**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 **WASHINGTON,
        D.C. 20549**
  **FORM
        10-Q**
  x QUARTERLY
              REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
              OF
              1934
  For
        the
        quarterly period ended October 1, 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
                    or other jurisdiction of
                  incorporation
                    or organization)
                (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**
  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 the filing requirements
        for
        at least the past 90 days. YES x NO o
  Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-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
  As
        of
        October 31, 2006 the number of shares of $0.01 par value common stock
        outstanding was 33,080,189.
  
 
  THERAGENICS
        CORPORATION
  TABLE
        OF
        CONTENTS
  **Page
                  No.**PART
                I. FINANCIAL INFORMATIONITEM 1.
              CONSOLIDATED
                  FINANCIAL STATEMENTS
                  (UNAUDITED)
              
              3Consolidated
                  Balance Sheets –
                  October 1,
                  2006 and December 31, 2005
              
              3Consolidated
                  Statements of Operations and Comprehensive
                  Income for the three and nine months ended October 1, 2006 and
                  three and
                  nine months ended October 2, 2005
              
              5Consolidated
                  Statements of Cash Flows for the nine months ended October 1, 2006
                  and
                  October 2, 2005
              
              6Consolidated
                  Statement of Shareholders’ Equity for the nine months ended October 1,
                  2006
              
              8Notes
                  to Consolidated Financial
                  Statements
              
              9ITEM
                2.
              MANAGEMENT’S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                  AND RESULTS OF OPERATIONS
              
              24ITEM 3.
              QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              
              31ITEM 4.
              CONTROLS
                  AND PROCEDURES
              
              32PART II.OTHER
                INFORMATIONITEM 1.
              LEGAL
                  PROCEEDINGS
              
              33ITEM 1A.
              RISK
                  FACTORS
              
              33ITEM 6.
              EXHIBITS
              
              34SIGNATURES
              
              35
  2
 **PART
        I. FINANCIAL INFORMATION**
  **Item
        1.** **Financial
        Statements**
  **THERAGENICS
        CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 **(Amounts
        in thousands)**
  ASSETS**October
                  1,**
                **2006**
                **(Unaudited)**
              
              **December
                  31,**
                **2005**CURRENT
                  ASSETSCash
                  and short-term investments
              
              $
              14,132
              
              $
              10,073Marketable
                  securities
              
              
              14,883
              
              
              35,535Trade
                  accounts receivable, less allowance of $595 in 2006 and $517 in
                  2005
              
              
              8,893
              
              
              7,622Inventories
              
              
              7,576
              
              
              5,042Prepaid
                  expenses and other current assets
              
              
              2,991
              
              
              2,720Assets
                  held for sale
              
              
              3,400
              
              
              3,433TOTAL
                  CURRENT ASSETS
              
              
              51,875
              
              
              64,425PROPERTY
                  AND EQUIPMENTBuildings
                  and improvements
              
              
              22,374
              
              
              21,793Machinery
                  and equipment
              
              
              36,603
              
              
              35,271Office
                  furniture and equipment
              
              
              924
              
              
              70159,901
              
              
              57,765Less
                  accumulated depreciation
              
              
              (29,061
              )
              
              (25,960
              )30,840
              
              
              31,805Land
              
              
              822
              
              
              822Construction
                  in progress
              
              
              163
              
              
              139TOTAL
                  PROPERTY AND EQUIPMENT
              
              
              31,825
              
              
              32,766Goodwill
              
              
              38,824
              
              
              18,370Other
                  intangible assets, net
              
              
              14,290
              
              
              6,388Other
                  assets
              
              
              112
              
              
              11553,226
              
              
              24,873TOTAL
                  ASSETS
              
              $
              136,926
              
              $
              122,064
  The
        accompanying notes are an integral part of these statements.
  3
  **THERAGENICS
        CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS - Continued**
 **(Amounts
        in thousands)**
  LIABILITIES
                  & SHAREHOLDERS’ EQUITY**October
                  1,**
                **2006**
                **(Unaudited)**
              
              **December
                  31,**
                **2005**CURRENT
                  LIABILITIESTrade
                  accounts payable
              
              $
              1,498
              
              $
              1,488Accrued
                  salaries, wages and payroll taxes
              
              
              1,495
              
              
              1,659Other
                  current liabilities
              
              
              1,489
              
              
              1,025TOTAL
                  CURRENT LIABILITIES
              
              
              4,482
              
              
              4,172LONG-TERM
                  LIABILITIESDeferred
                  income taxes
              
              
              873
              
              
              —Decommissioning
                  retirement
              
              
              549
              
              
              672Contract
                  termination liability
              
              
              1,522
              
              
              1,537Long-term
                  debt
              
              
              7,500
              
              
              —TOTAL
                  LONG-TERM LIABILITIES
              
              
              10,444
              
              
              2,209COMMITMENTS
                AND CONTINGENCIES
              
              
              —
              
              
              —SHAREHOLDERS’
                  EQUITYCommon
                  stock, authorized 100,000 shares of $0.01 par value, issued and
                  outstanding, 33,080 in 2006 and 32,008 in 2005
              
              
              331
              
              
              320Additional
                  paid-in capital
              
              
              72,028
              
              
              68,623Retained
                  earnings
              
              
              49,789
              
              
              46,924Accumulated
                  other comprehensive loss
              
              
              (148
              )
              
              (184
              )TOTAL
                  SHAREHOLDERS’ EQUITY
              
              
              122,000
              
              
              115,683TOTAL
                  LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              136,926
              
              $
              122,064
  The
        accompanying notes are an integral part of these statements.
 
 4




**THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME**


**(UNAUDITED)**


**(Amounts
      in thousands, except per share data)**




**Three
                  Months Ended**
              
              **Nine
                  Months Ended****October
                  1,**
                **2006**
              
              **October
                  2, 2005**
              
              **October
                  1, 2006**
              
              **October
                  2, 2005**REVENUEProduct
                  sales
              
              $
              13,766
              
              $
              11,845
              
              $
              38,446
              
              $
              32,489Licensing
                  fees
              
              
              554
              
              
              157
              
              
              858
              
              
              42414,320
              
              
              12,002
              
              
              39,304
              
              
              32,913COST
                  OF SALES
              
              
              7,263
              
              
              6,833
              
              
              19,798
              
              
              17,871GROSS
                  PROFIT
              
              
              7,057
              
              
              5,169
              
              
              19,506
              
              
              15,042OPERATING
                  EXPENSESSelling,
                  general & administrative
              
              
              4,552
              
              
              4,227
              
              
              15,277
              
              
              14,515Amortization
                  of purchased intangibles
              
              
              471
              
              
              187
              
              
              846
              
              
              313Research
                  & development
              
              
              206
              
              
              823
              
              
              624
              
              
              3,374Restructuring
                  expenses
              
              
              —
              
              
              32,915
              
              
              369
              
              
              32,915Gain
                  on sale of assets
              
              
              —
              
              
              —
              
              
              (201
              )
              
              —5,229
              
              
              38,152
              
              
              16,915
              
              
              51,117EARNINGS(LOSS)
                  FROM OPERATIONS
              
              
              1,828
              
              
              (32,983
              )
              
              2,591
              
              
              (36,075
              )OTHER
                  INCOME/(EXPENSE)Interest
                  income
              
              
              362
              
              
              326
              
              
              1,231
              
              
              1,049Interest
                  and financing costs
              
              
              (114
              )
              
              (44
              )
              
              (249
              )
              
              (144
              )Other
              
              
              (39
              )
              
              6
              
              
              (58
              )
              
              6209
              
              
              288
              
              
              924
              
              
              911Earnings
                  (loss) before income taxes
              
              
              2,037
              
              
              (32,695
              )
              
              3,515
              
              
              (35,164
              )Income
                  tax expense (benefit)
              
              
              380
              
              
              (5,457
              )
              
              650
              
              
              (6,394
              )NET
                  EARNINGS (LOSS)
              
              $
              1,657
              
              $
              (27,238
              )
              $
              2,865
              
              $
              (28,770
              )NET
                  EARNINGS (LOSS) PER COMMON SHARE:Basic
              
              $
              0.05
              
              $
              (0.85
              )
              $
              0.09
              
              $
              (0.93
              )Diluted
              
              $
              0.05
              
              $
              (0.85
              )
              $
              0.09
              
              $
              (0.93
              )WEIGHTED
                  AVERAGE SHARESBasic
              
              
              32,752
              
              
              31,915
              
              
              32,293
              
              
              31,024Diluted
              
              
              32,822
              
              
              31,915
              
              
              32,368
              
              
              31,024Comprehensive
                  income (loss):Net
                  earnings (loss)
              
              $
              1,657
              
              $
              (27,238
              )
              $
              2,865
              
              $
              (28,770
              )Other
                  comprehensive income/(loss):Reclassification
                  adjustment for realized loss included in net earnings
              
              
              39
              
              
              —
              
              
              39
              
              
              —Unrealized
                  gain/(loss) on securities available for sale, net of taxes
              
              
              108
              
              
              (64
              )
              
              (3
              )
              
              (42
              )Total
                  comprehensive income (loss)
              
              $
              1,804
              
              $
              (27,302
              )
              $
              2,901
              
              $
              (28,812
              )




The
      accompanying notes are an integral part of these statements.




