Certain
        pro forma adjustments have been made to reflect the impact of the purchase
        transactions, primarily consisting of amortization of intangible assets with
        determinate lives, reductions in interest income as a result of cash used
        in the
        acquisition, increases in interest expense resulting from borrowings under
        the
        Company’s credit facility, elimination of share based compensation on equity
        awards that terminated upon a change in control of the acquired company,
        and
        increases in weighted average shares outstanding for the common shares issued
        in
        each transaction. The pro forma adjustments also include non-recurring charges
        of $474,000 and $341,000 in 2006 and 2005, respectively, for amortization
        of the
        fair market value adjustments for inventory and backlog.
  NOTE
        D -
        GOODWILL AND INTANGIBLE ASSETS
 
 Goodwill
        and trade names are assigned to reporting units and are not amortized. 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
        estimated 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.
        Assumptions used in these analyses are consistent with the Company’s internal
        planning. The Company completed its most recent annual impairment assessments
        in
        the fourth quarter of 2006 after its annual forecasting and budgeting process,
        and determined that goodwill and other intangible assets were not
        impaired.
  F-17


Theragenics
      Corporation and Subsidiaries


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2006 and 2005


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





**Surgical
                products**
            ****
            **Brachytherapy**
            ****
            **Total**Balance,
                January 1, 2004
            
            $
            —
            
            $
            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
            
            
            18,370Goodwill
                acquired during year
            
            
            20,454
            
            
            —
            
            
            20,454Balance,
                December 31, 2006
            
            $
            36,246
            
            $
            2,578
            
            $
            38,824





Other
      intangibles assets include the following (in thousands):






****
              **December
                  31,**
              ****
              ****
              ********
              ****
              **2006**
              
              **2005**
              ****
              **Weighted**
                **Average
                  Life**Trade
                  names
              
              $
              2,600
              
              $
              1,700
              
              
              indefiniteCustomer
                  relationships
              
              
              8,600
              
              
              3,500
              
              
              8
                  yearsNon-compete
                  agreements
              
              
              2,969
              
              
              1,269
              
              
              4
                  yearsDeveloped
                  technology
              
              
              1,260
              
              
              360
              
              
              12
                  yearsLoan
                  fees, patents and other
              
              
              414
              
              
              290
              
              
              12
                  years15,843
              
              
              7,119Accumulated
                  amortization
              
              
              2,081
              
              
              731$
              13,762
              
              $
              6,388


At
        December 31, 2006, the weighted average life of intangible assets subject
        to
        amortization was 7.6 years. Amortization expense related to purchased
        intangibles was $1,371,000 and $500,000 in 2006 and 2005, respectively, and
        is
        disclosed as such in the accompanying consolidated statements of operations
        and
        comprehensive earnings. Amortization expense related to other intangibles
        was
        $21,000, $57,000 and $24,000 for 2006, 2005 and 2004, respectively, and is
        included in selling, general and administrative expenses.
 
 As
        of
        December 31, 2006, future approximate aggregate amortization expense for
        intangible assets subject to amortization is as follows (in thousands):


**Year
                Ending**
              **December
                31,**2007
            
            $
            1,8812008
            
            
            1,8772009
            
            
            1,8352010
            
            
            1,4712011
            
            
            1,186Beyond
            
            
            2,912$
            11,162




F-18




Theragenics
        Corporation and Subsidiaries
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 December
        31, 2006 and 2005


NOTE
      E -
      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 use of
      palladium-103 in 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
      was
      to sharpen the Company’s focus on its two business segments, brachytherapy seeds
      and surgical 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. The Company also incurred $369,000 of restructuring charges
      in
      2006 associated with site exit and disposal activities related to the Oak Ridge
      facility. The restructuring activities were completed in the second quarter
      of
      2006.





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


**Total
                  amount**
                **expected
                  to**
                **be
                  incurred**
              
              
              **Amount**
                **incurred
                  in**
                **2006**
              
              
              **Cumulative**
                **amount
                  incurred**
                **through**
                **December
                  31, 2006**Impairment
                  of long-lived assets
              
              $
              28,789
              
              $
              —
              
              $
              28,789Write
                  off of inventory and other assets
              
              
              1,757
              
              
              —
              
              
              1,757Contract
                  termination costs
              
              
              1,495
              
              
              —
              
              
              1,495Severance
                  costs
              
              
              904
              
              
              14
              
              
              904Site
                  exit and disposal costs
              
              
              712
              
              
              355
              
              
              712Other
              
              
              102
              
              
              —
              
              
              102$
              33,759
              
              $
              369
              
              $
              33,759





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


**Accrual
                  at**
                **December
                  31,**
                **2005**
              
              
              **Charged**
                **to**
                **expenses**
              
              
              **Payments**
              
              
              **Accrual
                  at**
                **December
                  31,**
                **2006**Contract
                  termination costs
              
              $
              1,560
              
              $
              —
              
              $
              23
              
              $
              1,537Severance
              
              
              530
              
              
              14
              
              
              382
              
              
              162Site
                  exit and disposal activities
              
              
              —
              
              
              355
              
              
              355
              
              
              —




F-19




Theragenics
        Corporation and Subsidiaries
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 December
        31, 2006 and 2005


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. The accrual includes $24,000 and $23,000 classified as other
      current liabilities in the accompanying consolidated balance sheets at December
      31, 2006 and 2005, respectively, representing the current portion of the
      liability due.




