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 September 28, 2008
  Or
  o
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
transition period from __________ to __________
  Commission
File No. 0-15443
  THERAGENICS
CORPORATION®
 (Exact
name of registrant as specified in its charter)
  Delaware
              58-1528626(State
      or other jurisdiction of
              (I.R.S.
      Employerincorporation
      or organization)
              Identification
      Number)5203
      Bristol Industrial WayBuford,
      Georgia
              30518(Address
      of principal executive offices)
              (Zip
      Code)
  Registrant’s
telephone number, including area code: (770) 271-0233
  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, a non-accelerated filer, or smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
  Large
Accelerated Filer  oAccelerated
Filer  xNon Accelerated Filer  oSmaller Reporting
Company o
  Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES o  
NO x
  As of
November 3, 2008 the number of shares of $0.01 par value common stock
outstanding was 33,246,191.
 
 
 THERAGENICS
CORPORATION
  TABLE OF
CONTENTS
  Page
      No.PART
      I.
              FINANCIAL INFORMATIONITEM
      1.
              CONDENSED
      CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)Condensed
      Consolidated Balance Sheets – September 28, 2008 and December 31,
      2007
              3Condensed
      Consolidated Statements of Earnings for the three and nine months ended
      September 28, 2008 and September 30, 2007
              5Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      28, 2008 and September 30, 2007
              6Condensed
      Consolidated Statement of Shareholders’ Equity for the nine months ended
      September 28, 2008
              8Notes
      to Condensed Consolidated Financial Statements
              9ITEM
      2.
              MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
              22ITEM
      3.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
              34ITEM
      4.
              CONTROLS
      AND PROCEDURES
              35PART
      II.
              OTHER
      INFORMATION
              35ITEM
      1.
              LEGAL
      PROCEEDINGS
              35ITEM
      1A.
              RISK
      FACTORS
              35ITEM
      6.
              EXHIBITS
              36SIGNATURES
              37
  2
 PART
I. FINANCIAL INFORMATION
  Item
1. Financial
Statements
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (Amounts
in thousands, except per share data)
  ASSETSSeptember
      28,
                2008
                (Unaudited)
              
              
              December
      31,
                2007CURRENT
      ASSETSCash
      and cash equivalents
              
              $
              28,925
              
              
              $
              28,666Marketable
      securities – short-term
              
              
              9,091
              
              
              
              20,123Trade
      accounts receivable, less allowance of $366 in 2008 and $372 in
      2007
              
              
              9,882
              
              
              
              7,882Inventories
              
              
              11,999
              
              
              
              7,644Deferred
      income tax asset
              
              
              3,075
              
              
              
              1,664Prepaid
      expenses and other current assets
              
              
              2,183
              
              
              
              1,338TOTAL
      CURRENT ASSETS
              
              
              65,155
              
              
              
              67,317PROPERTY
      AND EQUIPMENTBuildings
      and improvements
              
              
              22,866
              
              
              
              22,579Machinery
      and equipment
              
              
              41,314
              
              
              
              37,349Office
      furniture and equipment
              
              
              1,133
              
              
              
              98865,313
              
              
              
              60,916Less
      accumulated depreciation
              
              
              (36,029
              )
              
              
              (34,327
              )29,284
              
              
              
              26,589Land
      and improvements
              
              
              822
              
              
              
              822Construction
      in progress
              
              
              508
              
              
              
              561PROPERTY
      AND EQUIPMENT, NET
              
              
              30,614
              
              
              
              27,972Goodwill
              
              
              67,824
              
              
              
              38,658Other
      intangible assets, net
              
              
              22,076
              
              
              
              11,881Marketable
      securities – long-term
              
              
              500
              
              
              
              —Asset
      held for sale
              
              
              —
              
              
              
              2,900Other
      assets
              
              
              87
              
              
              
              9390,487
              
              
              
              53,532TOTAL
      ASSETS
              
              $
              186,256
              
              
              $
              148,821
  The
accompanying notes are an integral part of these statements.
 3
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED BALANCE SHEETS - Continued
 (Amounts
in thousands, except per share data)
  LIABILITIES
      & SHAREHOLDERS’ EQUITYSeptember
      28,
                2008
                (Unaudited)
              
              
              December
      31,
                2007CURRENT
      LIABILITIESTrade
      accounts payable
              
              $
              1,800
              
              
              $
              1,530Accrued
      salaries, wages and payroll taxes
              
              
              2,321
              
              
              
              1,868Income
      taxes payable
              
              
              577
              
              
              
              867Other
      current liabilities
              
              
              1,709
              
              
              
              724TOTAL
      CURRENT LIABILITIES
              
              
              6,407
              
              
              
              4,989LONG-TERM
      LIABILITIESLong-term
      debt
              
              
              32,000
              
              
              
              7,500Deferred
      income taxes
              
              
              10,564
              
              
              
              1,369Contract
      termination liability
              
              
              —
              
              
              
              1,487Decommissioning
      retirement liability
              
              
              635
              
              
              
              602Other
      long-term liabilities
              
              
              304
              
              
              
              255TOTAL
      LONG-TERM LIABILITIES
              
              
              43,503
              
              
              
              11,213COMMITMENTS
      AND CONTINGENCIES
              
              
              —
              
              
              
              —SHAREHOLDERS’
      EQUITYCommon
      stock, authorized 100,000 shares of $0.01 par value, issued and
      outstanding, 33,243 in 2008 and 33,274 in 2007
              
              
              332
              
              
              
              333Additional
      paid-in capital
              
              
              72,732
              
              
              
              72,918Retained
      earnings
              
              
              63,339
              
              
              
              59,424Accumulated
      other comprehensive loss
              
              
              (57
              )
              
              
              (56
              )TOTAL
      SHAREHOLDERS’ EQUITY
              
              
              136,346
              
              
              
              132,619TOTAL
      LIABILITIES AND SHAREHOLDERS’ EQUITY
              
              $
              186,256
              
              
              $
              148,821
  The
accompanying notes are an integral part of these statements.
 4
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS
 (UNAUDITED)
 (Amounts
in thousands, except per share data)
  Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      28,
                2008
              
              
              September
      30, 2007
              
              
              September
      28,
                2008
              
              
              September
      30,
                2007REVENUEProduct
      sales
              
              $
              17,914
              
              
              $
              15,757
              
              
              $
              48,545
              
              
              $
              46,348License
      and fee income
              
              
              192
              
              
              
              244
              
              
              
              710
              
              
              
              67918,106
              
              
              
              16,001
              
              
              
              49,255
              
              
              
              47,027COST
      OF SALES
              
              
              10,292
              
              
              
              8,207
              
              
              
              25,534
              
              
              
              24,180GROSS
      PROFIT
              
              
              7,814
              
              
              
              7,794
              
              
              
              23,721
              
              
              
              22,847OPERATING
      EXPENSESSelling,
      general & administrative
              
              
              5,608
              
              
              
              4,498
              
              
              
              15,578
              
              
              
              14,252Amortization
      of purchased intangibles
              
              
              683
              
              
              
              469
              
              
              
              1,620
              
              
              
              1,406Research
      & development
              
              
              373
              
              
              
              430
              
              
              
              667
              
              
              
              1,100Change
      in estimated value of asset held for sale
              
              
              —
              
              
              
              —
              
              
              
              (142
              )
              
              
              —Gain
      on sale of equipment
              
              
              (8
              )
              
              
              —
              
              
              
              (5
              )
              
              
              —6,656
              
              
              
              5,397
              
              
              
              17,718
              
              
              
              16,758EARNINGS
      FROM OPERATIONS
              
              
              1,158
              
              
              
              2,397
              
              
              
              6,003
              
              
              
              6,089NON-OPERATING
      INCOME/(EXPENSE)Interest
      income
              
              
              173
              
              
              
              530
              
              
              
              929
              
              
              
              1,653Interest
      expense
              
              
              (241
              )
              