5


**THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**


**(Amounts
      in thousands)**




**Nine
                  Months Ended****October
                  1,**
                **2006**
              
              **October
                  2,**
                **2005**CASH
                  FLOWS FROM OPERATING ACTIVITIESNet
                  earnings (loss)
              
              $
              2,865
              
              $
              (28,770
              )Adjustments
                  to reconcile net earnings (loss) to net cash provided by operating
                  activitiesDepreciation
                  and amortization
              
              
              3,995
              
              
              5,487Non-cash
                  restructuring expenses
              
              
              —
              
              
              32,041Deferred
                  income taxes
              
              
              540
              
              
              (6,510
              )Realized
                  loss on sale of marketable securities
              
              
              39
              
              
              —Provision
                  for allowances
              
              
              213
              
              
              279Share
                  based compensation
              
              
              302
              
              
              163Deferred
                  rent
              
              
              —
              
              
              7Decommissioning
                  retirement liability
              
              
              (123
              )
              
              —Gain
                  on sale of equipment
              
              
              (201
              )
              
              —Changes
                  in assets and liabilities:Accounts
                  receivable
              
              
              (432
              )
              
              (465
              )Inventories
              
              
              (685
              )
              
              (41
              )Prepaid
                  expenses and other current assets
              
              
              (258
              )
              
              349Other
                  assets
              
              
              27
              
              
              —Trade
                  accounts payable
              
              
              (311
              )
              
              (638
              )Accrued
                  salaries, wages and payroll taxes
              
              
              (359
              )
              
              514Other
                  current liabilities
              
              
              263
              
              
              (2
              )Other
              
              
              (16
              )
              
              —Net
                  cash provided by operating activities
              
              
              5,859
              
              
              2,414CASH
                  FLOWS FROM INVESTING ACTIVITIESPurchases
                  and construction of property and equipment
              
              
              (563
              )
              
              (338
              )Proceeds
                  from sale of equipment
              
              
              234
              
              
              —Cash
                  paid for acquisition, net of cash acquired
              
              
              (29,656
              )
              
              (20,468
              )Purchases
                  of marketable securities
              
              
              (8,108
              )
              
              (13,701
              )Maturities
                  of marketable securities
              
              
              22,770
              
              
              14,956Proceeds
                  from sales of marketable securities
              
              
              5,961
              
              
              —Net
                  cash used by investing activities
              
              
              (9,362
              )
              
              (19,551
              )CASH
                  FLOWS FROM FINANCING ACTIVITIESProceeds
                  from long-term debt
              
              
              7,500
              
              
              —Exercise
                  of stock options and stock purchase plan
              
              
              62
              
              
              112Net
                  cash provided by financing activities
              
              
              7,562
              
              
              112NET
                  INCREASE (DECREASE) IN CASH AND SHORT-TERM INVESTMENTS
              
              $
              4,059
              
              $
              (17,025
              )CASH
                  AND SHORT-TERM INVESTMENTS AT BEGINNING OF PERIOD
              
              
              10,073
              
              
              26,150CASH
                  AND SHORT-TERM INVESTMENTS AT END OF PERIOD
              
              $
              14,132
              
              $
              9,125




The
      accompanying footnotes are an integral part of these statements.





6




**THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS - CONTINUED**


**(UNAUDITED)**


**(Amounts
      in thousands)**




**Nine
                Months Ended****October
                1,**
              **2006**
            
            **October
                2,**
              **2005**Supplementary
                cash flow disclosure:Interest
                paid
            
            $
            248
            
            $
            144Taxes
                paid
            
            $
            278
            
            $
            —Non-cash
                investing activities:Common
                stock issued in acquisition
            
            $
            3,052
            
            $
            6,250




The
      accompanying footnotes are an integral part of these statements.





7




**THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**CONSOLIDATED
      STATEMENT OF SHAREHOLDERS’ EQUITY**


**FOR
      THE NINE MONTHS ENDED OCTOBER 1, 2006**


**(UNAUDITED)**


**(Amounts
      in thousands)**




**Common
                  Stock****Number
                  of**
                **Shares**
              
              **Par**
                **value**
                **$0.01**
              
              **Additional**
                **Paid-in**
                **Capital**
              
              **Deferred**
                **Compensation**
              
              **Retained**
                **Earnings**
              
              **Accumulated**
                **Other**
                **Comprehensive**
                **Loss**
              
              **Total**BALANCE,
                  December 31, 2005
              
              
              32,008
              
              $
              320
              
              $
              68,717
              
              $
              (94
              )
              $
              46,924
              
              $
              (184
              )
              $
              115,683Adoption
                  of SFAS 123R
              
              
              —
              
              
              —
              
              
              (94
              )
              
              94
              
              
              —
              
              
              —
              
              
              —Employee
                  stock purchase plan
              
              
              24
              
              
              —
              
              
              62
              
              
              —
              
              
              —
              
              
              —
              
              
              62Issuance
                  of shares under restricted units
              
              
              40
              
              
              1
              
              
              (1
              )
              
              —
              
              
              —
              
              
              —
              
              
              —Issuance
                  of restricted shares
              
              
              30
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —Issuance
                  of shares for Galt acquisition
              
              
              978
              
              
              10
              
              
              3,042
              
              
              —
              
              
              —
              
              
              —
              
              
              3,052Stock
                  based compensation
              
              
              —
              
              
              —
              
              
              302
              
              
              —
              
              
              —
              
              
              —
              
              
              302Reclassification
                  adjustment for realized loss included in net earnings
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              39
              
              
              39Unrealized
                  loss on securities available for sale, net of taxes
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              (3
              )
              
              (3
              )Net
                  earnings for the period
              
              
              —
              
              
              —
              
              
              —
              
              
              —
              
              
              2,865
              
              
              —
              
              
              2,865BALANCE,
                  October 1, 2006
              
              
              33,080
              
              $
              331
              
              $
              72,028
              
              $
              —
              
              $
              49,789
              
              $
              (148
              )
              $
              122,000




The
      accompanying notes are an integral part of these statements.





8


**THERAGENICSCORPORATION
      AND SUBSIDIARIES**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
        1, 2006**
 **(Unaudited)**




**NOTE
      A - BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS**




The
      unaudited interim consolidated financial statements included herein reflect
      the
      consolidated operations of Theragenics Corporation and its
      wholly-owned subsidiaries, CP Medical Corporation and Galt Medical Corp. (the
      “Company”).
      All
      intercompany accounts and transactions have been eliminated in consolidation.
      These statements reflect all adjustments that are, in the opinion of management,
      necessary to present fairly the consolidated financial position, consolidated
      results of operations, consolidated cash flows and changes in shareholders’
equity for the periods presented. All such adjustments are of a normal recurring
      nature. Pursuant to the rules and regulations of the Securities and Exchange
      Commission for reporting on Form 10-Q, certain information and footnote
      disclosures normally included in financial statements prepared in accordance
      with accounting principles generally accepted in the United States of America
      have been condensed or omitted. These unaudited financial statements and notes
      should be read in conjunction with the audited financial statements and notes
      for the year ended December 31, 2005, included in the Form 10-K filed by the
      Company. The interim consolidated results of operations are not necessarily
      indicative of the results to be expected for a full year.




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 related products and
      services. The Company’s surgical products business consists of wound
      closure and other surgical products and supplies at CP Medical Corporation
      (“CP
      Medical”) and disposable medical devices utilized for vascular access at Galt
      Medical Corp (“Galt”). CP Medical produces sutures, cardiac pacing cables,
      brachytherapy needles and other surgical supplies. These products have
      applications in urology, veterinary, cardiology, orthopedics, plastic surgery,
      dental, and other fields. Galt’s current products include guidewires,
      micro-introducer kits and tear-away introducer sets and kits, and hemostasis
      valve introducer sets and kits. Galt primarily serves the interventional
      radiology and interventional cardiology markets.




**NOTE
      B - LICENSING FEES**




The
      Company holds a worldwide exclusive license from the University of Missouri
      (the
“University”)
      for the use of
      technology patented by the University, used in the Company’s
      TheraSphere ® product.
      The Company has granted certain of its geographical rights under the licensing
      agreement with the University to Nordion International, Inc. Under the Nordion
      agreement, the Company is entitled to licensing fees for each geographic area
      in
      which Nordion receives new drug approval. The 2006 periods include $400,000
      of
      one-time license fee revenue resulting from Nordion’s obtaining CE marking and
      European registration for TheraSphere® in the third quarter of 2006. The Company
      is also entitled to a percentage of revenues earned by Nordion as royalties
      under the agreement. License fee revenue is recognized in the periods to which
      they relate. Continuing license fees from TheraSphere® product sales are not
      expected to be material in the near future.




9


**THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
        1, 2006**
 **(Unaudited)**




**NOTE
      C –
      ACQUISITIONS**




The
      Company accounts for acquisitions under the purchase method of accounting,
      in
      accordance Financial Accounting Standards 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.




CP
      Medical




The
      Company acquired all of the outstanding common stock of CP Medical Corporation
      (“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
      Medical Corp.




The
      Company acquired all of the outstanding common stock and other equity interests
      of Galt Medical Corp. (“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. The per share value of the common stock issued
      was
      based upon the closing price of the common stock on the date of acquisition.
      The
      Company financed a portion of the purchase price with $7.5 million of borrowings
      under its $40.0 million credit facility. Galt develops, manufactures and markets
      disposable medical devices utilized for vascular access, primarily serving
      the
      interventional radiology and interventional cardiology 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.




10


**THERAGENICS
        CORPORATION AND SUBSIDIARIES**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
        1, 2006**
 **(Unaudited)**




Following
      is a summary of the preliminary 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.