Severance
      costs were expensed as they became vested in accordance with the terms of the
      severance agreements. Site exit and disposal costs were expensed as
      incurred.





Assets
      held for sale of approximately $3.4 million at December 31, 2006, represents
      the
      estimated fair market value of the Oak Ridge related equipment and facilities
      to
      be disposed of related to the restructuring.







NOTE
      F -
      ASSET RETIREMENT OBLIGATIONS




The
      Company provides for retirement obligations relating to future decommissioning
      costs associated with the Company’s equipment and buildings in accordance with
      SFAS No. 143, *Accounting
      for Asset Retirement Obligations.* The
      liability is recorded at present value by discounting the Company’s estimated
      future cash flows associated with future decommissioning activities using the
      Company’s estimated credit-adjusted borrowing rate. The asset retirement
      obligation has been recorded in the accompanying consolidated balance sheets
      and
      will be adjusted to fair value over the estimated useful lives of the assets
      as
      an accretion expense. Changes in estimated future cash flows are adjusted in
      the
      period of change.




The
      following summarizes activity in the Company’s asset retirement obligation
      liability (in thousands):




**Year
                Ended****2006**
            
            
            **2005**Asset
                retirement obligation at beginning of period
            
            $
            672
            
            $
            549Accretion
                expense
            
            
            46
            
            
            77Revision
                in estimated cash flows
            
            
            (157
            )
            
            46Asset
                retirement obligation at end of period
            
            $
            561
            
            $
            672




NOTE
      G -
      CREDIT AGREEMENT





The
      Company has a credit agreement with a financial institution that provides for
      borrowings of up to $40.0 million, including
      a $5.0 million sub-limit for letters of credit (the “Credit Agreement”).
      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. At December
      31, 2006, the Company had $7.5 million of borrowings outstanding under the
      Credit Agreement at an interest rate of LIBOR plus 1% (6.3% at December 31,
      2006). All outstanding borrowings are due upon expiration of the Credit
      Agreement, which is October 31, 2009. No borrowings were outstanding under
      the
      Credit Agreement at December 31, 2005.




The
      Credit Agreement is unsecured, but provides for a lien to be established on
      substantially all of the assets of the Company (subject to certain exceptions)
      in the event certain events of default occur under the Credit 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,
      2006.




F-20


Theragenics
        Corporation and Subsidiaries
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 December
        31, 2006 and 2005


The
      Company has letters of credit outstanding under the Credit Agreement as of
      December 31, 2006 totaling approximately $876,000. These letters of credit
      are
      related to asset retirement liabilities of long-lived assets and utility
      deposits. The letters of credit are subject to terms identical to those of
      borrowings under the Credit Agreement.




NOTE
      H -
      INCOME TAXES





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


**Year
                  ended December 31,****2006**
              
              **2005**
              
              **2004**Current
              
              $
              134
              
              $
              —
              
              $
              (2,248
              )Federal
              
              
              89
              
              
              116
              
              
              (163
              )State
              
              
              223
              
              $
              116
              
              $
              (2,411
              )DeferredFederal
              
              $
              1,745
              
              $
              (5,699
              )
              $
              (148
              )State
              
              
              (55
              )
              
              (811
              )
              
              17Change
                  in allowance
              
              
              (3,625
              )
              
              —
              
              
              —$
              (1,935
              )
              $
              (6,510
              )
              $
              (131
              )Income
                  tax benefit
              
              $
              (1,712
              )
              $
              (6,394
              )
              $
              (2,542
              )




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




**December
                31,****2006**
            
            
            **2005**Deferred
                tax assets:Asset
                held for sale
            
            
            4,414
            
            
            4,427Net
                operating loss carryforwards
            
            
            3,583
            
            
            4,461Non-deductible
                accruals and allowances
            
            
            265
            
            
            808Inventories
            
            
            284
            
            
            310Share
                based compensation
            
            
            471
            
            
            383Asset
                retirement obligation
            
            
            207
            
            
            223Credits
            
            
            511
            
            
            377Contract
                termination liability
            
            
            569
            
            
            577Other
            
            
            284
            
            
            95Gross
                deferred tax assets
            
            
            10,588
            
            
            11,661Deferred
                tax liabilities:Property
                and equipment
            