              
              (177
              )
              
              
              (518
              )
              
              
              (528
              )Other
              
              
              209
              
              
              
              (1
              )
              
              
              145
              
              
              
              1141
              
              
              
              352
              
              
              
              556
              
              
              
              1,126EARNINGS
      BEFORE INCOME TAX
              
              
              1,299
              
              
              
              2,749
              
              
              
              6,559
              
              
              
              7,215Income
      tax expense
              
              
              658
              
              
              
              986
              
              
              
              2,644
              
              
              
              2,740NET
      EARNINGS
              
              $
              641
              
              
              $
              1,763
              
              
              $
              3,915
              
              
              $
              4,475NET
      EARNINGS PER COMMON SHARE:Basic
              
              $
              0.02
              
              
              $
              0.05
              
              
              $
              0.12
              
              
              $
              0.14Diluted
              
              $
              0.02
              
              
              $
              0.05
              
              
              $
              0.12
              
              
              $
              0.13WEIGHTED
      AVERAGE SHARESBasic
              
              
              33,000
              
              
              
              33,118
              
              
              
              33,089
              
              
              
              33,101Diluted
              
              
              33,139
              
              
              
              33,237
              
              
              
              33,237
              
              
              
              33,262
  The
accompanying notes are an integral part of these statements.
 5
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (UNAUDITED)
 (Amounts
in thousands)
  Nine
      Months EndedSeptember
      28
                2008
              
              
              September
      30,
                2007CASH
      FLOWS FROM OPERATING ACTIVITIESNet
      earnings
              
              $
              3,915
              
              
              $
              4,475Adjustments
      to reconcile net earnings to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              3,944
              
              
              
              4,711Fair
      value adjustment from acquired inventory
              
              
              490
              
              
              
              —Deferred
      income taxes
              
              
              2,616
              
              
              
              1,530Gain
      on sale of equipment
              
              
              (5
              )
              
              
              —Realized
      loss on marketable securities
              
              
              254
              
              
              
              5Gain
      on sale of scrap metal
              
              
              (457
              )
              
              
              —Provision
      for allowances
              
              
              (1
              )
              
              
              (70
              )Share
      based compensation
              
              
              481
              
              
              
              575Contract
      termination liability
              
              
              (15
              )
              
              
              (19
              )Decommissioning
      retirement liability
              
              
              33
              
              
              
              30Change
      in estimated value of asset held for sale
              
              
              (142
              )
              
              
              —Changes
      in assets and liabilities:Accounts
      receivable
              
              
              (251
              )
              
              
              (1,037
              )Inventories
              
              
              (818
              )
              
              
              (239
              )Prepaid
      expenses and other current assets
              
              
              (596
              )
              
              
              2,270Other
      assets
              
              
              11
              
              
              
              (64
              )Trade
      accounts payable
              
              
              (17
              )
              
              
              (542
              )Accrued
      salaries, wages and payroll taxes
              
              
              149
              
              
              
              526Income
      taxes payable
              
              
              (867
              )
              
              
              997Other
      current liabilities
              
              
              595
              
              
              
              (330
              )Other
              
              
              49
              
              
              
              303Net
      cash provided by operating activities
              
              
              9,368
              
              
              
              13,121CASH
      FLOWS FROM INVESTING ACTIVITIESCash
      paid for acquisition, net of cash acquired
              
              
              (45,518
              )
              
              
              —Purchases
      and construction of property and equipment
              
              
              (1,269
              )
              
              
              (1,223
              )Proceeds
      from sale of equipment, including asset held for sale
              
              
              1,576
              
              
              
              —Purchases
      of marketable securities
              
              
              (8,000
              )
              
              
              (22,900
              )Maturities
      of marketable securities
              
              
              5,859
              
              
              
              14,976Proceeds
      from sales of  marketable securities
              
              
              14,411
              
              
              
              280Net
      cash used by investing activities
              
              
              (32,941
              )
              
              
              (8,867
              )
  The
accompanying footnotes are an integral part of these statements.
 6
 
 THERAGENICS
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
 (UNAUDITED)
 (Amounts
in thousands)
  Nine
      Months EndedSeptember
      28,
                2008
              
              
              September
      30,
                2007CASH
      FLOWS FROM FINANCING ACTIVITIESProceeds
      from long-term debt
              
              
              24,500
              
              
              
              —Exercise
      of stock options and stock purchase plan
              
              
              23
              
              
              
              154Retirement
      of common stock
              
              
              (691
              )
              
              
              —Excess
      tax benefit from exercise of stock options
              
              
              —
              
              
              
              16Net
      cash provided by financing activities
              
              
              23,832
              
              
              
              170NET
      INCREASE IN CASH AND CASH EQUIVALENTS
              
              $
              259
              
              
              $
              4,424CASH
      AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
              
              
              28,666
              
              
              
              18,258CASH
      AND CASH EQUIVALENTS AT END OF PERIOD
              
              $
              28,925
              
              
              $
              22,682Supplementary
      cash flow disclosure:Cash
      paid (recovered) for:Interest
              
              $
              454
              
              
              $
              473Taxes,
      net
              
              $
              2,263
              
              
              $
              (1,648
              )Non-cash
      transactions:Termination
      of lease underlying contract termination liability
              
              $
              1,498
              
              
              
              —
  The
accompanying footnotes are an integral part of these statements.
 7
 
 THERAGENICS
CORPORATION AND SUBSIDIARIES
 CONDENSED
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
 FOR
THE NINE MONTHS ENDED SEPTEMBER 28, 2008
 (UNAUDITED)
 (Amounts
in thousands)
    Common
      StockNumber
                of
                Shares
              
              
              Par
                value
                $0.01
              
              
              Additional
                Paid-in
                Capital
              
              
              Retained
      Earnings
              
              
              Accumulated
                Other
      Comprehensive
                Loss
              
              
              TotalBALANCE,
      December 31, 2007
              
              
              33,274
              
              
              $
              333
              
              
              $
              72,918
              
              
              $
              59,424
              
              
              $
              (56
              )
              
              $
              132,619Employee
      stock purchase plan
              
              
              8
              
              
              
              —
              
              
              
              23
              
              
              
              —
              
              
              
              —
              
              
              
              23Retirement
      of common stock received in settlement for  other
      receivable
              
              
              (202
              )
              
              
              (2
              )
              
              
              (689
              )
              
              
              —
              
              
              
              —
              
              
              
              (691
              )Issuance
      of restricted units and restricted shares
              
              
              186
              
              
              
              1
              
              
              
              (1
              )
              
              
              —
              
              
              
              —
              
              
              
              —Restricted
      units and restricted shares forfeited
              
              
              (23
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Share
      based compensation
              
              
              —
              
              
              
              —
              
              
              
              481
              
              
              
              —
              
              
              
              —
              
              
              
              481Other
      comprehensive income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (1
              )
              
              
              (1
              )Net
      earnings for the period
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3,915
              
              
              
              —
              
              
              
              3,915BALANCE,
      September 28, 2008
              
              
              33,243
              
              
              $
              332
              
              
              $
              72,732
              
              
              $
              63,339
              
              
              $
              (57
              )
              
              $
              136,346
   The
accompanying notes are an integral part of these statements.
 8
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
28, 2008
 (Unaudited)
  NOTE
A - BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
 
 The
unaudited interim condensed consolidated financial statements included herein
reflect the consolidated operations of Theragenics Corporation and its
wholly-owned subsidiaries (collectively, “Theragenics” or the “Company”). All
material 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 consolidated
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
condensed consolidated financial statements and notes should be read in
conjunction with the audited consolidated financial statements and notes for the
year ended December 31, 2007, included in the Form 10-K Annual Report filed by
the Company. The December 31, 2007 condensed consolidated balance sheet included
herein has been derived from the December 31, 2007 audited consolidated balance
sheet included in the aforementioned Form 10-K.  The consolidated
results of operations for the periods ended September 28, 2008 are not
necessarily indicative of the results to be expected for a full
year.
 