$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 (see Note K). 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 CP Medical and Galt 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 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):




**Three
                  months ended**
              
              **Nine
                  months ended****October
                  1,**
                **2006**
              
              **October
                  2,**
                **2005**
              
              **October
                  1,**
                **2006**
              
              **October
                  2,**
                **2005**Revenue
              
              $
              15,058
              
              $
              14,081
              
              $
              45,294
              
              $
              41,564Net
                  earnings (loss)
              
              $
              1,662
              
              $
              (27,038
              )
              $
              3,425
              
              $
              (28,817
              )Earnings
                  per shareBasic:
              
              $
              0.05
              
              $
              (0.82
              )
              $
              0.10
              
              $
              (0.88
              )Diluted
              
              $
              0.05
              
              $
              (0.82
              )
              $
              0.10
              
              $
              (0.88
              )




Certain
      pro forma adjustments have been made to reflect the impact of the purchase
      transactions, primarily consisting of amortization of certain intangible assets,
      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 for the year to date periods for 2006
      and
      2005 also include non-recurring charges consisting of $474 and $341,
      respectively, for amortization of the fair market value adjustments for
      inventory and backlog.




11


**THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**October
      1, 2006**


**(Unaudited)**




**NOTE
      D - GOODWILL AND OTHER INTANGIBLE ASSETS**





Goodwill
      and trade names are assigned to business segments 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
      fair value of the reporting unit with its carrying value, including goodwill
      and
      other intangible assets that are not amortized. Impairment assessments are
      performed primarily using discounted cash flow analyses and the assumptions
      used
      in these analyses are consistent with the Company’s internal planning. The
      Company completed its annual impairment assessments in the fourth quarter of
      2005 after its annual forecasting and budgeting process, and determined that
      goodwill and other intangible assets were not impaired.




Changes
      in the carrying amount of goodwill for the nine months ended October 1, 2006
      are
      as follows (in thousands):




**Segment****Surgical
                  products**
              
              **Brachytherapy**
              
              **Total**Balance,
                  December 31, 2005
              
              $
              15,792
              
              $
              2,578
              
              $
              18,370Goodwill
                  acquired
              
              
              20,454
              
              
              —
              
              
              20,454Ending
                  balance, 10/1/06
              
              $
              36,246
              
              $
              2,578
              
              $
              38,824




Other
      intangible assets include the following (in thousands):




**October
                  1,**
                **2006**
              
              **December
                  31,**
                **2005**
              
              **Amortization**
                **Life**Trade
                  names
              
              $
              2,600
              
              $
              1,700
              
              
              indefiniteCustomer
                  relationships
              
              
              8,600
              
              
              3,500
              
              
              7.5
                  - 9 yearsNon-compete
                  agreements
              
              
              2,969
              
              
              1,269
              
              
              1-5
                  yearsDeveloped
                  technology
              
              
              1,260
              
              
              360
              
              
              7
                  - 14 yearsOther
              
              
              414
              
              
              248
              
              
              3
                  mos - 17 years15,843
              
              
              7,077Accumulated
                  amortization
              
              
              1,553
              
              
              689$
              14,290
              
              $
              6,388  At
          October 1, 2006, the weighted average life of intangible assets subject
          to
          amortization was 7.6 years.




12


**THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**October
      1, 2006**


**(Unaudited)**




As
      of
      October 1, 2006, future approximate aggregate amortization expense for
      intangible assets subject to amortization is as follows (in thousands):




**Twelve
                  months ending October 1,**2007
              
              $
              1,9412008
              
              
              1,8762009
              
              
              1,8602010
              
              
              1,6182011
              
              
              1,186Beyond
              
              
              3,209$
              11,690


**NOTE
      E - RESTRUCTURING**




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




Restructuring
      activities were completed in the second quarter of 2006. $369,000 of
      restructuring costs was incurred in the nine months ended October 1, 2006.
      These
      costs consisted primarily of the ongoing site exit and disposal costs associated
      with shutting down the PSP facility.




Activity
      during the nine months ended October 1, 2006 related to the above-described
      restructuring is summarized as follows: (in thousands):




**Total
                  amount**
                **expected
                  to be**
                **incurred**
              
              **Amount**
                **incurred**
                **in
                  2006**
              
              **Cumulative**
                **amount**
                **incurred
                  through**
                **October
                  1, 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
              
              
              903
              
              
              14
              
              
              903Site
                  exit and disposal costs
              
              
              712
              
              
              355
              
              
              712Other
              
              
              102
              
              
              —
              
              
              102$
              33,758
              
              $
              369
              
              $
              33,758


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




**Accrual
                  at**
                **December
                  31,**
                **2005**
              
              **Charged
                  to**
                **expenses**
              
              **Payments**
              
              **Accrual
                  at**
                **October
                  1,**
                **2006**Contract
                  termination costs
              
              $
              1,560
              
              $
              —
              
              $
              16
              
              $
              1,544Severance
              
              
              530
              
              
              14
              
              
              346
              
              
              198Site
                  exit and disposal activities
              
              
              —
              
              
              355
              
              
              355
              
              
              —




13
 **THERAGENICS
          CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**October
      1, 2006**


**(Unaudited)**




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 $22,000 and $23,000 classified as other
      current liabilities in the accompanying consolidated balance sheets at October
      1, 2006 and December 31, 2005, respectively, representing the current portion
      of
      the liability due.




Severance
      costs are vested in accordance with the terms of the severance agreements.
      Site
      exit and disposal activities related to shut down activities at the Oak Ridge
      facility and were expensed as incurred.




Assets
      held for sale of approximately $3.4 million at October 1, 2006, represents
      the
      estimated fair market value of the Oak Ridge facility to be disposed as a result
      of the restructuring.




**NOTE
      F - INVENTORIES**




Inventories
      are stated at the lower of cost or market. Cost is determined using the
      first-in, first-out (“FIFO”)
      method. Market
      is replacement cost or net realizable value. The Company estimates reserves
      for
      inventory obsolescence based on management’s judgment of future realization.
      Inventories as of October 1, 2006 and December 31, 2005 were comprised of the
      following (in thousands):




**October
                1,**
              **2006**
            
            **December
                31,**
              **2005**Raw
                materials
            
            $
            3,857
            
            $
            2,381Work
                in process
            
            
            1,209
            
            
            531Finished
                goods
            
            
            1,918
            
            
            1,422Spare
                parts and supplies
            
            
            897
            
            
            9217,881
            
            
            5,255Allowance
                for doubtful inventory
            
            
            (305
            )
            
            (213
            )Total
            
            $
            7,576
            
            $
            5,042




**NOTE
      G - ASSET RETIREMENT OBLIGATIONS**




Theragenics
      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):




**Nine
                  Months Ended****October
                  1,**
                **2006**
              
              **October
                  2,**
                **2005**Asset
                  retirement obligation at beginning of period
              
              $
              672
              
              $
              549Accretion
                  expense
              
              
              34
              
              
              15Revision
                  in estimated cash flows
              
              
              (157
              )
              
              47Asset
                  retirement obligation at end of period
              
              $
              549
              
              $
              611


14


**THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**October
      1, 2006**


**(Unaudited)**




**NOTE
      H - CREDIT AGREEMENT**




On
      June
      29, 2006, the Company amended its $40 million Credit Agreement with a financial
      institution (The “Credit Facility”), extending the expiration date of the Credit
      Facility to October 31, 2009. All other terms and conditions of the Credit
      Agreement remained substantially unchanged.  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 covenants at October 1, 2005.




In
      August
      2006, the Company borrowed $7.5 million under its Credit Facility. Interest
      on
      outstanding borrowings is payable monthly at LIBOR plus 1% (effective rate
      of
      6.33% at October 1, 2006).




**NOTE
      I - COMMITMENTS AND CONTINGENCIES**




Lease
      Commitments and Obligations




The
      Company leases equipment and production, warehouse, office and other space
      under
      non-cancelable leases that expire at various dates through June 2013.
      Approximate minimum lease payments under the leases are as follows (in
      thousands):




**Twelve
                  months ending October 1,**2007
              
              $
              5332008
              
              
              5272009
              
              
              4972010
              
              
              2822011
              
              
              184Beyond
              
              
              322$
              2,345





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




Rent
      expense was approximately $142,000 and $341,000 for the three and nine months
      ended October 1, 2006, respectively. Rent expense was approximately $125,000
      and
      $311,000 for the three and nine months ended October 2, 2005,
      respectively.




Contingencies




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




**NOTE
      J - SHARE-BASED COMPENSATION**




The
      Company provides stock-based compensation under equity incentive plans approved
      by stockholders, which provide for the granting of stock options, restricted
      stock and other equity incentives. As of October 1, 2006 there were 2,557,200
      options and restricted stock rights outstanding and 1,614,814 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.







15


**THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**October
      1, 2006**


**(Unaudited)**




The
      Company adopted Statement of Financial Accounting Standards No. 123R, *Share-Based
      Payment* (“SFAS
      123R”), effective January 1, 2006. SFAS 123R revises Statement of Financial
      Accounting Standards 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 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 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 will be recognized
      as the requisite service is rendered. 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 performance-based and 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.




Compensation
      cost for the portion of stock options outstanding at January 1, 2006 for which
      the requisite service period had not been rendered is recognized based on their
      grant date fair value as calculated for the pro forma disclosures under SFAS
      123. The performance-based and restricted stock and stock unit awards were
      previously recorded using fair value in a manner substantially equivalent to
      the
      accounting required under SFAS 123R. Accordingly, the adoption of SFAS 123R
      did
      not have a material effect on the Company’s results of operations, earnings per
      share or cash flows in the first nine months of 2006.