            
            (5,009
            )
            
            (4,616
            )Goodwill
                and intangible assets
            
            
            (3,669
            )
            
            (289
            )Other
            
            
            (21
            )
            
            —Gross
                deferred tax liabilities
            
            
            (8,699
            )
            
            (4,905
            )Valuation
                allowance
            
            
            (239
            )
            
            (6,756
            )Net
                deferred tax asset
            
            $
            1,650
            
            $
            —




F-21




Theragenics
        Corporation and Subsidiaries
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 December
        31, 2006 and 2005


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





**December
                31,****2006**
            
            
            **2005**Current
                deferred tax asset
            
            $
            7,798
            
            $
            —Long-term
                deferred tax liability
            
            
            (6,148
            )
            
            —Net
                deferred tax asset
            
            $
            1,650
            
            $
            —




Activity
      in the allowance for deferred tax assets is as follows (amounts in
      thousands):


**Year
                Ended December 31,****2006**
            
            
            **2005**
            
            
            **2004**Valuation
                allowance, beginning of period
            
            $
            6,756
            
            $
            —
            
            $
            —Increase
                in allowance
            
            
            —
            
            
            6,756
            
            
            —Decrease
                in allowance from acquisition
            
            
            (2,892
            )
            
            —
            
            
            —Release
                of allowance
            
            
            (3,625
            )
            
            —
            
            
            —Valuation
                allowance, end of period
            
            $
            239
            
            $
            6,756
            
            
            —




Management
      periodically evaluates the recoverability of the deferred tax assets and
      recognizes the tax benefit only as reassessment demonstrates that they are
      realizable. At such time, if it is determined that it is more likely than not
      that the deferred tax assets are realizable, the valuation allowance is
      adjusted. The $6.8 million net deferred tax asset arose in 2005 primarily as
      a
      result of the existence of operating losses and other deductible temporary
      differences related to the Company’s 2005 restructuring. At that time, a
      valuation allowance for the entire amount of the net deferred tax asset was
      established due to uncertainties surrounding its realizability. In the third
      quarter of 2006, $2.9 million of deferred income tax liabilities arising from
      fair value adjustments in purchase accounting related to the acquisition of
      Galt
      were recorded as a reduction of the allowance. During the fourth quarter of
      2006, the Company determined it was more likely than not that a significant
      portion of these deferred tax assets would be realized and released
      $3.6 million of the valuation allowance. Factors considered by management
      in the fourth quarter of 2006 included, among other things, the Company’s
      performance for the year which included four consecutive quarters of
      profitability, a full fiscal year of realization of the cost savings associated
      with the 2005 restructuring which exceeded the expected cost savings, certain
      changes in federal laws and policies occurring in December 2006 related to
      Medicare reimbursement of brachytherapy seeds, and the continued successful
      diversification of the Company’s business through its surgical products segment.
      The remaining allowance of $239,000 relates primarily to certain state net
      operating loss carryforwards for which the Company believes it is more likely
      than not that the benefit will not be realized.





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





**2006**
            ****
            **2005**
            ****
            **2004**Tax
                at applicable federal rates
            
            35.0
            %
            (35.0
            )%
            (35.0
            )%State
                tax, net of federal income tax
            
            
            2.2
            
            
            (2.0
            )
            
            (2.0
            )Deferred
                tax asset valuation allowance
            
            
            (70.0
            )
            
            18.9
            
            
            —Tax
                exempt interest
            
            
            (0.9
            )
            
            (0.3
            )
            
            (1.7
            )Other
            
            
            .5
            
            
            0.3
            
            
            1.6(33.2
            )%
            
            (18.1
            )%
            
            (37.1
            )%




F-22




Theragenics
        Corporation and Subsidiaries
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 December
        31, 2006 and 2005


The
      Company has net operating loss carryforwards of approximately $9.0 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 $274,000.





NOTE
      I -
      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.





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. 2006 includes $400,000 of one-time license fee revenue
      resulting from Nordion’s obtaining CE marking and European registration for
      TheraSphere® during the year.





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 2011.
      Approximate minimum lease payments under the leases are as follows: 2007,
      $522,000; 2008, $526,000; 2009, $471,000; 2010, $245,000 and 2011,
      $94,000.




The
      Company leases certain 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 $14,000 are due
      under this lease through April 2010 and are included in the above lease
      commitments.





Rent
      expense was approximately $471,000, $453,000 and $366,000 for the years ended
      December 31, 2006, 2005 and 2004, respectively, including rent expense of
      approximately $167,000 and $109,000 in 2006 and 2005, respectively, under the
      related party leases referred to above.





The
      contract termination liability of $1,537,000 (including $24,000 classified
      as
      short term) included in the accompanying consolidated balance sheet at December
      31, 2006, 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. 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: 2007, $24,136; 2008, $26,269; 2009, $28,591;
      2010, $31,119; 2011, $33,869; beyond, $1,393,404.