 Theragenics
Corporation is a medical device company serving the surgical products and cancer
treatment markets, operating in two business segments. The Company’s surgical
products business consists of wound closure, vascular access, and specialty
needle products.  Wound closure includes sutures, needles, and other
surgical products.  Vascular access includes introducers, guidewires,
and related products.  Specialty needles include coaxial, biopsy,
spinal and disposable veress needles, access trocars, and other needle based
products.  The Company’s surgical products segment serves a number of
markets and applications, including among other areas, interventional
cardiology, interventional radiology, vascular surgery, orthopedics, plastic
surgery, dental surgery, urology, veterinary medicine, pain management,
endoscopy, and spinal surgery. The Company’s brachytherapy business manufactures
and markets its premier product, the palladium-103 TheraSeed®device,
and I-Seed, an iodine-125 based device, which are used primarily in the
minimally invasive treatment of localized prostate cancer.
 
 On July
28, 2008, the Company completed the acquisition of NeedleTech Products, Inc.
(“NeedleTech”).  NeedleTech is a manufacturer of specialty needles and
related medical devices, and a part of the Company’s surgical products
segment.  See Note C, Acquisition of NeedleTech Products,
Inc.
  NOTE
B – RECENTLY ISSUED ACCOUNTING STANDARDS
  In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) 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 was effective for the Company on January
1, 2008.  However, in February 2008 the FASB released FASB Staff
Position No. FAS 157-2, Effective Date of FASB Statement
No. 157 (“FSP FAS 157-2”), which
delayed the effective date of SFAS 157 for all non-financial assets and
non-financial liabilities, except those that are recognized or disclosed in the
financial statements at fair value at least annually.  Accordingly,
the Company has adopted the provisions of SFAS 157 only with respect to its
financial assets and liabilities as of January 1, 2008. The Company will not
apply the provisions of SFAS No. 157 until January 1, 2009 for the following
major categories of nonfinancial assets and liabilities: goodwill, other
intangible assets, and the decommissioning retirement liability. On October 10,
2008, the FASB issued FASB Staff Position No. FAS 157-3, Determining the Fair Value of a
Financial Assets When the Market for That Asset is Not Active (which was
effective upon issuance),to clarify the application of SFAS 157 in a market that is not active.
The adoption of SFAS 157 for the Company’s financial assets and liabilities did
not have a material impact on its consolidated financial
statements.  The Company is currently assessing the potential effect
on its consolidated financial statements of the adoption of SFAS 157 for its
non-financial assets and liabilities, which the Company will adopt on January 1,
2009.
  9
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
28, 2008
 (Unaudited)
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115 (“SFAS
159”).  SFAS 159 permits entities to choose to measure eligible items
at fair value at specified election dates and report unrealized gains and losses
on items for which the fair value option has been elected in earnings at each
subsequent reporting date.  SFAS No. 159, which the Company adopted on
January 1, 2008, did not have a material impact on its consolidated financial
statements. As permitted under SFAS 159, the Company hascurrently chosen not to
elect the fair value option for any items that are not already required to be
measured at fair value in accordance with accounting principles generally
accepted in the United States.
  In
December 2007, the FASB issued SFAS 141R, Business Combinations, which
the Company will adopt on January 1, 2009. This standard will significantly
change the accounting for business acquisitions both during the period of the
acquisition and in subsequent periods. Among the more significant changes in the
accounting for acquisitions are the following:
  ●
              Transaction
      costs will generally be expensed. Certain such costs are presently treated
      as costs of the acquisition.●
              In-process
      research and development (IPR&D) will be accounted for as an asset,
      with the cost recognized as the research and development is realized or
      abandoned. IPR&D is presently expensed at the time of the
      acquisition.●
              Contingencies,
      including contingent consideration, will generally be recorded at fair
      value with subsequent adjustments recognized in operations. Contingent
      consideration is presently accounted for as an adjustment of purchase
      price.●
              Decreases
      in valuation allowances on acquired deferred tax assets will be recognized
      in operations. Such changes previously were considered to be subsequent
      changes in the allocation of the purchase price and were recorded as
      decreases in goodwill.
  Generally,
the effects of SFAS 141R on the Company’s consolidated financial statements will
depend on acquisitions occurring in 2009 and thereafter.  The Company
followed SFAS 141, Business
Combinations,as originally issued, for its NeedleTech acquisition in
July 2008 (see Note C, Acquisition of NeedleTech Products,
Inc.).
  In April
2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 142-3 (“FSP FAS
142-3”), Determination of the
Useful Life of Intangible Assets.  FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under FASB
Statement No. 142, Goodwill
and Other Intangible Assets.  The intent
of  FSP FAS 142-3 is to improve the consistency between the useful
life of a recognized intangible asset under SFAS 142 and the period of expected
cash flows used to measure the fair value of the asset under SFAS 141R and other
U.S. generally accepted accounting principles.  FSP FAS 142-3 is
effective for the Company beginning January 1, 2009.  The guidance for
determining the useful life of intangible assets included in this FSP will be
applied prospectively to intangible assets acquired after the January 1, 2009
effective date.  The Company is evaluating the impact of FSP FAS
142-3, and the potential impact of this statement on the Company’s consolidated
financial statements has not been determined.
  10
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
28, 2008
 (Unaudited)
  NOTE
C – ACQUISITION OF NEEDLETECH PRODUCTS, INC.
  The
Company acquired all of the outstanding common stock of NeedleTech Products,
Inc. (“NeedleTech”) on July 28, 2008.  The total purchase price,
including transaction costs, was approximately $43.5 million (net of cash, cash
equivalents, and marketable securities acquired with an estimated fair value of
approximately $5.8 million).  The purchase price was paid in cash,
including $24.5 million of borrowings under the Company’s $40 million credit
facility.  The purchase price is subject to a working capital
adjustment, which is expected to be completed in the fourth quarter of
2008.
  NeedleTech
is a manufacturer of specialty needles and related medical
devices.  NeedleTech’s current products include coaxial needles,
biopsy needles, access trocars, brachytherapy needles, guidewire introducer
needles, spinal needles, disposable veress needles, and other needle-based
products.  End markets served include the cardiology, orthopedics,
pain management, endoscopy, spinal surgery, urology, and veterinary
medicine.  This transaction further diversifies Theragenics’ surgical
products business and leverages the Company’s existing strengths within these
markets.
  This
acquisition was accounted for under the purchase method of accounting, in
accordance with SFAS No. 141, Business Combinations.
Accordingly, the purchase price was allocated on a preliminary basis 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 NeedleTech
are included subsequent to the acquisition date.
  Following
is a summary of the fair value of the assets acquired and liabilities assumed,
based on the preliminary allocation of the purchase price (in
thousands):
  Estimated
      Fair
                value
              
              
              Amortization
      life
                of
      intangible assetsCash
      and cash equivalents
              
              $
              3,754
              
              
              —Marketable
      securities
              
              
              1,998
              
              
              —Other
      current assets
              
              
              5,567
              
              
              —Equipment
              
              
              3,615
              
              
              —Goodwill
              
              
              29,166
              
              
              IndefiniteTrade
      names
              
              
              3,156
              
              
              IndefiniteCustomer
      relationships
              
              
              7,668
              
              
              7
      yearsNon-compete
      agreements
              
              
              943
              
              
              5
      yearsBacklog
              
              
              150
              
              
              3
      monthsOther
      assets
              
              
              5
              
              
              —Current
      liabilities
              
              
              (1,584
              )
              
              —Deferred
      income tax liability, short and long term
              
              
              (5,166
              )
              