Stock
      Options




Stock
      options granted to date have had an exercise price at least equal to 100% of
      market value of the underlying common stock on the date granted. These options
      expire ten years from the date of grant and become exercisable over a three
      to
      five-year vesting period.




The
      following is a summary of activity in stock options outstanding during the
      nine
      months ended October 1, 2006 (shares in thousands):




**Shares**
            
            **Weighted**
              **average**
              **exercise**
              **price**
            
            **Weighted**
              **average**
              **remaining**
              **contractual**
              **life
                (yrs)**
            
            **Aggregate**
              **intrinsic**
              **value**Outstanding,
                beginning of period
            
            
            2,433
            
            $
            12.56
            
            
            5.2
            
            
            —Granted
            
            
            —
            
            
            —
            
            
            —
            
            
            —Exercised
            
            
            —
            
            
            —
            
            
            —
            
            
            —Forfeited
            
            
            1
            
            
            3.95
            
            
            8.9
            
            
            —Outstanding,
                end of period
            
            
            2,432
            
            $
            12.56
            
            
            4.8
            
            $
            —Exercisable
                at end of period
            
            
            2,349
            
            $
            12.69
            
            
            4.5
            
            $
            —






16


**THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**October
      1, 2006**


**(Unaudited)**




A
      summary
      of the status of the Company’s non-vested stock options as of October 1, 2006
      and changes during the nine months ended October 1, 2006 follows (shares in
      thousands):




**Non-vested
                shares**
            
            **Shares**
            
            **Weighted**
              **average
                grant**
              **date
                fair value**Non-vested
                at January 1, 2006
            
            
            140
            
            $
            2.03Granted
            
            
            —
            
            
            —Vested
            
            
            (55
            )
            
            2.30Forfeited
            
            
            (1
            )
            
            1.38Non-vested
                at October 1, 2006
            
            
            84
            
            $
            1.83









A
      summary
      of grant date fair values and intrinsic values follows (in thousands, except
      per
      share amounts):




**Nine
                Months Ended****October
                1,**
              **2006**
            
            **October
                2,**
              **2005**Grant
                date fair value of options granted
            
            
            N/A
            
            $
            1.38Intrinsic
                value of options exercised
            
            
            N/A
            
            $
            60Fair
                value of options vested
            
            $
            114
            
            
            N/A




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
      $15,000 and $46,000 during the three and nine months ended October 1, 2006,
      respectively. As of October 1, 2006, there was approximately $30,000 of
      unrecognized compensation cost related to nonvested stock options, which is
      expected to be recognized over a weighted average period of less than 1
      year.




Restricted
      Stock




In
      2003
      and 2004, the Company issued 7,000 shares of restricted stock annually to
      non-officer directors as a portion of director compensation, which vested one
      year after issuance. In 2005, the Board of Directors approved a change in
      director compensation effective January 1, 2005 that eliminated the granting
      of
      stock options and increased the number of restricted shares granted annually
      to
      each non-officer director to the lesser of 5,000 restricted shares or the number
      of shares calculated by dividing $50,000 by the closing market price of the
      Company’s common stock on the last business day preceding the date of the annual
      meeting, such shares to be granted on the date of the annual meeting. In May
      2005 and May 2006, the Company issued an aggregate of 35,000 and 20,000
      restricted shares, respectively, under this director compensation program.
      In
      August 2006, the Company issued 4,590 shares of restricted shares to a newly
      appointed director. These restricted shares vest ratably over three years.
      In
      August 2006, the Company also issued 5,000 shares of restricted stock, which
      vests two years after issuance, to an employee.




Compensation
      cost related to the restricted shares is based on the grant date fair value
      of
      the common stock granted. The weighted average per share grant date fair value
      of restricted shares issued was $3.24 in 2006 and $3.45 for 2005. Compensation
      expense is recorded over the requisite service period and totaled $18,000 and
      $93,000 for the three and nine months ended October 1, 2006, respectively.
      The
      Company recognized $17,000 and $37,000 of compensation expense related to these
      restricted shares for the three and nine months ended October 2, 2005,
      respectively. As of October 1, 2006, there was approximately $97,000 of
      unrecognized compensation cost related to the restricted shares, which is
      expected to be recognized through May 2009. 21,668 restricted shares vested
      during the nine months ended October 1, 2006. 37,922 restricted shares were
      unvested as of October 1, 2006.


17


**THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**October
      1, 2006**


**(Unaudited)**




Stock
      Rights




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




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




Under
      SFAS 123R, the Company’s Performance Stock Rights based on TSR would be
      considered to be based on a “market condition”, as defined in SFAS 123R. Under
      SFAS 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 Stock Rights under
      SFAS No. 123R, in November 2005 the Board of Directors revised the outstanding
      Performance Stock Rights held by current executive officers. The revision
      includes termination of the performance cycle for measuring TSR under the
      outstanding Performance Stock Rights held by current executive officers as
      of
      December 31, 2005. As a result, the number of shares to be issued upon vesting
      was determined based on TSR through December 31, 2005. Vesting remains
      conditioned on continued employment through the original term of the award,
      subject to acceleration in certain events as set forth in the original award.
      Terms of Performance Stock Rights outstanding and held by former employees
      were
      not changed, and continue to be subject to a minimum of 0.30 and maximum of
      2
      shares per Performance Stock Right, based on TSR.




In
      February 2006, the Board of Directors approved the issuance of 104,000
      Performance Stock Rights to executive officers, which vest on December 31,
      2008.
      The number of common shares issuable upon vesting of each Performance
      Stock Right is subject to a minimum of 31,200 shares and a maximum of
      208,000 shares, and will be partly based on the Company’s revenue and earnings
      per share from 2006 to 2008, relative to its strategic objectives over the
      same
      period, and partly based on the subjective discretion of the Board of Directors.
      The grant date fair value of the Performance Stock Rights 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 Performance Stock rights
      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 Performance Stock Rights 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. In addition, the fair value of Performance Stock Rights
      subject to discretionary performance conditions is estimated assuming the
      maximum number of shares issuable, until such time that the actual number of
      shares can be determined.




Compensation
      cost related to Stock Rights issued to employees totaled $43,000 and $152,000
      for the three and nine months ended October 1, 2006, respectively, and $47,000
      and $126,000 for the three and nine months ended October 2, 2005, respectively.
      As of October 1, 2006 there was approximately $342,000 of unrecognized
      compensation related to Stock Rights issued to employees, which is expected
      to
      be recognized over a weighted average period of 1.8 years.


18
 **THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**October
      1, 2006**


**(Unaudited)**




A
      summary
      of Stock Rights outstanding at October 1, 2006 follows:




****
              ****
              ****
              ****
              **Common
                  shares issuable**
              ****
              ****
              ******Rights**
                **outstanding**
              ****
              **Vesting
                  date**
                **December
                  31,**
              ****
              **Minimum**
              ****
              **Maximum**
              ****
              **Weighted
                  average**
                **grant
                  date**
                **fair
                  value**53,508
              
              
              2006
              
              
              23,052
              
              
              34,116
              
              $
              3.9143,668
              
              
              2007
              
              
              26,750
              
              
              29,586
              
              $
              3.67104,000
              
              
              2008
              
              
              31,200
              
              
              208,000
              
              $
              3.05




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 $3,000 and
      $10,000 for the three and nine months ended October 1, 2006,
      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 all periods presented (in thousands, except per share data):




**Three
                  months ended**
              
              **Nine
                  months ended****October
                  1,**
                **2006**
              
              **October
                  2,**
                **2005**
              
              **October
                  1,**
                **2006**
              
              **October
                  2,**
                **2005**Net
                  earnings (loss), as reported
              
              $
              1,657
              
              $
              (27,238
              )
              $
              2,865
              
              $
              (28,770
              )Add:
                  Stock-based compensation as reported, net of related tax
                  benefit
              
              
              
              
              
              53
              
              
              
              
              
              133Less:
                  Total stock based compensation expense determined under fair value
                  method
                  for all stock options, net of related tax benefit
              
              
              —
              
              
              (79
              )
              
              —
              
              
              (212
              )Pro
                  forma net earnings (loss)
              
              $
              1,657
              
              $
              (27,264
              )
              $
              2,865
              
              $
              (28,849
              )Basic
                  and diluted earnings (loss) per share:As
                  reported
              
              $
              .05
              
              $
              (0.85
              )
              $
              0.09
              
              $
              (0.93
              )Pro
                  forma
              
              $
              .05
              
              $
              (0.85
              )
              $
              0.09
              
              $
              (0.93
              )




The
      weighted average fair value of the options granted during the first quarter
      of
      2005 was $1.38. The Company has not granted any stock options after the first
      quarter of 2005. The fair values were estimated using the Black-Scholes
      options-pricing model with the following weighted average
      assumptions:




Expected
                dividend yield
            
            
            0.0
            %Expected
                stock price volatility
            
            
            45.8
            %Risk-free
                interest rate
            
            
            3.0
            %Expected
                life of option (years)
            
            
            3.1




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.


19


**THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**October
      1, 2006**


**(Unaudited)**




**NOTE
      K - INCOME TAXES**




Income
      tax expense for 2006 periods includes deferred income taxes related to the
      portion of goodwill and trade names that are deductible for income tax purposes
      and for which the timing of the corresponding deduction for financial reporting
      purposes cannot be determined. The deferred tax liability of $873,000 at October
      1, 2006 also relates to these items and acquired intangible assets which have
      no
      tax basis and for which the timing of the deduction for financial reporting
      purposes cannot be determined.