F-23


Theragenics
        Corporation and Subsidiaries
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 December
        31, 2006 and 2005


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.  During
      2006, the plaintiff voluntarily dismissed the derivative suit with no financial
      settlement due.





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
      J -
      SHARE BASED COMPENSATION AND SHAREHOLDERS’ EQUITY




The
      Company provides share-based compensation under equity incentive plans approved
      by stockholders, which provide for the granting of stock options, restricted
      stock and other equity incentives. As of December 31, 2006 there were 2,150,867
      options and restricted stock rights outstanding and 1,604,814 shares of Common
      Stock remaining available for issuance under the Company’s equity incentive
      plans. The Company issues new shares from its authorized but unissued share
      pool.




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 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.




F-24


Theragenics
      Corporation and Subsidiaries


NOTES
      TO
      CONSOLIDATED FINANCIAL STATEMENTS


December
      31, 2006 and 2005




The
      following is a summary of activity in stock options outstanding during the
      year
      ended December 31, 2006 (shares in thousands):




Shares
              
              Weighted
                average
                exercise
                price
              
              Weighted
                average
                remaining
                contractual
                life
                  (yrs)
              
              Aggregate
                intrinsic
                valueOutstanding,
                  beginning of period
              
              
              2,433
              
              $
              9.90
              
              
              
              
              $
              —Granted
              
              
              —
              
              
              —
              
              
              
              
              
              —Exercised
              
              
              —
              
              
              —
              
              
              
              
              
              —Forfeited
              
              
              (
                  2
              )
              
              3.95
              
              
              
              
              
              —Expired
              
              
              (415
              )
              
              7.97
              
              
              
              
              
              —Outstanding,
                  end of period
              
              
              2,016
              
              $
              10.30
              
              
              3.3
              
              $
              —Exercisable
                  at end of period
              
              
              1,954
              
              $
              10.50
              
              
              3.1
              
              $
              —




A
        summary
        of the status of the Company’s non-vested stock options as of December 31, 2006
        and changes during the year then ended follows (shares in
        thousands):
  Non-vested
                    options
                
                Shares
                
                Weighted
                  average
                    grant
                  date
                    fair
                  valueNon-vested
                    at January 1, 2006
                
                
                140
                
                $
                1.87Granted
                
                
                —
                
                
                —Vested
                
                
                (76
                )
                
                2.03Forfeited
                
                
                (2
                )
                
                1.38Non-vested
                    at December 31, 2006
                
                
                62
                
                $
                1.69




A
        summary
        of grant date fair values and intrinsic values follows (in thousands, except
        per
        share amounts):
  Year
                    Ended December 31,2006
                
                2005
                
                2004Weighted
                    average grant date fair value of options granted
                
                
                N/A
                
                $
                1.38
                
                $
                2.77Total
                    intrinsic value of options exercised
                
                
                N/A
                
                $
                62
                
                $
                66Total
                    fair value of options vested
                
                $
                155
                
                $
                506
                
                $
                920




The
        Company recognizes compensation expense for awards with graded vesting on
        a
        straight-line basis over the requisite service period for each separately
        vesting portion of the award. Compensation cost related to stock options
        totaled
        $62,000 for the year ended December 31, 2006. As of December 31, 2006 there
        was
        approximately $14,000 of unrecognized compensation cost related to nonvested
        stock options, which is expected to be recognized over a weighted average
        period
        of approximately 1 year.




F-25




Theragenics
          Corporation and Subsidiaries
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006 and 2005
  Restricted
            Stock
  The
            Company may issue restricted stock to employees, directors and others.
            Restrictions limit the sale or transfer of the shares until vested. Vesting
            of
            restricted stock is time-based over a three-year period. A summary of
            activity
            in non-vested restricted stock awards for the year ended December 31,
            2006
            follows (shares in thousands):
  Non-vested
                        Restricted Stock
                    
                    Shares
                    
                    Weighted
                      average
                      grant
                      date
                        fair
                      valueNon-vested
                        at January 1, 2006
                    
                    
                    35
                    
                    $
                    3.44Granted
                    
                    
                    40
                    
                    
                    3.21Vested
                    
                    
                    (22
                    )
                    