              —Net
      assets acquired
              
              $
              49,272
  The
weighted average life of intangible assets subject to amortization is 6.7 years.
The intangible assets acquired, including goodwill, are not expected to be
deductible for income tax purposes.
  11
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
28, 2008
 (Unaudited)
  Pro Forma
Information
  The
following unaudited pro forma summary combines the Company’s results with those
of NeedleTech as if the acquisition had occurred at the beginning of each the
periods presented.  This unaudited pro forma information is not
intended to represent or be indicative of the Company’s consolidated results of
operations or financial condition that would have been reported for the periods
presented had the acquisition been completed at the beginning of each the
periods presented, and should not be taken as indicative of the Company’s future
consolidated results of operations or financial condition (in thousands, except
per share data):
  Three
      Months Ended
              
              Nine
      Months EndedSeptember
      28,
              
              September
      30,
              
              September
      28,
              
              September
      30,2008
              
              2007
              
              2008
              
              2007Revenue
              
              $
              19,311
              
              
              $
              20,358
              
              
              $
              59,316
              
              
              $
              59,460Net
      earnings
              
              $
              408
              
              
              $
              1,770
              
              
              $
              4,007
              
              
              $
              4,918Earnings
      per shareBasic
              
              $
              0.01
              
              
              $
              0.05
              
              
              $
              0.12
              
              
              $
              0.15Diluted
              
              $
              0.01
              
              
              $
              0.05
              
              
              $
              0.12
              
              
              $
              0.15
  Certain
pro forma adjustments have been made to reflect the impact of the purchase
transaction, primarily consisting of amortization of intangible assets with
determinate lives, reductions in interest income as a result of cash used in the
acquisition, increases in interest expense resulting from borrowings under the
Company’s credit facility and income taxes to reflect the Company’s effective
tax rate for the period.  Pro forma net earnings include pre-tax
charges of $885,000 in each of the periods presented for amortization of
the fair market value adjustments for inventory and backlog.
  NOTE
D – COMPREHENSIVE INCOME
 
 The
following table summarizes comprehensive income for the applicable period (in
thousands):
  Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      28, 2008
              
              
              September
      30,
                2007
              
              
              September
      28,
                2008
              
              
              September
      30,
                2007Comprehensive
      income:Net
      earnings
              
              $
              641
              
              
              $
              1,763
              
              
              $
              3,915
              
              
              $
              4,475Other
      comprehensive income, net of taxes:Reclassification
      adjustment for realized loss included in net earnings
              
              
              3
              
              
              
              5
              
              
              
              254
              
              
              
              5Unrealized
      gain (loss) on securities available for sale
              
              
              (17
              )
              
              
              5
              
              
              
              (255
              )
              
              
              20Total
      other comprehensive income
              
              
              (14
              )
              
              
              10
              
              
              
              (1
              )
              
              
              25Total
      comprehensive income
              
              $
              627
              
              
              $
              1,773
              
              
              $
              3,914
              
              
              $
              4,500
 
 12
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
28, 2008
 (Unaudited)
   NOTE
E - INVENTORIES
  Inventories
are stated at the lower of cost or market. Cost is determined using the
first-in, first-out (“FIFO”) method or weighted average cost method, which
approximates FIFO. Market is replacement cost or net realizable value. The
Company estimates reserves for inventory obsolescence based upon management’s
judgment of future realization. Inventories were comprised of the following (in
thousands):
  September
      28,
                2008
              
              
              December
      31,
                2007Raw
      materials
              
              $
              4,940
              
              
              $
              3,702Work
      in process
              
              
              3,235
              
              
              
              1,463Finished
      goods
              
              
              3,468
              
              
              
              2,211Spare
      parts and supplies
              
              
              914
              
              
              
              91312,557
              
              
              
              8,289Allowance
      for obsolete inventory
              
              
              (558
              )
              
              
              (645
              )Total
              
              $
              11,999
              
              
              $
              7,644
 
 NOTE
F - PROPERTY, EQUIPMENT, AND DEPRECIATION
  In
December 2007 the Company changed the estimated service lives of certain
depreciable assets, mainly the cyclotron equipment used in its brachytherapy
segment. The estimated service life of the cyclotron equipment was increased
from 10 years to 15 years, and was based on, among other things, an assessment
of the equipment’s operating and maintenance history and expected future
performance. The Company accounted for this change as a change in estimate in
accordance with SFAS No. 154, Accounting Changes and Error
Corrections. Accordingly, this change was accounted for in the period of
the change and will be accounted for in future periods. This change reduced
depreciation expense by $318,000 and $1,194,000 from what would have been
reported otherwise in the third quarter and first nine months of 2008,
respectively.  This change is expected to reduce depreciation expense
by approximately $200,000 in the fourth quarter of 2008, compared to what would
have otherwise been reported.
  NOTE
G – CREDIT AGREEMENT
 
 The
Company has a credit agreement with a financial institution that provides for
borrowings of up to $40.0 million, including a $5.0 million sub-limit for
letters of credit (the “Credit Agreement”). At December 31, 2007, borrowings of
$7.5 million were outstanding under the Credit Agreement at an interest rate of
LIBOR plus 1% (effective rate of 6.2%).  In July 2008 the Company
borrowed an additional $24.5 million under the Credit Agreement in connection
with the NeedleTech acquisition.  Total outstanding borrowings were
$32.0 million at September 28, 2008, at an interest rate of LIBOR plus 1%
(effective rate of 3.5%).  All outstanding borrowings are due upon
expiration of the Credit Agreement, which is October 31, 2009.
  The
Credit Agreement is unsecured, but provides for a lien to be established on
substantially all of the assets of the Company (subject to certain exceptions)
in the event certain events of default occur under the Credit Agreement. The
Credit Agreement contains representations and warranties, as well as
affirmative, reporting and negative covenants, customary for financings of this
type. Among other things, certain provisions of the Credit Agreement limit the
incurrence of additional debt and require the maintenance of certain financial
ratios. The Company was in compliance with these debt covenants at September 28,
2008.
  13
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
28, 2008
 (Unaudited)
  NOTE
H – INCOME TAXES
  The
Company’s effective income tax rate in the third quarter and first nine months
of 2008 was approximately 51% and 40%, respectively, compared to 36% and 38% for
each of the comparable 2007 periods.  These rates include federal and
state income taxes. The tax rate in the 2008 periods were higher than taxes as
calculated at the statutory rates primarily due to a $302,000 deferred income
tax asset charged to income tax expense that was related to non-qualified stock
options expiring unexercised in July 2008.  This expense was recorded
in the third quarter of 2008 in accordance with SFAS No. 123R, “Share-Based Payment” (“SFAS
123R”).  Under SFAS 123R, the write-off of a deferred tax asset
related to an item for which the amount deductible in a company’s tax return is
less than the cumulative compensation expense recognized for financial reporting
purposes is first offset to any remaining additional paid in capital from excess
tax benefits from previous awards.  The remaining balance of the
write-off of such a deferred tax asset is charged to the income statement. The
Company had no additional paid in capital from excess tax benefits at the time
the options expired.  Under SFAS 123R, differences between deductible
temporary differences related to share based payments and the tax deduction that
would result based on the current fair value of the Company’s shares cannot be
considered in measuring the gross deferred tax asset or determining the need for
a valuation allowance recognized.  Accordingly, the deferred tax asset was
written off in the period in which the stock options expired and not in prior
periods.
  NOTE
I - SHARE-BASED COMPENSATION
  Stock
Options
  The
following is a summary of activity in stock options outstanding during the first
nine months of 2008 (shares and aggregate intrinsic value in
thousands):
  Shares
              
              
              Weighted
                average
                exercise
                price
              
              
              Weighted
                average
                remaining
                contractual
                life
      (yrs)
              
              
              Aggregate
                intrinsic
                valueOutstanding,
      beginning of period
              
              
              1,415
              
              
              $
              8.33Granted
              
              
              234
              
              
              
              3.74Exercised
              
              
              --
              
              
              
              --Forfeited
              
              
              (105
              )
              
              
              5.83Expired
              
              
              (148
              )
              
              
              20.29Outstanding,
      end of period
              
              
              1,396
              
              
              $
              6.48
              
              
              