Income
      tax expense for all periods presented is lower than income taxes as computed
      at
      the statutory rates, primarily due to the utilization of net operating loss
      carryforwards that were not recognized in previous periods. 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, and the uncertainty of projecting future taxable income
      sufficient to recognize these deferred tax assets, a valuation allowance for
      the
      full amount of the net deferred tax asset was recorded. Approximately $1.5
      million of the valuation allowance was reduced in the nine months ended October
      1, 2006, reducing income tax expense by that amount and reflecting the
      utilization of a portion of the net operating loss carryforwards. In addition,
      $2.9 million of deferred income tax liability arising from the 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 in the third quarer
      of
      2006.  While the Company was profitable in the first nine months of 2006,
      management believes that the Company must continue to establish a track record
      of profitability before recognizing tax benefits associated with future taxable
      income. Accordingly, at October 1, 2006, a valuation allowance related to $2.4
      million of net deferred tax assets, exclusive of the deferred tax liability
      related to temporary differences in intangible assets with indeterminate lives
      that are not amortized for financial statement purposes, has been recorded.
      If
      the Company is successful in establishing a basis for justifying that an
      allowance is not necessary, these benefits will be recognized at that time.




**NOTE
      L - 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, 2007, and
      will be automatically extended for one additional year unless either party
      gives
      notice of its intent not to extend by December 31, 2006. The Bard Agreement
      gives Bard the non-exclusive right to distribute the TheraSeed ® device
      in the U.S., Canada, and other international locations for the treatment of
      prostate cancer and other solid localized cancerous tumors. A distribution
      agreement with Medi-Physics, Inc. (formerly d/b/a Nycomed Amersham and part
      of
      Oncura) terminated on September 8, 2005.




*Major
      Customers*




Sales
      to
      Bard represented approximately 58% and 61% of total brachytherapy seed product
      revenue, and approximately 35% and 40% of consolidated revenue, for the three
      and nine months ended October 1, 2006, respectively. For the three and nine
      months ended October 2, 2005, sales to Bard and Oncura represented approximately
      68% and 73% of total brachytherapy product revenue, respectively.




Accounts
      receivable from Bard represented approximately 55% of brachytherapy accounts
      receivable and 35% of consolidated accounts receivable at October 1, 2006.
      At
      December 31, 2005, accounts receivable from Bard represented approximately
      52%
      of brachytherapy accounts receivable and 39% of consolidated accounts
      receivable.


20


**THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**October
      1, 2006**


**(Unaudited)**




For
      the
      nine months ended October 1, 2006, two customers totaled 20% of surgical
      products sales with each customer equaled to 10% of surgical product
      sales. For the three months ended October 1, 2006, no customers exceeded 10%
      of
      surgical products sales. No customers exceeded 10% of surgical products accounts
      receivable at October 1, 2006, and one customer totaled 24% of surgical products
      accounts receivable at December 31, 2005.




**NOTE
      M - SEGMENT REPORTING**




*Segment
      Reporting*




The
      Company operates in two segments, the brachytherapy seed segment and the
      surgical products segment. The brachytherapy seed segment is comprised of the
      Company’s TheraSeed ® and
      I-Seed products as well as related products and services. The surgical products
      segment manufactures and distributes wound closure, needles and other surgical
      products used in the urology, veterinary, orthopedic and other markets through
      CP Medical, and disposable medical devices used for vascular access through
      Galt. The following tables provide certain segment information for the three
      and
      nine months ended October 1, 2006 and October 2, 2005 (amounts in
      thousands):





**Three
                Months Ended**
            
            **Nine
                Months Ended****October
                1,**
              **2006**
            
            **October
                2,**
              **2005**
            
            **October
                1,**
              **2006**
            
            **October
                2,**
              **2005**RevenuesBrachytherapy
                seed
            
            $
            9,248
            
            $
            9,076
            
            $
            26,866
            
            $
            27,889Surgical
                products
            
            
            5,112
            
            
            2,933
            
            
            12,573
            
            
            5,031Intersegment
                eliminations
            
            
            (40
            )
            
            (7
            )
            
            (135
            )
            
            (7
            )$
            14,320
            
            $
            12,002
            
            $
            39,304
            
            $
            32,913Restructuring
                expensesBrachytherapy
                seed
            
            $
            —
            
            $
            32,915
            
            $
            369
            
            $
            32,915Surgical
                products
            
            
            —
            
            
            —
            
            
            —
            
            
            —$
            —
            
            $
            32,915
            
            $
            369
            
            $
            32,915Gain
                on sale of assetsBrachytherapy
                seed
            
            $
            —
            
            $
            —
            
            $
            199
            
            $
            —Surgical
                products
            
            
            —
            
            
            —
            
            
            2
            
            
            —$
            —
            
            $
            —
            
            $
            201
            
            $
            —Earnings
                (loss) from operationsBrachytherapy
                seed
            
            $
            1,708
            
            $
            (33,585
            )
            $
            1,647
            
            $
            (37,182
            )Surgical
                products
            
            
            140
            
            
            602
            
            
            977
            
            
            1,107Intersegment
                eliminations
            
            
            (20
            )
            
            —
            
            
            (33
            )
            
            —$
            1,828
            
            $
            (32,983
            )
            $
            2,591
            
            $
            (36,075
            )Capital
                expendituresBrachytherapy
                seed
            
            $
            14
            
            $
            114
            
            $
            100
            
            $
            270Surgical
                products
            
            
            361
            
            
            47
            
            
            463
            
            
            68$
            375
            
            $
            161
            
            $
            563
            
            $
            338Depreciation
                and amortizationBrachytherapy
                seed
            
            $
            1,009
            
            $
            1,632
            
            $
            3,013
            
            $
            5,143Surgical
                products
            
            
            554
            
            
            203
            
            
            982
            
            
            344$
            1,563
            
            $
            1,835
            
            $
            3,995
            
            $
            5,487






21


**THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
        1, 2006**
 **(Unaudited)**




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




**October
                1,**
              **2006**
            
            **December
                31,**
              **2005**Identifiable
                assetsBrachytherapy
                seed
            
            $
            137,525
            
            $
            120,485Surgical
                products
            
            
            68,245
            
            
            29,191Intersegment
                eliminations
            
            
            (68,844
            )
            
            (27,612
            )$
            136,926
            
            $
            122,064GoodwillBrachytherapy
                seed
            
            $
            2,578
            
            $
            2,578Surgical
                products
            
            
            36,246
            
            
            15,792$
            38,824
            
            $
            18,370Other
                intangible assetsBrachytherapy
                seed
            
            $
            8
            
            $
            29Surgical
                products
            
            
            14,282
            
            
            6,359$
            14,290
            
            $
            6,388




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




**Three
                Months Ended**
            
            **Nine
                Months Ended****October
                1,**
              **2006**
            
            **October
                2,**
              **2005**
            
            **October
                1,**
              **2006**
            
            **October
                2,**
              **2005**United
                States
            
            $
            13,346
            
            $
            11,462
            
            $
            37,328
            
            $
            32,045Europe
            
            
            435
            
            
            392
            
            
            1,081
            
            
            651Other
                foreign countries
            
            
            539
            
            
            148
            
            
            895
            
            
            217$
            14,320
            
            $
            12,002
            
            $
            39,304
            
            $
            32,913




Foreign
      sales are attributed to countries based on location of the
      customer. For
      the
      three and nine months ended October 1, 2006, $400,000 of revenue from other
      foreign countries represents one-time license fee revenue. (See Note B.) The
      remaining other foreign sales relate to the surgical products segment. All
      of
      the Company’s long-lived assets are located within the United States.




**NOTE
      N – EARNINGS
      PER SHARE**




Basic
      earnings per share represents net earnings divided by the weighted average
      shares outstanding. Diluted earnings per share represents net earnings divided
      by weighted average shares outstanding adjusted for the incremental dilution
      of
      outstanding stock options and awards. A reconciliation of weighted average
      common shares outstanding to weighted average common shares outstanding assuming
      dilution for the periods presented follows (in thousands, except per share
      data):




**Quarter
                  ended**
              
              **Nine
                  months ended****October
                  1,**
                **2006**
              
              **October
                  2,**
                **2005**
              
              **October
                  1,**
                **2006**
              
              **October
                  2,**
                **2005**Net
                  earnings
              
              $
              1,657
              
              $
              (27,238
              )
              $
              2,865
              
              $
              (28,770
              )Weighted
                  average common shares outstanding
              
              
              32,752
              
              
              31,915
              
              
              32,293
              
              
              31,024Incremental
                  common shares issuable under stock options and awards
              
              
              70
              
              
              —
              
              
              75
              
              
              —Weighted
                  average common shares outstanding assuming dilution
              
              
              32,822
              
              
              31,915
              
              
              32,368
              
              
              31,024Earnings
                  per shareBasic
              
              $
              0.05
              
              $
              (0.85
              )
              $
              0.09
              
              $
              (0.93
              )Diluted
              
              $
              0.05
              
              $
              (0.85
              )
              $
              0.09
              
              $
              (0.93
              )




22


**THERAGENICS
      CORPORATION AND SUBSIDIARIES**


**NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **October
        1, 2006**
 **(Unaudited)**




For
      the
      quarter and nine months ended October 1, 2006, common stock equivalents from
      2,432,733 stock options were not included in the diluted earnings per share
      calculation because their effect is antidilutive. For the quarter and nine
      months ended October 2, 2005, common stock equivalents from 2,631,569 stock
      options were not included in the diluted earnings per share calculation because
      their effect is antidilutive.