                    3.44Forfeited
                    
                    
                    —
                    
                    
                    —Non-vested
                        at December 31, 2006
                    
                    
                    53
                    
                    $
                    3.27




Compensation
        cost related to the restricted shares is based on the grant date fair value
        of
        the common stock granted and is recorded over the requisite service period
        of
        three years. The weighted average per share grant date fair value of restricted
        shares issued was $3.21, $3.45 and $3.91 in 2006, 2005 and 2004, respectively.
        Compensation expense related to the restricted stock totaled approximately
        $115,000, $50,000 and $4,000 in 2006, 2005 and 2004, respectively. As of
        December 31, 2006, there was approximately $106,000 of unrecognized compensation
        cost related to the restricted shares, which is expected to be recognized
        over a
        weighted average period of 1.4 years.
  Stock
        Units
  The
        Company issues restricted stock units and performance restricted stock units.
        The following is a summary of activity for Stock Units:
  *Restricted
        Stock Units*
  In
        August
        2004, the Board of Directors granted an aggregate of 48,000 Restricted Stock
        Units to executive officers which vested on December 31, 2005. The weighted
        average grant date fair value of these awards was $3.90. In August 2005 the
        Board of Directors granted 10,000 Restricted Stock Units to a newly appointed
        executive officer that vested on December 31, 2006. The grant date fair value
        of
        this award was $3.42. Vesting for all Restricted Stock Units was time-based.
        Compensation cost related to the Restricted Stock Units was based on the
        grant
        date fair value of the common stock granted and recorded over the requisite
        service period. Compensation expense related to the Restricted Stock Units
        totaled approximately $24,000, $115,000 and $55,000 in 2006, 2005 and 2004,
        respectively.
  *Performance
        Restricted Stock Units*
  The
        Board
        of Directors approved the issuance of performance restricted stock units
        in 2004
        and 2005 to executive officers as long-term incentives (the “2004 and 2005
        Performance Restricted Stock Units”). Under the original terms of these
        long-term incentives, the number of shares issuable upon vesting of each
        of the
        2004 and 2005 Performance Restricted Stock Units was dependent upon 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 Restricted Stock Unit
        represented 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 remained in the
        Company’s employ as of the vesting date.
  F-26




Theragenics
        Corporation and Subsidiaries
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 December
        31, 2006 and 2005
  Under
          SFAS No. 123R, the Company’s 2004 and 2005 Performance Restricted Stock Units
          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 requires 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 Restricted Stock Units under SFAS No. 123R, in
          November
          2005 the Compensation Committee of the Board of Directors revised the 2004
          and
          2005 Performance Restricted Stock Units held by current executive officers.
          The
          revision included termination of the performance cycle for measuring TSR
          under
          the outstanding 2004 and 2005 Performance Restricted Stock Units 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 2004
          and 2005 Performance Restricted Stock Units outstanding and held by former
          employees were not changed.
  In
          February 2006, the Compensation Committee approved the issuance of 104,000
          performance restricted stock units to executive officers, which vest on
          December
          31, 2008 (the “2006 Performance Restricted Stock Units”). The number of common
          shares issuable upon vesting of the 2006 Performance Restricted Stock Units
          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 Compensation Committee. The grant
          date
          fair value of the 2006 Performance Restricted Stock Units was based on
          the fair
          value of the underlying common stock and is recognized over the three-year
          requisite service period. For the portion of the 2006 Performance Restricted
          Stock Units containing performance conditions, the grant date fair value
          is
          adjusted each period for the number of shares ultimately expected to be
          issued.
          For the portion of the 2006 Performance Restricted Stock Units subject
          to
          discretionary performance conditions, the grant date has not been established
          and accordingly, the fair value of the award is updated each period for
          changes
          in the fair value of the underlying common stock.
  A
          summary
          of activity in non-vested Performance Restricted Stock Units follows (shares
          in
          thousands):
  Non-vested
                      Performance Restricted Stock Units
                  
                  Units
                  
                  Weighted
                    average
                      grant
                    date
                      fair
                    valueNon-vested
                      at January 1, 2006
                  
                  
                  87
                  
                  $
                  3.94Granted
                  
                  
                  104
                  
                  
                  3.33Vested
                  
                  
                  (43
                  )
                  
                  4.21Forfeited
                  
                  
                  —
                  
                  
                  —Non-vested
                      at December 31, 2006
                  
                  
                  148
                  
                  $
                  3.43




The
      minimum, target and maximum shares issuable under the Performance Restricted
      Stock Units outstanding at December 31, 2006 are as follows (shares in
      thousands):