              4.2
              
              
              $
              --Exercisable
      at end of period
              
              
              1,081
              
              
              $
              7.15
              
              
              
              2.8
              
              
              $
              --
 
 The
weighted grant date fair value of the stock options issued in 2008 was $1.93 per
share and was estimated using the Black-Scholes options-pricing model using the
following weighted average assumptions:
  Expected
      dividend yield
              0.0%Expected
      volatility
              50.6%Risk-free
      interest rate
              3.2%Expected
      life
              6
      years
 
 Expected
stock price volatility is based on the historical volatility of the Company’s
stock price over the most recent period commensurate with the expected option
life. Whendetermining
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 are also
considered. These factors may cause the expected volatility and expected life of
options granted to differ from period to period.
  14
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
28, 2008
 (Unaudited)
  The
Company recognizes compensation expense for option 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
$36,000 and $192,000 for the three and nine months ended September 28, 2008,
respectively and $61,000 and $167,000 for the three and nine months ended
September 30, 2007, respectively.  As of September 28, 2008 there was
approximately $399,000 of unrecognized compensation cost related to non-vested
stock options, which is expected to be recognized over a weighted average period
of approximately 1.5 years.  No stock options were exercised during
the nine months ended September 28, 2008.  The total intrinsic value
of options exercised was approximately $45,000 for the nine months ended
September 30, 2007.
  Restricted
Stock
  A summary
of activity in non-vested restricted stock awards during the first nine months
of 2008 follows (shares in thousands):
 
 Shares
              
              
              Weighted
                average
      grant
                date
      fair valueNon-vested
      at January 1, 2008
              
              
              161
              
              
              $
              4.32Granted
              
              
              159
              
              
              
              3.70Vested
              
              
              (53
              )
              
              
              4.25Forfeited
              
              
              (23
              )
              
              
              4.31Non-vested
      at September 28, 2008
              
              
              244
              
              
              $
              3.87
  Fair
value of restricted shares granted to employees and directors is based on the
fair value of the underlying common stock at the grant date.  The fair
value of the restricted shares granted to non-employees is remeasured each
period until they are vested based on the fair value of the underlying common
stock. Compensation expense related to restricted stock totaled approximately
$68,000 and $290,000 for the three and nine months ended September 28, 2008,
respectively, and $98,000 and $267,000 for the three and nine months ended
September 30, 2007, respectively. As of September 28 2008, there was
approximately $548,000 of unrecognized compensation cost related to the
restricted shares, which is expected to be recognized over a weighted average
period of 1.6 years.  The total fair value of restricted stock vested
was approximately $226,000 and $94,000 for the nine months ended September 28,
2008 and September 30, 2007, respectively.
  Stock
Units
  Approximately
20,000 stock units were forfeited during the three and nine months ended
September 28, 2008. There was no activity in stock units during 2008 or 2007
other than the aforementioned forfeitures, and no stock units were vested during
the nine months ended September 28, 2008 or the nine months ended September 30,
2007.  As a result of the forfeitures, a benefit of approximately
$36,000 and $5,000 was recorded for the three and nine months ended September
28, 2008, respectively.  For the three and nine months ended September
30, 2007, compensation expense related to stock units totaled approximately
$49,000 and $136,000 respectively.  As of September 28, 2008, there
was approximately $17,000 of unrecognized compensation cost related to the stock
units, which is expected to be recognized over a weighted average period of 0.25
years.
  15
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
28, 2008
 (Unaudited)
  Employee Stock Purchase
Plan
  The
Theragenics Corporation Employee Stock Purchase Plan (the “ESPP”) allows
eligible employees the right to purchase common stock on a quarterly basis at
the lower of 85% of the market price at the beginning or end of each quarterly
offering period. Compensation cost related to the ESPP totaled approximately
$1,000 and $4,000 for the three and nine months ended September 28, 2008 and
$2,000 and $5,000 for the three and nine months ended September 30, 2007,
respectively.
  NOTE
J - DISTRIBUTION AGREEMENT AND MAJOR CUSTOMERS
  Distribution
Agreement
  The
Company’s brachytherapy business sells its TheraSeed® device
directly to health care providers and to third party
distributors.  The Company’s primary non-exclusive distribution
agreement is with C. R. Bard (“Bard”) for the distribution of the TheraSeed® device
(the “Bard Agreement”). The terms of the Bard Agreement provide for automatic
one-year extensions of the term, unless either party gives notice of its intent
not to renew at least twelve months prior to the end of the current term. The
current terms expires December 31, 2009 and will be automatically extended for
one additional year unless either party gives notice of its intent not to extend
by December 31, 2008. 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. The Company also has
a non-exclusive distribution agreement in place with a second distributor.
Revenue generated from the second distributor is not material.
  Major
Customers
  Sales to
Bard under the Bard Agreement represented the following portion of segment and
consolidated sales:
  Three
      Months Ended
                
                Nine
      Months EndedSeptember
      28, 2008
                
                September
      30, 2007
                
                September
      28, 2008
                
                September
      30, 2007Brachytherapy
      seed product sales
                
                
                51
                %
                
                
                51
                %
                
                
                51
                %
                
                
                54
                %Consolidated
      revenue
                
                
                18
                %
                
                
                26
                %
                
                
                22
                %
                
                
                28
                %
  Accounts
receivable from Bard under the Bard Agreement represented approximately 42% of
brachytherapy accounts receivable and 16% of consolidated accounts receivable at
September 28, 2008. At December 31, 2007, accounts receivable from Bard
represented approximately 40% of brachytherapy accounts receivable and 24% of
consolidated accounts receivable. One additional customer totaled 12% of
brachytherapy accounts receivable and 5% of consolidated accounts receivable at
September 28, 2008.
  For the
three and nine months ended September 28, 2008, no single customer equaled or
exceeded 10% of surgical products sales.  For the three months ended
September 30, 2007, one customer totaled 10% of surgical products
sales.  No single customer equaled or exceeded 10% of surgical
products sales for the nine months ended September 30, 2007.  No
single customer equaled or exceeded 10% of surgical products accounts receivable
at September 28, 2008.  One customer receivable represented
approximately 23% of surgical products accounts receivable and 10% of
consolidated accounts receivable at December 31, 2007.
  16
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
28, 2008
 (Unaudited)
 NOTE K–FAIR VALUE
  Effective
January 1, 2008, the Company adopted SFAS No. 157, which defines fair
value as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous
market for the asset or liability in an orderly transaction between market
participants at the measurement date. SFAS No. 157 establishes a
three-level fair value hierarchy that prioritizes the inputs used to measure
fair value. This hierarchy requires entities to maximize the use of observable
inputs and minimize the use of unobservable inputs. The three levels of inputs
used to measure fair value are as follows:
  •
Level 1 — Quoted prices in active markets for identical assets or
liabilities.
 • Level 2 — Observable inputs
other than quoted prices included in Level 1, such as quoted prices for
similar assets and liabilities in active markets; quoted prices for identical or
similar assets and liabilities in markets that are not active; or other inputs
that are observable or can be corroborated by observable market data.
 •Level 3 —
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities. This includes
certain pricing models, discounted cash flow methodologies and similar
techniques that use significant unobservable inputs.
 
 The
Company's adoption of SFAS No. 157 for its financial assets and liabilities
did not have a material impact on its consolidated financial statements. The
Company has segregated all financial assets and liabilities that are measured at fair value on a recurring basis (at least annually)
into the most appropriate level within the fair value hierarchy based on the
inputs used to determine the fair value at the measurement date in the table
below. FSP FAS 157-2 delayed the effective date for all nonfinancial assets
and liabilities until January 1, 2009, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis. The
Company will not apply the provisions of SFAS No. 157 until January 1, 2009 for
the following major categories of nonfinancial assets and liabilities: goodwill,
other intangible assets, and the decommissioning retirement
liability.
 