**NOTE
      O –
      RECENTLY ISSUED ACCOUNTING STANDARD**




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.
      The
      Company is currently evaluating FIN 48 and the potential impact on its financial
      statements has not been determined.




In
      September 2006, the FASB issue 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.
      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 Securities and Exchange Commission (“SEC”) issued Staff
      Accounting Bulletin 108, “Considering the Effects of Prior Year Misstatements
      when Quantifying Misstatements in Current Year Financial Statements” (“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. The guidance in SAB 108 must be applied to annual
      financial statements for fiscal years ending after November 15, 2006. 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.





23


**Item
      2.** **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 other surgical products and supplies at CP Medical
      Corporation (“CP Medical”) and disposable medical devices utilized for vascular
      access at Galt Medical Corp (“Galt”). CP Medical produces sutures, cardiac
      pacing cables, brachytherapy needles and other surgical supplies. These products
      have applications in urology, veterinary, cardiology, orthopedics, plastic
      surgery, dental, and other fields. Galt’s current products include guidewires,
      micro-introducer kits and tear-away introducer sets and kits, and hemostasis
      valve introducer sets and kits. Galt primarily serves the interventional
      radiology and interventional cardiology markets.




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 financed a portion of the Galt purchase
      price with $7.5 million of borrowings under its $40.0 million credit facility.
      The Company’s consolidated results of operations include the results of CP
      Medical and Galt subsequent to their respective dates of acquisition.




***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 vascular, macular degeneration and breast cancer areas, and eliminated
      production of radiochemical products. Significant restructuring charges were
      recorded in the third quarter of 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. As a result, restructuring charges
      of
      approximately $32.9 million were recorded in the third quarter of 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. Assets
      held for sale of $3.4 million are included in the accompanying consolidated
      balance sheet at October 1, 2006.




The
      restructuring generated pre-tax operating expense savings, as compared to the
      Company’s run rates prior to the restructuring, of approximately $2.1 million,
      including cash-based savings of $1.5 million, in the third quarter of 2006
      and
      $6.3 million, including cash-based savings of $4.3 million, for the nine month
      period. For the full year of 2006, the Company expects pre-tax operating expense
      savings to exceed its original estimate of approximately $6.5 million to $7.0
      million, including pre-tax cash savings of approximately $4.0 million to $4.4
      million.




The
      Company recognized gains on the sale of assets of $201,000 in first quarter
      of
      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.




24


***Results
      of Operations***




***Revenue***




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




**Quarter
                Ended**
            
            **Nine
                Months Ended****October
                1,**
              **2006**
            
            **October
                2,**
              **2005**
            
            **Change**
              **(%)**
            
            **October
                1,**
              **2006**
            
            **October
                2,**
              **2005**
            
            **Change**
              **(%)**BrachytherapyContinuing
                revenue
            
            $
            8,848
            
            $
            9,076
            
            
            (2.5
            )%
            $
            26,466
            
            $
            27,889
            
            
            (5.1
            )%One-time
                license fees
            
            
            400
            
            
            —
            
            
            n/a
            
            
            400
            
            
            —
            
            
            n/aTotal
                Brachytherapy
            
            
            9,248
            
            
            9,076
            
            
            1.9
            %
            
            26,866
            
            
            27,889
            
            
            (3.7
            )%Surgical
                products
            
            
            5,072
            
            
            2,926
            
            
            73.3
            %
            
            12,438
            
            
            5,024
            
            
            147.6
            %Consolidated
            
            $
            14,320
            
            $
            12,002
            
            
            19.3
            %
            $
            39,304
            
            $
            32,913
            
            
            19.4
            %




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 received in the third
      quarter. The licensing agreement provides for continuing license fees from
      European and U.S. product sales of TheraSphere®, though we do not expect
      continuing license fees 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. The third quarter of 2006 includes $1.7 million
      of
      revenue from Galt, which was acquired in August 2006, and an increase in revenue
      at CP Medical of $500,000, or 17%, over the third quarter of 2005. The year
      to
      date revenue increase in surgical products is due to the acquisition of Galt
      in
      August 2006, and the inclusion of CP Medical for the entire year in 2006.




Excluding
      the one-time license fee revenue, brachytherapy sales decreased 2.5% in the
      third quarter of 2006 and 5.1% in the first nine months, as compared to the
      2005
      periods. These decreases primarily reflect softness in sales to our primary
      distributor. Sales to this distributor decreased 6% in the third quarter and
      5%
      in the nine month period compared to the respective 2005 periods. Decreases
      from
      the loss of another distributor in late 2005 were partially offset by increases
      in direct sales during the 2006 periods. The
      Company maintains its own internal brachytherapy sales force that sells
      TheraSeed ® and
      I-Seed directly to hospitals and physicians. The
      third
      quarter of 2006 was the eleventh consecutive quarter of increased direct unit
      sales. The average selling price of the TheraSeed® device during the 2006
      periods was comparable to the corresponding 2005 periods.




The
      Company has a non-exclusive distribution agreement in place with C. R. Bard
      (“Bard”) for the distribution of the TheraSeed ® device,
      which is effective through December 31, 2007 (the “Bard Agreement”). The terms
      of the Bard Agreement provide for automatic one year extensions of the term,
      unless either party gives notice of its intent not to renew at least twelve
      months prior to the end of the current term. The current term expires on
      December 31, 2007, and will be automatically extended for one additional year
      unless either party gives notice of its intent not to extend by December 31,
      2006. The Company also had a non exclusive distribution agreement in place
      with
      Oncura, a company formed by a merger of the brachytherapy business of Amersham
      plc and Galil Medical Ltd. (the “Oncura Agreement”). In December 2004, Oncura
      notified the Company that it would not be renewing its distribution agreement
      effective December 31, 2005 and subsequently, the Oncura Agreement was
      terminated effective September 8, 2005. The Company’s direct sales force has
      aggressively marketed TheraSeed ® to
      customers of Oncura in an effort to retain the business.




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, changes and uncertainties regarding Medicare
      reimbursement, declining prices for iodine-125 and palladium-103 seeds,
      competitors’ selling tactics and the effects of consolidation in the industry.
      Additionally on November 1, 2006, the Centers for Medicare and Medicaid Services
      posted a final rule with payment rates for brachytherapy seeds for Medicare’s hospital 
      outpatient prospecrtive payment system in calendar year 2007.  See “*Medicare
      Developments”* below. 
      At any point in time, Theragenics and/or its non-exclusive distributors may
      change their respective pricing policies for the TheraSeed ® or
      I-Seed (in the case of Theragenics) device in order to take advantage of market
      opportunities or respond to competitive situations. Responding to market
      opportunities and competitive situations could have an adverse effect on average
      selling prices and could have a favorable effect or prevent an unfavorable
      effect on market share and volumes. Conversely, the Company and its
      non-exclusive 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.




25


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




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




**Quarter
                Ended**
            
            **Nine
                Months Ended****October
                1, 2006**
            
            **October
                2, 2005**
            
            **Change**
              **($)**
            
            **October
                1, 2006**
            
            **October
                2,2005**
            
            **Change**
              **($)**BrachytherapyOperating
                income (loss)
            
            $
            1,708
            
            $
            (33,585
            )
            $
            35,293
            
            $
            1,647
            
            $
            (37,182
            )
            $
            38,829One-time
                license fees
            
            
            (400
            )
            
            —
            
            
            (400
            )
            
            (400
            )
            
            —
            
            
            (400
            )Restructuring
                related items
            
            
            —
            
            
            32,915
            
            
            (32,915
            )
            
            170
            
            
            32,915
            
            
            (32,745
            )Other
                severance
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            731
            
            
            (731
            )Brachytherapy
                excluding special items
            
            
            1,308
            
            
            (670
            )
            
            1,978
            
            
            1,417
            
            
            (3,536
            )
            
            4,953Surgical
                products
            
            
            140
            
            
            602
            
            
            (462
            )
            
            977
            
            
            1,107
            
            
            (130
            )Intersegment
                eliminations
            
            
            (20
            )
            
            —
            
            
            (20
            )
            
            (33
            )
            
            —
            
            
            (33
            )Operating
                income (loss)Consolidated
            
            $
            1,828
            
            $
            (32,983
            )
            $
            34,811
            
            $
            2,591
            
            $
            (36,075
            )
            $
            38,666Excluding
                special items
            
            $
            1,428
            
            $
            (68
            )
            $
            1,496
            
            $
            2,361
            
            $
            (2,429
            )
            $
            4,790




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 the
      2006
      periods 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 52.9% in
      the
      third quarter of 2006 and 52.4% for the first nine months of the year, with
      costs of manufacturing totaling $4.1 million and $12.3 million for the quarter
      and nine month period, respectively. Gross margins in the brachytherapy seed
      business are dependent on sales levels, due to the high fixed cost component
      of
      the business. The 2006 cost of manufacturing expenses are representative of
      what
      management expects going forward. Operating income before special items in
      the
      2006 periods also improved from 2005 as a result of decreases in advertising
      and
      bad debt expense.




Operating
      income in the surgical products segment decreased by $461,000 in the third
      quarter and $130,000 in the first nine months of the year, compared to the
      2005
      periods. The third quarter of 2006 includes $317,000 of amortization of
      purchased intangibles and inventory related to the Galt acquisition that will
      not recur after fourth quarter of 2006. The 2006 periods also reflect higher
      personnel and other costs at CP Medical to support increased capacity and
      anticipated future growth, and increases in professional fees resulting from
      Sarbanes-Oxley related compliance costs.