**Shares**Minimum
                award
            
            
            45Target
                award
            
            
            148Maximum
                award
            
            
            294




F-27




Theragenics
        Corporation and Subsidiaries
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 December
        31, 2006 and 2005
  The
          weighted average per share grant date fair value of Performance Restricted
          Stock
          Units granted was $3.33, $3.66 and $4.30 in 2006, 2005 and 2004, respectively.
          Compensation cost related to Performance Restricted Stock Units totaled
          $150,000, $50,000 and $20,000 in 2006, 2005 and 2004, respectively. As
          of
          December 31, 2006 there was approximately $233,000 of unrecognized compensation
          cost related to Performance Restricted Stock Units issued to employees,
          which is
          expected to be recognized over a weighted average period of 1.3
          years.
  Employee
          Stock Purchase Plan
  The
          Theragenics Corporation Employee Stock Purchase Plan (the “ESPP”) allows
          eligible employees the right to purchase common stock on a quarterly basis
          at
          the lower of 85% of the market price at the beginning or end of each quarterly
          offering period. Compensation cost related to the ESPP totaled approximately
          $11,000 in 2006. As of
          December 31, 2006 and 2005, there were 49,000 and 79,000 shares of common
          stock
          reserved and un-issued for the ESPP, respectively, and 151,000 and 121,000
          shares had been issued under the plan, respectively.
  Pro
          Forma results
  The
          following represents the effect on net earnings (loss) and earnings per
          share if
          the Company had applied the fair market value recognition provisions of
          SFAS
          123R for 2005 and 2004 (in thousands, except per share data):
  2005
                  
                  2004Net
                      loss
                  
                  
                  As
                      reported
                  
                  $
                  (29,006
                  )
                  $
                  (4,310
                  )Pro
                      forma
                  
                  
                  (29,112
                  )
                  
                  (4,799
                  )Basic
                      net loss per common share
                  
                  
                  As
                      reported
                  
                  $
                  (0.93
                  )
                  $
                  (0.14
                  )Pro
                      forma
                  
                  
                  (0.93
                  )
                  
                  (0.16
                  )Diluted
                      net loss per common share
                  
                  
                  As
                      reported
                  
                  $
                  (0.93
                  )
                  $
                  (0.14
                  )Pro
                      forma
                  
                  
                  (0.93
                  )
                  
                  (0.16
                  )




The
        weighted average fair value of the options granted during 2005 and 2004 was
        $1.38 and $2.77, respectively. The fair values were estimated using the
        Black-Scholes options-pricing model with the following weighted average
        assumptions:
 
 2005
              
              2004Expected
                  dividend yield
              
              
              0.0
              %
              
              0.0
              %Expected
                  stock price volatility
              
              
              45.8
              %
              
              64.1
              %Risk-free
                  interest rate
              
              
              3.5
              %
              
              3.2
              %Expected
                  life of option (years)
              
              
              3.1
              
              
              5.4
 
 Expected
        stock price volatility is primarily based on the historical volatility of
        the
        Company’s stock price over the most recent period commensurate with the expected
        option life. When  determining
        the expected life of stock options, the Company classifies options into groups
        for employees where relatively homogeneous exercise behavior is expected.
        The
        vesting period of the options, the length of time similar grants have remained
        outstanding in the past, and the expected volatility of the stock is also
        considered. These factors may cause the expected volatility and expected
        life of
        options granted to differ from period to period.
  F-28




Theragenics
        Corporation and Subsidiaries
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 December
        31, 2006 and 2005
  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 2017 and do not become exercisable unless a group
          acquires or announces a tender or exchange offer for 20% or more of the
          Company’s outstanding Common Stock. Each Right that is not held by the 20% or
          more shareholders will entitle its holder to purchase additional shares
          of
          Common Stock at a substantial discount to then current market prices.
 
 NOTE
          K -
          401(K) SAVINGS PLANS
 
 The
          Company and its subsidiaries sponsor 401(k) defined contribution retirement
          savings plans for employees. Matching contributions are made in Company
          stock or
          in cash, depending on the plan. Matching contributions are charged to operating
          expenses and totaled approximately $114,000, $91,000 and $168,000 in 2006,
          2005
          and 2004, respectively.
 
 NOTE
          L -
          EARNINGS/(LOSS) PER SHARE
 
 Earnings
          (loss) per common share was computed as follows (in thousands, except per
          share
          data):
  Year
                    ended December 31,2006
                
                2005
                
                2004Net
                    earnings (loss)
                
                $
                6,865
                
                $
                (29,006
                )
                $
                (4,310
                )Weighted
                    average common shares outstanding
                
                
                32,452
                
                
                31,273
                
                
                29,971Incremental
                    common shares issuable from stock options and awards
                
                
                88
                
                
                —
                
                
                —Weighted
                    average common shares outstanding assuming dilution
                
                
                32,540
                
                
                31,273
                
                
                29,971Basic
                    earnings (loss) per share
                
                $
                0.21
                
                $
                (0.93
                )
                $
                (0.14
                )Diluted
                    earnings (loss) per share
                
                $
                0.21
                
                $
                (0.93
                )
                $
                (0.14
                )
  Diluted
          loss per share does not include the effect of certain stock options and
          awards
          as their impact would be anti-dilutive. Approximately 2,016,000, 2,433,000
          and
          2,562,000 stock options and awards for the years ended December 31, 2006,
          2005 and 2004, respectively, were not included in the computation of diluted
          earnings (loss) per share for those years.
  F-29