 The
Company’s assets measured at fair value on a recurring basis subject to the
disclosure requirements of SFAS 157 at September 28, 2008 were as follows (in
thousands):
  Quoted
      Prices
                in
      Active
                Markets
                (Level
      1)
              
              
              Significant
                Other
                Observable
                Inputs
                (Level
      2)
              
              
              Significant
      Unobservable
                Inputs
                (Level
      3)
              
              
              TotalMarketable
      securities
              
              $
              1,091
              
              
              $
              -
              
              
              $
              8,500
              
              
              $
              9,591
 The
following table provides a reconciliation between the beginning and ending
balances of items measured at fair value on a recurring basis in the table above
that used significant unobservable inputs (Level 3).
  Auction
      Rate SecuritiesBalance
      at January 1, 2008
              
              $
              --Realized
      gain (loss) included in earnings
              
              
              --Unrealized
      gain (loss) included in other comprehensive income
              
              
              --Purchases,
      sales and settlements, net
              
              
              --Transfers
      into Level 3
              
              
              8,500Balance
      at September 28, 2008
              
              $
              8,500
 
 Through
December 31, 2007, the Company valued all of its marketable securities at fair
value based on quoted market prices.  At September 28, 2008,
$1,091,000 of marketable securities consisted of “A+” rated corporate
bond funds and “AAA” rated asset
backed securities.  These securities were valued at fair value based
on quoted market prices.
  17
 THERAGENICS
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
28, 2008
 (Unaudited)
  The
remaining $8.5 million of marketable securities consisted of auction-rate
securities (“ARS”), of which $8.0 million are subject to a publicly announced
buy back program by one of the Company’s investment banks. During 2008, auctions
for all ARS began to fail due to insufficient buyers, as the amount of
securities submitted for sale in auctions exceeded the aggregate amount of the
bids.  For each failed auction, the interest rate on the security moves to
a maximum rate specified for each security, and generally resets at a level
higher than specified short-term interest rate benchmarks.  During the
first half of 2008, the Company had sold at par $5.4 million in ARS without
incurring any realized losses.  At September 28, 2008, the Company’s
entire remaining ARS securities portfolio, consisting of four investments in
ARS, was subject to failed auctions.  The Company estimated the fair
value of its ARS based on its investment banks’ estimates of value, which equal
the par value of the securities. The investment banks have notified the Company
that they utilize internal models to estimate fair value based on, among other
things, security yield, credit rating, and the average life of the assets in the
portfolio.  Accordingly, the Company has not recorded any unrealized
losses or impairment of the ARS. The estimated fair values could change
significantly based on future market conditions. The Company will continue to
assess the fair value of its ARS for substantive changes in relevant market
conditions, changes in financial condition or other changes that may alter the
Company’s estimates.  The Company may be required to record an
unrealized holding loss or an impairment charge to earnings if it determines
that its investment portfolio has incurred a decline in fair value that is
temporary or other-than-temporary, respectively.
  Three
investments in ARS totaling $8.0 million are subject to a settlement made by
Wachovia Securities, one of the Company’s investment banks, with the Securities
and Exchange Commission and various regulators.  Under the terms of
that settlement agreement, Wachovia agreed to reimburse its clients in full for
the face value of certain ARS. This reimbursement is scheduled to take place
between November 2008 and June 2009.  These $8 million of ARS qualify
under the terms of this settlement, and the Company expects full liquidation at
par in accordance with the terms of the settlement.  Accordingly,
these ARS have been classified as current in the Company’s consolidated balance
sheet.  To date, the Company has collected all interest due on these
$8.0 million of ARS and expects to continue to do so in the future. These
ARS are rated as “AAA” by Moody, and the contractual maturity of these
securities range from July 2037 to June 2038.
  One
investment in ARS totaling $500,000 is not part of the Wachovia settlement noted
above.  This ARS is rated “AA3” by Moody, and has
a contractual maturity of July 2033.  To date, the Company has
collected all interest due on this $500,000 of ARS and expects to continue to do
so.  As a result of the continued failed auctions with this ARS and
the uncertainty of when this investment could be liquidated at par, the Company
has classified this security as long-term at September 28, 2008.
  The
Company intends to either hold its ARS until they are liquidated in accordance
with the terms of the Wachovia Settlement, successful auctions occur, a buyer is
found outside of the auction process, the issuers establish a different form of
financing to replace these securities, or final payments come due according to
the contractual maturities of the debt issues.   The Company
believes that issuers and financial markets are exploring alternatives that may
improve liquidity, although it is not yet clear when or if such efforts will be
successful. The Company intends to hold its ARS until the full principal amount
can be recovered through one of the means described above, and believes it has
the ability to do so based on other sources of liquidity.
  The
Company reviews its investments in marketable securities for impairment based on
both quantitative and qualitative criteria that include the extent to which cost
exceeds market value, the duration of any market decline, the Company’s intent
and ability to hold to maturity or expected recovery, and the creditworthiness
of the issuer.  Management performs research and analysis, and
monitors market conditions to identify potential
impairments.  Currently, management has not recognized any impairment
charges related to its current investments in marketable
securities.  However, due to the uncertainties related to the U.S. and
global investment and credit markets, including markets related to auction rate
securities, the Company is exposed to the risk of changes in fair value of its
marketable securities in future periods, which may cause it to take impairment
charges that are not currently anticipated.  In the second quarter of
2008 the Company realized a loss of $256,000 when a highly rated bond fund that
it was invested in unexpectedly liquidated at less than full
value.  While management will continue to research, analyze and
monitor our investments, it cannot predict what the effect of current investment
and credit market circumstances might have on its portfolio going
forward.
  18
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
28, 2008
 (Unaudited)
  NOTE
L- SEGMENT REPORTING
 
 Theragenics
Corporation is a medical device company serving the surgical products and cancer
treatment markets, operating in two business segments. The Company’s surgical
products business consists of wound closure, vascular access, and specialty
needle products.  Wound closure includes sutures, needles, and other
surgical products.  Vascular access includes introducers, guidewires,
and related products.  Specialty needles include coaxial, biopsy,
spinal and disposable veress needles, access trocars, and other needle based
products.  The Company’s surgical products segment serves a number of
markets and applications, including among other areas, interventional
cardiology, interventional radiology, vascular surgery, orthopedics, plastic
surgery, dental surgery, urology, veterinary medicine, pain management,
endoscopy, and spinal surgery. The Company’s brachytherapy business manufactures
and markets its premier product, the palladium-103 TheraSeed®device,
and I-Seed, an iodine-125 based device, which are used primarily in the
minimally invasive treatment of localized prostate cancer.  The following
tables provide certain information for these segments (in
thousands):
 
 Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      28,
                2008
              
              
              September
      30
                2007
              
              
              September
      28,
                2008
              
              
              September
      30,
                2007RevenuesSurgical
      products
              
              $
              11,444
              
              
              $
              7,587
              
              
              $
              27,208
              
              
              $
              21,498Brachytherapy
      seed
              
              
              6,707
              
              
              
              8,477
              
              
              
              22,221
              
              
              
              25,676Intersegment
      eliminations
              
              
              (45
              )
              
              
              (63
              )
              
              
              (174
              )
              
              
              (147
              )$
              18,106
              
              
              $
              16,001
              
              
              $
              49,255
              
              
              $
              47,027Earnings
      (loss) from operationsSurgical
      products
              
              $
              1,170
              
              
              $
              1,160
              
              
              $
              4,211
              
              
              $
              2,766Brachytherapy
      seed
              
              
              (35
              )
              
              
              1,244
              
              
              
              1,774
              
              
              
              3,335Intersegment
      eliminations
              
              
              23
              
              
              
              (7
              )
              
              
              18
              
              
              
              (12
              )$
              1,158
              
              
              $
              2,397
              
              
              $
              6,003
              
              
              $
              6,089Increase
      in estimated value of asset held for saleSurgical
      products
              
              $
              --
              
              
              $
              --
              
              
              $
              --
              
              
              $
              --Brachytherapy
      seed
              
              
              --
              
              
              