26


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 TheraSight trial, in accordance with
      the FDA-approved protocol for this trial. Research and development expenses
      in
      the surgical products business may increase significantly in future periods
      as
      investments are made in product development to address growth opportunities
      at
      CP Medical and Galt.




***Other***




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 $44,000 in third quarter of 2005 to $114,000
      in 2006, and from $144,000 in the first nine months of 2005 to $249,000 in
      2006.
      The increases are 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 October
      1,
      2006. The Company expects to maintain borrowings under its credit facility
      to
      provide flexibility for diversification. Accordingly, interest expense is
      expected to increase in future periods due to these outstanding borrowings,
      and
      will also be impacted by increases or decreases in the interest rate in the
      borrowings.




Income
      tax expense for all periods presented is lower than income tax expense at the
      statutory rates, primarily due to the utilization of net operating loss
      carryforwards that were not recognized in previous periods. Income tax expense
      for the three and nine months ended October 1, 2006 also includes deferred
      income taxes related to the portion of goodwill and trade names that are
      deductible for income tax purposes and for which the timing of the corresponding
      deduction for financial reporting purposes cannot be determined.




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, and the uncertainty of projecting future taxable
      income sufficient to recognize these deferred tax assets, a valuation
      allowance for the full amount of the net deferred tax asset was recorded.
      Approximately $1.5 million of the valuation allowance was reduced in the nine
      months ended October 1, 2006, reducing income tax expense by that amount and
      reflecting the utilization of a portion of the net operating loss carryforwards.
      In addition, $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 in the third quarter
      of
      2006. While the Company was profitable in the first three quarters of 2006,
      management believes that the Company must continue to establish a track record
      of profitability before recognizing tax benefits associated with future taxable
      income. Accordingly, a valuation allowance for the full amount of the $2.4
      million in net deferred tax assets, exclusive of the deferred tax liabilities
      related to temporary differences in intangible assets with indeterminate lives
      that are not amortizerd for financial statement purposes, at October 1 2006
      has been recorded. If the Company is successful in establishing a basis for
      justifying that an allowance is not necessary, then these benefits will be
      recognized at that time.




***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:




27


*Property,
      plant and equipment* .
      Property, plant and equipment are recorded at cost and depreciated on a
      straight-line basis over the estimated useful lives of such assets. The
      Company’s estimates can result in differences from the actual useful lives of
      certain assets. As of October 1, 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. It is possible that Management’s
      estimates concerning the realizability of the Company’s depreciable assets could
      change in the future.




*Goodwill* .
      The
      Company has $38.8 million of goodwill associated with its acquisitions of CP
      Medical, Galt and its iodine-125 production line. 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 market 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.




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. The most
      recent assessment was performed in the fourth quarter of 2005 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 $595,000, was approximately $8.9 million
      as of
      October 1, 2006.






28




*Share-based
        compensation* .
        In
        February 2006, the Company granted certain Performance Stock Rights to executive
        officers, which vest on December 31, 2008. The number of common shares issuable
        upon vesting of each Performance Stock Right is subject to a minimum of
        31,200 shares and a maximum of 208,000 shares, and will be partly based on
        the
        Company’s revenue and earnings per share from 2006 to 2008, relative to its
        strategic objectives over the same period, and partly based on the subjective
        discretion of the Board of Directors. The grant date fair value of the
        Performance Stock Rights 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 Performance Stock Rights containing performance conditions,
        the
        grant date fair value is adjusted each period for the number of shares
        ultimately expected to be issued. To the extent that the number of shares
        issuable varies significantly from period to period, the Company may record
        additional compensation expense or adjust previously recorded compensation
        expense to reflect current estimates. For the portion of the Performance
        Stock
        Rights 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. In
        addition, the fair value of Performance Stock Rights subject to discretionary
        performance conditions is estimated assuming the maximum number of shares
        issuable, until such time that the actual number of shares can be determined.
        To
        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.




A
      full
      valuation reserve related to the $2.4 million net deferred tax asset, exclusive
      of the deferred tax liability related to temporary differences in intangible
      assets with indeterminate lives that are not amortized for financial statement
      purposes, has been provided as of October 1, 2006. In the future, if sufficient
      evidence of the Company’s ability to generate adequate future taxable income
      becomes apparent, the valuation allowance may be required to be reduced. This
      would result in income tax benefits being recognized in the consolidated
      statement of operations. Management evaluates the realizability of the deferred
      tax assets and assesses the need for the valuation allowance each reporting
      period.




***Commitments
        and Other Contractual Obligations***
  **Operating
        Leases**
  The
        Company leases equipment and production, warehouse, office and other space
        under
        non-cancelable leases that expire at various dates through April 2010.
        Approximate minimum payments of these obligations are as follows:
  
 Obligation
                  (in thousands)
              
              Payments
                  due for twelve months ending October 1,Total
              
              2007
              
              2008
              
              2009
              
              2010
              
              2011
              
              ThereafterRental
                  Space and equipment
              
              $
              1,758
              
              $
              370
              
              $
              364
              
              $
              334
              
              $
              184
              
              $
              184
              
              $
              322Production,
                  office and warehouse space - related party (1)
              
              
              587
              
              
              163
              
              
              163
              
              
              163
              
              
              98
              
              
              -
              
              
              -Total
                  operating lease obligations
              
              $
              2,345
              
              $
              533
              
              $
              527
              
              $
              497
              
              $
              282
              
              $
              184
              
              $
              322
 
 
 (1)
        - CP Medical leases production, warehouse and office space from an entity
        controlled by the former owner of CP Medical, who is currently an officer
        and
        stockholder of Theragenics. Monthly payments of approximately $13,600 are
        due under this lease through April 2010 and are included in the above lease
        commitments.
 
 29




***New
        Accounting Pronouncements***
  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.
        The
        Company is currently evaluating FIN 48 and the potential impact on its financial
        statements has not been determined.
  In
        September 2006, the FASB issue 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.
        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 Securities and Exchange Commission (“SEC”) issued Staff
        Accounting Bulletin 108, “Considering the Effects of Prior Year Misstatements
        when Quantifying Misstatements in Current Year Financial Statements” (“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. The guidance in SAB 108 must be applied to annual
        financial statements for fiscal years ending after November 15, 2006.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




***Liquidity
      and Capital Resources***




The
      Company had cash, short-term investments and marketable securities of $29.0
      million at October 1, 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 decrease in cash, short-term investments and
      marketable securities was primarily the result of cash used in the Galt
      acquisition, partially offset by cash generated from operations and borrowings
      under the Company’s credit facility.




Working
      capital was $47.4 million at October 1, 2006, compared to $60.3 million at
      December 31, 2005. The decrease in working capital was a result of cash used
      for
      the acquisition of Galt, partially offset by cash generated from operations
      and
      increases in other current assets. The Company also has a Credit Agreement
      which
      expires in October 2009 with a financial institution that provides for revolving
      borrowings of up to $40.0 million, including a $5.0 million sub-limit for
      letters of credit, through a credit facility. As of October 1, 2006, there
      was
      $7.5 million outstanding under the Credit Agreement and letters of credit
      totaling $876,000 were outstanding. Interest on outstanding borrowings is
      payable monthly at LIBOR plus 1% (effective rate of 6.3% at October 1, 2006).
      The Credit Agreement is unsecured, but provides for a “springing lien” to be
      established on substantially all of the assets of the Company (subject to
      certain exceptions) in the event certain events of default occur under the
      Credit Agreement. The Credit Agreement, as amended, contains representations
      and
      warranties, as well as affirmative, reporting and negative covenants, customary
      for financings of this type. Among other things, certain provisions of the
      Credit Agreement limit the incurrence of additional debt and require the
      maintenance of certain financial ratios and tests.




Cash
      provided by operations was $5.9 million and $2.4 million during the nine months
      ended October 1, 2006 and October 2, 2005, respectively. Cash provided by
      operations consists of net earnings/(loss) plus non-cash expenses such as
      depreciation, amortization, and stock based compensation, and changes in balance
      sheet items such as accounts receivable, inventories, prepaid expenses and
      payables. Accounts receivable and inventories increased $432,000 and $685,000
      respectively, during the first nine months of 2006 as a result of increased
      sales volume in the surgical products segment. Trade accounts payable, accrued
      salaries, wages and payroll taxes, and other current liabilities decreased
      an
      aggregate of $407,000 during the first nine months of 2006 primarily as a result
      of the timing of the payments.




Cash
      used
      by investing activities was $9.4 million and $19.6 million during the nine
      months ended October 1, 2006 and October 2, 2005, respectively. The Company
      used
      $29.6 million for the acquisition of Galt Medical in 2006 and $20.6 million
      for
      the acquisition of CP Medical in 2005. Cash was also used for capital
      expenditures, totaling $563,000 and $338,000 during the first nine months of
      2006 and 2005, respectively. These uses of cash were partially offset by
      proceeds from the maturities and sales of marketable securities.





30


Cash
      provided by financing activities was $7.6 million and $112,000 in the first
      nine
      months of 2006 and 2005, respectively. In 2006, $7.5 million was borrowed under
      the Company’s $40.0 million credit facility.




Cash
      could be used in 2006 for increased marketing and brachytherapy support
      activities, support for growth in the surgical products segment, and in the
      pursuit of additional diversification such as the purchase of technologies,
      products or companies.




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.