Theragenics
        Corporation and Subsidiaries
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 December
        31, 2006 and 2005
  NOTE
        M -
        SEGMENT REPORTING
  *Segment
        Reporting*
 
 The
        Company is a medical device company serving the cancer treatment and surgical
        markets, operating in two business segments. In its brachytherapy seed business,
        the Company produces, markets and sells TheraSeed®,
        its
        premier palladium-103 prostate cancer treatment device, I-Seed, its iodine-125
        based prostate cancer treatment device, and related products and services.
        The
        Company’s
        surgical products business consists of wound closure and vascular access
        products. Wound closure includes sutures, needles and other surgical products
        with applications in, among other areas, urology, veterinary, cardiology,
        orthopedics, plastic surgery and dental. Vascular access includes introducers
        and guidewires used in the interventional radiology, interventional cardiology
        and vascular surgery markets. The following tables provide certain information
        for these segments (in thousands):
 
 Year
                  Ended December 31,2006
              
              2005
              
              2004RevenueBrachytherapy
                  seed
              
              $
              34,880
              
              $
              36,372
              
              $
              33,338Surgical
                  products
              
              
              19,372
              
              
              7,921
              
              
              —Intersegment
                  eliminations
              
              
              (156
              )
              
              (23
              )$
              54,096
              
              $
              44,270
              
              $
              33,338Restructuring
                  expensesBrachytherapy
                  seed
              
              $
              369
              
              $
              33,390
              
              $
              —Surgical
                  products
              
              
              —
              
              
              —
              
              
              —$
              369
              
              $
              33,390
              
              $
              —Earnings
                  (loss) from operationsBrachytherapy
                  seed
              
              $
              2,122
              
              $
              (38,111
              )
              $
              (8,001
              )Surgical
                  products
              
              
              1,955
              
              
              1,430
              
              
              —Intersegment
                  eliminations
              
              
              (28
              )
              
              —
              
              
              —$
              4,049
              
              $
              (36,681
              )
              $
              (8,001
              )Capital
                  expenditures,excluding
                  acquisitionof
                  businessesBrachytherapy
                  seed
              
              $
              131
              
              $
              335
              
              $
              3,263Surgical
                  products
              
              
              602
              
              
              198
              
              
              —$
              733
              
              $
              533
              
              $
              3,263Depreciation
                  and amortizationBrachytherapy
                  seed
              
              $
              3,994
              
              $
              6,281
              
              $
              6,946Surgical
                  products
              
              
              2,035
              
              
              537
              
              
              —$
              6,029
              
              $
              6,818
              
              $
              6,946
  Earn ings
        from
        operations by segment do not include interest expense, interest income, other
        income and expense, or provision for income taxes. Intersegment eliminations
        are
        for surgical products segment sales transactions consummated at arm's
        length.
  F-30




Theragenics
        Corporation and Subsidiaries
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 December
        31, 2006 and 2005
  Segment
          information related to significant assets and liabilities follows (in
          thousands):
 
 December
                    31,2006
                
                
                2005Identifiable
                    assetsBrachytherapy
                    seed
                
                $
                140,803
                
                $
                120,485Surgical
                    products
                
                
                69,860
                
                
                29,191Intersegment
                    eliminations
                
                
                (64,419
                )
                
                (27,612
                )$
                146,244
                
                $
                122,064GoodwillBrachytherapy
                    seed
                
                $
                2,578
                
                $
                2,578Surgical
                    products
                
                
                36,246
                
                
                15,792$
                38,824
                
                $
                18,370Other
                    intangible assetsBrachytherapy
                    seed
                
                $
                6
                
                $
                29Surgical
                    products
                
                
                13,756
                
                
                6,359$
                13,762
                
                $
                6,388
 
 Information
          regarding revenue by geographic regions follows (in thousands):
 
 Year
                    Ended December 31,2006
                
                2005
                
                2004United
                    States
                
                $
                50,534
                
                $
                42,559
                
                $
                33,030Europe
                
                
                1,921
                
                
                764
                
                
                —Other
                    foreign countries
                
                
                621
                
                
                370
                
                
                —License
                    fees (Canada)
                
                
                1,020
                
                
                577
                
                
                308$
                54,096
                
                $
                44,270
                
                $
                33,338
 
 Foreign
          sales are attributed to countries based on location of the customer. License
          fees are recognized from the TheraSphere ® licensing agreement with Nordion, a Canada-based company. All other foreign
          sales are related to the surgical products segment. All of the Company’s
          long-lived assets are located within the United States.
  F-31


Theragenics
        Corporation and Subsidiaries
 NOTES
        TO
        CONSOLIDATED FINANCIAL STATEMENTS
 December
        31, 2006 and 2005




NOTE
      N -
      DISTRIBUTION AGREEMENT AND MAJOR CUSTOMERS





*Distribution
      Agreement*




The
      Company sells its TheraSeed ® device
      directly to health care providers and to third party distributors, and sells
      its
      I-Seed device directly to health care providers. One of the
      Company’s non-exclusive distribution agreements for the
      TheraSeed ® device is
      with C. R. Bard (“Bard”) (the “Bard Agreement”). The terms of the Bard
      Agreement provide for automatic one-year extensions of the term, unless either
      party gives notice of its intent not to renew at least twelve months prior
      to
      the end of the current term. The current terms expires December 31, 2008, and
      will be automatically extended for one additional year unless either party
      gives
      notice of its intent not to extend by December 31, 2007. 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) terminated on September 8, 2005.