              --
              
              
              
              (142
              )
              
              
              --$
              --
              
              
              $
              --
              
              
              $
              (142
              )
              
              $
              --Capital
      expendituresSurgical
      products
              
              $
              337
              
              
              $
              376
              
              
              $
              957
              
              
              $
              832Brachytherapy
      seed
              
              
              51
              
              
              
              59
              
              
              
              312
              
              
              
              391$
              388
              
              
              $
              435
              
              
              $
              1,269
              
              
              $
              1,223Depreciation
      and amortizationSurgical
      products
              
              $
              1,059
              
              
              $
              617
              
              
              $
              2,347
              
              
              $
              1,822Brachytherapy
      seed
              
              
              518
              
              
              
              955
              
              
              
              1,597
              
              
              
              2,889$
              1,577
              
              
              $
              1,572
              
              
              $
              3,944
              
              
              $
              4,711Fair
      value adjustment from acquired inventorySurgical
      products
              
              $
              490
              
              
              $
              –
              
              
              $
              490
              
              
              $
              –Brachytherapy
      seed
              
              
              –
              
              
              
              –
              
              
              
              –
              
              
              
              –$
              490
              
              
              $
              –
              
              
              $
              490
              
              
              $
              –
  The
Company evaluates business segment performance based on segment revenue and
segment earnings from operations.Earnings
from operations by segment do not include interest expense, interest income,
other income and expense, or provisions for income
taxes.  Intersegment eliminations are primarily for surgical products
segment sales transactions.
  19
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
28, 2008
 (Unaudited)
 September 28,
                2008
              
              
              December
      31,
                2007Identifiable
      assetsSurgical
      products
              
              $
              130,901
              
              
              $
              74,450Brachytherapy
      seed
              
              
              55,414
              
              
              
              79,359Corporate
      investment in subsidiaries
              
              
              110,939
              
              
              
              61,667Intersegment
      eliminations
              
              
              (110,998
              )
              
              
              (66,655
              )$
              186,256
              
              
              $
              148,821GoodwillSurgical
      products
              
              $
              65,246
              
              
              $
              36,080Brachytherapy
      seed
              
              
              2,578
              
              
              
              2,578$
              67,824
              
              
              $
              38,658Asset held for
      saleSurgical
      products
              
              $
              --
              
              
              $
              --Brachytherapy
      seed
              
              
              --
              
              
              
              2,900$
              --
              
              
              $
              2,900Other intangible
      assetsSurgical
      products
              
              $
              22,075
              
              
              $
              11,880Brachytherapy
      seed
              
              
              1
              
              
              
              1$
              22,076
              
              
              $
              11,881Contract termination
      liabilitySurgical
      products
              
              $
              --
              
              
              $
              --Brachytherapy
      seed
              
              
              --
              
              
              
              1,513$
              --
              
              
              $
              1,513
  Information
regarding revenue by geographic regions follows (in thousands):
  Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      28, 2008
              
              
              September
      30, 2007
              
              
              September
      28, 2008
              
              
              September
      30, 2007United
      States
              
              $
              16,114
              
              
              $
              14,771
              
              
              $
              44,234
              
              
              $
              43,709Europe
              
              
              1,468
              
              
              
              856
              
              
              
              3,720
              
              
              
              2,140Other
      foreign countries
              
              
              376
              
              
              
              130
              
              
              
              660
              
              
              
              499License
      fees (Canada)
              
              
              148
              
              
              
              244
              
              
              
              641
              
              
              
              679$
              18,106
              
              
              $
              16,001
              
              
              $
              49,255
              
              
              $
              47,027
 
 Foreign
sales are attributed to countries based on the location of the customer.
Thelicense
fees attributed to Canada are with Nordion, a Canadian based company, for the
license of the Company’s TheraSphere®
product.  All other foreign sales are related to the surgical products
segment.  All of the Company’s long-lived assets are located within
the United States.
  20
  THERAGENICS
CORPORATION AND SUBSIDIARIES
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER
28, 2008
 (Unaudited)
  NOTE
M – 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):
  Three Months
      Ended
              
              
              Nine months
      endedSeptember 28,2008
              
              
              September
      30,
                2007
              
              
              September 28,2008
              
              
              September
      30,
                2007Net
      earnings
              
              $
              641
              
              
              $
              1,763
              
              
              $
              3,915
              
              
              $
              4,475Weighted
      average common shares outstanding
              
              
              33,000
              
              
              
              33,118
              
              
              
              33,089
              
              
              
              33,101Incremental
      common shares issuable under stock options and awards
              
              
              139
              
              
              
              119
              
              
              
              148
              
              
              
              161Weighted
      average common shares outstanding assuming dilution
              
              
              33,139
              
              
              
              33,237
              
              
              
              33,237
              
              
              
              33,262Earnings
      per shareBasic
              
              $
              0.02
              
              
              $
              0.05
              
              
              $
              0.12
              
              
              $
              0.14Diluted
              
              $
              0.02
              
              
              $
              0.05
              
              
              $
              0.12
              
              
              $
              0.13
  For both
the three and nine months ended September 28 2008, potential common stock from
approximately 1,396,000 stock options were not included in the diluted earnings
per share calculation because their effect is antidilutive.  For the
three and six months ended September 30, 2007, potential common stock from
approximately 1,716,000 and 1,576,000 stock options, respectively, were not
included in the diluted earnings per share calculation because their effect is
antidilutive.
 
 NOTE
N – NON-OPERATING INCOME/(EXPENSE)
 
 Other
non-operating income/(expense) consists of the following:
 
 Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      28, 2008
              
              
              September
      30, 2007
              
              
              September
      28, 2008
              
              
              September
      30, 2007Realized
      loss on marketable securities
              
              $
              (2
              )
              
              $
              --
              
              
              $
              (254
              )
              
              $
              --Gain
      on sale of scrap metal
              
              
              213
              
              
              
              --
              
              
              
              457
              
              
              
              --Miscellaneous
              
              
              (2
              )
              
              
              (1
              )
              
              
              (58
              )
              
              
              1Total
      other
              
              $
              209
              
              
              $
              (1
              )
              
              $
              145
              
              
              $
              1
 
 NOTE
O – SALE OF OAK RIDGE FACILITY
  On July
23, 2008, the Company completed the sale of its Oak Ridge, Tennessee
facility.  At December 31, 2007, this facility was classified as a
long term “Asset Held for Sale”, with the associated “Contract Termination
Liability”, representing the underlying land sublease, classified as a
liability.  As part of this transaction, the facility was sold and the
underlying land sublease was terminated.   The $142,000 gain
realized from the completion of the sale in July, including the termination of
the sublease, was recognized as a change in the estimate of the fair value of
the Asset Held for Sale in the second quarter of 2008.
  21
  Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
  Overview
  Theragenics
Corporation is a medical device company serving the surgical products and cancer
treatment markets, operating in two business segments. The
terms "Company", "we", "us", or "our" mean Theragenics Corporation and all
entities included in our consolidated financial statements.
 
 Our surgical
products business consists of wound closure, vascular access, and specialty
needle products.  Wound closure includes sutures, needles and other
surgical products. Vascular access includes introducers, guidewires, and related
products.  Specialty needles include coaxial, biopsy, spinal and
disposable veress needles, access trocars, and other needle based
products.  This segment serves a number of markets and applications,
including among other areas, interventional cardiology, interventional
radiology, vascular surgery, orthopedics, plastic surgery, dental surgery,
urology, veterinary medicine, pain management, endoscopy, and spinal
surgery.
 
 In our
brachytherapy seed business, we produce, market and sell TheraSeed®, our
premier palladium-103 prostate cancer treatment device; I-Seed, our iodine-125
based prostate cancer treatment device; and other related products and services.
We are the world’s largest producer of palladium-103, the radioactive isotope
that supplies the therapeutic radiation for our TheraSeed® device.
Physicians, hospitals and other healthcare providers, primarily located in the
United States, utilize the TheraSeed® device.
The majority of TheraSeed® sales
are channeled through third-party distributors. We also sell our TheraSeed® and
I-Seed devices directly to physicians.
 