***Medicare
      Developments***




On
        November 1, 2006, the Centers for Medicare and Medicaid Services (“CMS”) posted
        a final rule with payment rates for brachytherapy seeds for Medicare's hospital
        outpatient prospective payment system (“OPPS”) in calendar year 2007. CMS will
        continue to use Medicare's existing codes and continue to reimburse for
        brachytherapy seeds on the basis of the number, type and intensity of seeds
        prescribed to treat each patient.
  CMS
        established prospective payment rates for all types of brachytherapy seeds,
        including separate payment rates for palladium-103 (such as TheraSeed®) and
        iodine-125 (such as I-Seed). CMS will not bundle reimbursement for brachytherapy
        seeds with reimbursement for other supplies or services associated with the
        brachytherapy procedure. CMS determined these rates by calculating the median
        cost for seeds from a subset of hospital claims submitted to Medicare for
        reimbursement. In determining these rates, CMS did not distinguish between
        the
        various configurations of seeds (for example, loose seeds versus stranded
        seeds)
        prescribed for each patient. These rates are the per seed rates at which
        hospitals would be reimbursed, regardless of whether a hospital's actual
        purchase cost is higher or lower. Additionally, the rule provides for the
        prospective payment rate to be updated annually. The new payment rates under
        Medicare’s OPPS for brachytherapy seeds in 2007 does not affect reimbursement in
        an Ambulatory Surgery Center (“ASC”) setting. Medicare reimbursement for
        brachytherapy seeds under an ASC setting will continue to be made at cost
        for
        2007.
  Since
        reimbursement rates for brachytherapy seeds are fixed based on isotope under
        the
        final rule, (without providing for price differentiation to reflect costs
        associated with different seed configurations), the implementation of
        prospective rates can be expected to lead to increased pricing pressure from
        hospitals, particularly with respect to stranded and other enhanced
        configurations of seeds. In addition, we believe that confusion and uncertainty
        among health care providers regarding prior reimbursement proposals may have
        affected sales of our brachytherapy products in the past, and may do so in
        the
        future.
  The
        Company believes that CMS’ approach to determining the reimbursement rate for
        brachytherapy seeds is fundamentally flawed. For example, CMS did not stratify
        cost data on differing seed configurations, such as loose versus stranded
        seeds.
  The
        Company believes that the changes planned for 2007 to the OPPS methodology
        for
        brachytherapy seeds should be delayed in order to provide adequate time for
        policy makers to determine the most appropriate reimbursement system for
        health
        care providers and patients. While we will continue to work with policy makers
        in efforts to rectify the shortcomings we believe are contained in the new
        CMS
        rule for 2007, and to identify the most appropriate reimbursement system
        for
        health care providers and patients, we cannot provide any assurance that
        we will
        be successful. We are currently assessing the final CMS rule as published
        and
        are considering both its potential short and longer term effects on the
        marketing, pricing and use of brachytherapy seeds in general, and TheraSeed® and
        I-Seed in particular. Management believes these prospective payment rates
        are
        likely to increase unit pricing pressure, which could adversely affect our
        brachytherapy revenue.
  ***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 Galt and CP Medical to Theragenics’ 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 Galt
        and CP
        Medical business plans, 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
        Quarterly Report on Form 10-Q. All forward looking statements and cautionary
        statements included in this document are made as of the date hereby based
        on
        information available to the Company as of the date hereof, and the Company
        assumes no obligation to update any forward looking statement or cautionary
        statement.


**Item
      3.** **Quantitative
      and Qualitative Disclosures 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 $876,000 are outstanding under the Company’s $40.0 million credit
      facility as of October 1, 2006. Interest on outstanding borrowings is payable
      monthly at LIBOR plus 1% (effective rate of 6.3% at October 1,
      2006).






31




**Item
        4.** **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 the effectiveness of the design and operation 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 October 1, 2006, the end of the period covered by this
        report.




The
      Company acquired Galt Medical Corp. (“Galt”) on August 2, 2006. Since the date
      of acquisition, the Company has been focusing on analyzing, evaluating, and
      implementing changes in Galt’s procedures and controls to determine their
      effectiveness and to make them consistent with our disclosure controls and
      procedures. Prior to our acquisition of Galt, they were not required to prepare
      interim financial statements in accordance with generally accepted accounting
      principles. In addition, Galt was not previously required to maintain disclosure
      controls and procedures or maintain, document and assess internal control over
      financial reporting, in each case as required under the rules and regulation
      of
      the Securities and Exchange Commission. Accordingly, we expect that it will
      take
      several months to continue to analyze Galt’s procedures and controls and expect
      to make additional changes in those controls in the future. We have performed
      additional procedures to review accounting records and substantiate the
      financial information of Galt included in this report. Galt’s total revenues
      following the acquisition accounted for 4.3% of the Company’s consolidated
      revenues for the nine months ended October 1, 2006.




As
      more
      fully described in Item 9A of the Company’s December 31, 2005 Annual Report on
      Form 10-K (the “2005 Form 10-K”), the Company acquired CP Medical Corporation
      (“CP Medical”) on May 6, 2005. Since the date of acquisition, we have analyzed,
      evaluated, and implemented changes in CP Medical’s procedures and controls to
      determine their effectiveness and to make them consistent with our disclosure
      controls and procedures. Prior to our acquisition of CP Medical, CP Medical
      was
      not required to prepare financial statements in accordance with accounting
      principles generally accepted in the United States of America. In addition,
      CP
      Medical was not previously required to maintain disclosure controls and
      procedures or maintain, document and assess internal control over financial
      reporting, in each case as required under the rules and regulation of the
      Securities and Exchange Commission.




As
      noted
      under Item 9A in Management’s Report on Internal Control over Financial
      Reporting in the 2005 Form 10-K, CP Medical was excluded from the scope of
      our assessment over the effectiveness of internal controls over financial
      reporting as of December 31, 2005. During the course of integrating the
      operations of CP Medical in 2005, material weaknesses in internal control
      specifically related to inventory accounting at CP Medical 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. In late 2005 and 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.




We
      have
      not completed testing of the controls to determine whether or not the controls
      are operating effectively to ensure remediation of the material weaknesses.




No
      changes in the Company’s internal control over financial reporting were
      identified as having occurred during the quarter ended October 1, 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 and Galt. Changes to processes, information
      technology systems, and other components of internal control over financial
      reporting resulting from the acquisition of Galt are expected as the integration
      proceeds.


32


**PART
      II. OTHER INFORMATION**




**Item
      1.** **Legal
      Proceedings**




During
      the second quarter of 2006, a derivative suit was voluntarily dismissed with
      no
      financial settlement due as discussed in Part II, Item 1, “Legal Proceedings” in
      our Quarterly Report on Form 10-Q for the period ended July 2, 2006.




**Item
      1A.** **Risk
      Factors**





In
      addition to the other information set forth in this report, the factors
      discussed in Part II, Item 1A, “Risk Factors” in our Quarterly Report on Form
      10-Q for the period ended July 2, 2006 and in Part I, Item 1A, “Risk Factors”,
      in our Annual Report on Form 10-K for the year ended December 31, 2005, which
      could materially affect our business, financial condition or future results,
      should be carefully considered. In addition to the items discussed in the
      aforementioned Forms 10-Q and 10-K, the item discussed in this report under
      Part
      I, Item 2, “Management’s Discussion and Analysis of Financial Condition and
      Results of Operations”, under the heading of “Medicare Developments”, should
      also be carefully considered.





The
      risks
      described in our Quarterly Report on Form 10-Q for the period ended July 2,
      2006, in our Annual Report on Form 10-K for the year ended December 31, 2005,
      and in this report as noted in the previous paragraph, are not the only risks
      facing our Company. Additional risks and uncertainties not currently known
      to us
      or that we currently deem to be immaterial also may materially adversely affect
      our business, financial condition and/or operating results.


33


**Item
      6.** **Exhibits**




**Exhibit
                No.**
            
            **Title**2.1
            
            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).10.1
            
            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 on
              August 8, 2006).10.2
            
            Registration
              Rights Agreement between Theragenics Corporation and James R. Eddings,
              as
              Sellers’
              Representative, dated as of August 2, 2006, (incorporated by reference
              to
              Exhibit 10.2 of Form 8-K filed on August 8, 2006).10.3
            
            Amendment
              to Employment Agreement dated August 8, 2006 between Theragenic's
              Corporation and M. Christine Jacobs, (incorporated by reference to
              Exhibit
              10.3 of Form 10-Q for the quarter ended July 2, 3006).31.1
            
            Certification
                of Chief Executive Officer pursuant to Rule 13a-14(a) and Section
                302 of
                the Sarbanes-Oxley Act of 2002.31.2
            
            Certification
                of Chief Financial Officer pursuant to Rule 13a-14(a) and Section
                302 of
                the Sarbanes-Oxley Act of 2002.32.1
            
            Certification
                of Chief Executive Officer pursuant to Section 1350, Chapter 63 of
                Title
                18, United States Code, as adopted to Section 906 of the Sarbanes-Oxley
                Act of 2002.32.2
            
            Certification
                of Chief Financial Officer pursuant to Section 1350, Chapter 63 of
                Title
                18, United States Code, as adopted to Section 906 of the Sarbanes-Oxley
                Act of 2002.










34


SIGNATURES




Pursuant
      to the requirements 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.




REGISTRANT:THERAGENICS
                CORPORATIONDate: November
                9, 2006
            
            By:
            /s/ M.
                Christine JacobsM.
                Christine Jacobs
              Chief
                Executive Officer




Date: November
                9, 2006
            
            By:
            /s/ Francis
                J. TaralloFrancis
                J. Tarallo
              Chief
                Financial Officer


35