*Major
      Customers*





Sales
      to
      Bard represented approximately 60% of brachytherapy product revenue and 38%
      of
      consolidated product revenue in 2006. Combined sales to Bard and Oncura
      represented approximately 71% and 81% of brachytherapy product revenue in 2005
      and 2004, respectively, and 57% and 81% of consolidated revenue in 2005 and
      2004, respectively.





Accounts
      receivable from Bard represented approximately 53% of brachytherapy accounts
      receivable and 31% of consolidated accounts receivable at December 31, 2006.
      At
      December 31, 2005, accounts receivable from Bard represented approximately
      52%
      of brachytherapy account receivable and 38% of consolidated accounts receivable.





One
      customer represented approximately 10% and 14% of surgical products revenue
      for
      2006 and 2005, respectively. This customer also totaled 11% and 24% of surgical
      products accounts receivable at December 31, 2006 and 2005,
      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 I.





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 in 2004 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 during 2004 for these animal studies.




F-32


Theragenics
          Corporation and Subsidiaries
 NOTES
          TO
          CONSOLIDATED FINANCIAL STATEMENTS
 December
          31, 2006 and 2005




NOTE
      P -
      QUARTERLY FINANCIAL DATA (UNAUDITED)





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




Year
                  ended December 31, 2006:
              
              **********Quarter
                  ended**
              ********
              ****
              **April
                  2**
              ****
              **July
                  2**
              ****
              **October
                  1**
              ****
              **December
                  31**Net
                  revenue
              
              $
              12,394
              
              $
              12,590
              
              $
              14,320
              
              $
              14,792Gross
                  profit
              
              
              6,339
              
              
              6,110
              
              
              7,057
              
              
              6,838Restructuring
                  expenses
              
              
              306
              
              
              63
              
              
              —
              
              
              —Net
                  earnings
              
              
              775
              
              
              433
              
              
              1,657
              
              
              4,000Net
                  earnings per common shareBasic
              
              $
              0.02
              
              $
              0.01
              
              $
              0.05
              
              $
              0.12Diluted
              
              $
              0.02
              
              $
              0.01
              
              $
              0.05
              
              $
              0.12




Year
                  ended December 31, 2005:
              
              **Quarter
                  ended****April
                  3**
              
              ******July
                  3**
              
              **October
                  2**
              
              **December
                  31**Net
                  revenue
              
              $
              9,539
              
              $
              11,372
              
              $
              12,002
              
              $
              11,357Gross
                  profit
              
              
              4,744
              
              
              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
              )




F-33




**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS ON SCHEDULE**




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
      7, 2007, 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. 123R, *Share
      Based-Payment* ,
      effective January 1, 2006, as discussed in Note B 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
      7,
      2007





S-1





Theragenics
      Corporation and Subsidiary





SCHEDULE
      II - VALUATION AND QUALIFYING ACCOUNTS





For
      each
      of the three years in the period ended December 31, 2006


(Amounts
      in thousands)




**Column
                    A - Description**
                
                **Column
                    B**
                ****
                **Column
                    C - Additions**
                ****
                **Column
                    D**
                ****
                **Column
                    E****Balance
                    at**
                  **beginning**
                  **of
                    period**
                ****
                **(1)**
                  **Charged
                    to**
                  **costs
                    and**
                  **expenses**
                ****
                **(2)**
                  **Charged
                    to**
                  **other**
                  **accounts**
                ****
                **Deductions**
                ****
                **Balance**
                  **at
                    end of**
                  **period**Year
                    ended December 31, 2006Allowance
                    for doubtful  accounts receivable
                
                $
                517
                
                $
                338
                
                $
                32(c
                )
                $
                270(a
                )
                $
                617Year
                    ended December 31, 2005Allowance
                    for doubtful  accounts receivable
                
                $
                177
                
                $
                278
                
                $
                76(b
                )
                $
                14(a
                )
                $
                517Year
                    ended December 31, 2004Allowance
                    for doubtful  accounts receivable
                
                $
                118
                
                $
                59
                
                $
                —
                
                $
                —
                
                $
                177





(a)  -
      write-off of uncollectible amounts


(b)  -
      acquisition of CP Medical


(c)
      -
      acquisition of Galt






S-2