 We have
substantially diversified our operations and revenues in recent years. Prior to
2003, our sole product was the palladium-103 TheraSeed® prostate
cancer treatment device. In 2003, we began to market an iodine-125 based I-Seed
prostate cancer treatment product. In May 2005, we expanded into the surgical
products business with the acquisition of CP Medical Corporation (“CP Medical”)
followed by the acquisition of Galt Medical Corp. (“Galt”) in August 2006. In
July 2008, we acquired NeedleTech Products, Inc. (“NeedleTech”).  CP
Medical, Galt, and NeedleTech comprise our surgical products business, which
accounted for 63% and 55% of consolidated revenue for the three and nine
months ended September 28, 2008, respectively.  Prior to May 2005, the
brachytherapy seed business constituted 100% of our revenue.
  Acquisition of NeedleTech
Products
  We
acquired all of the outstanding common stock of NeedleTech Products, Inc.
(“NeedleTech”) on July 28, 2008.  The total purchase price, including
transaction costs, was approximately $43.5 million (net of cash, cash
equivalents, and marketable securities acquired of approximately $5.8
million).  We paid the purchase price in cash, including $24.5 million
of borrowings under our $40 million credit facility.  The purchase
price is subject to a working capital adjustment, which we expect to be
completed in the fourth quarter of 2008.
  NeedleTech,
located in Attleboro, Massachusetts, is a manufacturer of specialty needles and
related medical devices.  Their current products include coaxial
needles, biopsy needles, access trocars, brachytherapy needles, guidewire
introducer needles, spinal needles, disposable veress needles, and other
needle-based products.  End markets served include the cardiology,
orthopedics, pain management, endoscopy, spinal surgery, urology, and veterinary
medicine markets.  We believe the acquisition of NeedleTech will
forward our stated strategy of becoming a diversified medical device
manufacturer, will increase our breadth of offerings to our existing customers
and will expand our customer base of large leading-edge original equipment
manufacturers (“OEM”). The results of NeedleTech’s operations were included in
our consolidated results subsequent to acquisition.
  The
increase in the amortization of purchased intangibles in the 2008 periods is
attributable to amortization associated with the intangible assets recorded in
the NeedleTech acquisition.
  22
  Results
of Operations
  Revenue
  Following
is a summary of revenue by segment (in thousands):
  Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      28, 2008
              
              
              September
      30,
                2007
              
              
              Change
                (%)
              
              
              September
      28, 2008
              
              
              September
      30,
                2007
              
              
              Change
                (%)Surgical
      products
              
              $
              11,444
              
              
              $
              7,587
              
              
              
              50.8
              %
              
              $
              27,208
              
              
              $
              21,498
              
              
              
              26.6
              %Brachytherapy
      seedProduct
      sales
              
              
              6,515
              
              
              
              8,233
              
              
              
              (20.9
              %)
              
              
              21,511
              
              
              
              24,997
              
              
              
              (13.9
              %)License
      fees
              
              
              192
              
              
              
              244
              
              
              
              (21.3
              %)
              
              
              710
              
              
              
              679
              
              
              
              4.6
              %Total
      brachytherapy seed
              
              
              6,707
              
              
              
              8,477
              
              
              
              (20.9
              %)
              
              
              22,221
              
              
              
              25,676
              
              
              
              (13.5
              %)Intersegment
      eliminations
              
              
              (45
              )
              
              
              (63
              )
              
              
              28.5
              %
              
              
              (174
              )
              
              
              (147
              )
              
              
              (18.4
              %)Consolidated
              
              $
              18,106
              
              
              $
              16,001
              
              
              
              13.2
              %
              
              $
              49,255
              
              
              $
              47,027
              
              
              
              4.7
              %
  Revenue
in our surgical products business increased 51% in the third quarter of 2008 and
27% in the first nine months of the year compared to the 2007
periods.  This growth was driven primarily by the acquisition of
NeedleTech, and organic growth from new customers, expanded programs for
existing customers, and continued growth of new products introduced in late 2006
and early 2007, mainly in our vascular access products.  Ordering
patterns of our significant OEM customers and distributors also impacted 2008
revenue.  A significant portion of sales in our surgical products
business is made to OEM customers and a network of
distributors.  Ordering patterns of these customers vary and are
difficult to predict.  Accordingly, surgical products revenue is
subject to fluctuation on a quarter-to-quarter basis.
  Brachytherapy
seed revenue decreased 21% in the third quarter of 2008 and 14% in the first
nine months of the year compared to the 2007 periods.  The decrease in
product sales included a decline in sales to our main distributor of 22% in the
third quarter and 18% in the first nine months of the year, compared to
2007.  Our direct product sales decreased 22% in the third quarter and
11% in the first nine months of 2008.  We believe the brachytherapy
industry as a whole experienced softness in 2008, with fewer procedures
performed.  We believe this softness is attributable to a number of
factors, including competing treatments (especially those with favorable
reimbursement levels), disruptive pricing from other brachytherapy providers,
and uncertainties surrounding reimbursement.  In addition, our
revenues continue to be affected by the disappointing performance of our main
distributor.  The average selling price of the TheraSeed® device
sold directly to hospitals and physicians during the third quarter and first
nine months of 2008 was down slightly compared to the 2007 periods.
  We have
two non-exclusive distribution agreements in place for the distribution of the
TheraSeed® device.  The
primary distribution agreement is with C. R. Bard (“Bard”), which is effective
through December 31, 2009 (the “Bard Agreement”). Sales to Bard under the Bard
Agreement represented the following portion of segment and consolidated
revenue:
  Three
      Months Ended
              
              Nine
      Months EndedSeptember
      28,
              
              September
      30,
              
              September
      28,
              
              September
      30,2008
              
              2007
              
              2008
              
              2007Brachytherapy
      seed product sales
              
              
              51
              %
              
              
              51
              %
              
              
              51
              %
              
              
              54
              %Consolidated
      revenue
              
              
              18
              %
              
              
              26
              %
              
              
              22
              %
              
              
              28
              %
  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, 2009, and will be automatically extended for one additional year
unless either party gives notice of its intent not to extend by December 31,
2008.  We also have a non-exclusive distribution agreement in place
with a second distributor, though revenue generated from the second distributor
was not material.
  23
  In May
2008, we entered into an exclusive license agreement for the rights to certain
intellectual property related to a breast brachytherapy delivery system that we
developed.  The term of the agreement is based on the life of any
patents that result from the intellectual property licensed.  The
licensee has the right to terminate the agreement if appropriate patents are not
issued to us within four years.  The agreement provides for a minimal
non-refundable initial license fee and a continuing royalty based upon sales
subject to certain minimums.   The non-refundable initial license
fee is being amortized over the expected life of the
agreement.  License fee revenue under this agreement was not material
in the third quarter or the first nine months of 2008 and is not expected to be
material in 2009.
  We
believe that Medicare reimbursement policies have affected the brachytherapy
market and will continue to affect the brachytherapy market.  During
2007 Medicare continued to reimburse for brachytherapy seeds under the “charges
adjusted to costs” methodology, which is based on the actual invoiced cost of
the seeds and which we sometimes refer to as a “pass-through”
methodology.  In December 2007, Congress enacted the Medicare,
Medicaid and SCHIP Extension Act of 2007, which extended the existing cost-based
reimbursement methodology through June 30, 2008.  On July 15, 2008,
the Medicare Improvements for Patients and Providers Act of 2008 (the “2008
Act”) was enacted into law.  The 2008 Act extends Medicare’s
longstanding cost-based reimbursement methodology for brachytherapy seeds
administered in the hospital outpatient setting through December 31, 2009,
ensuring that the Medicare program does not implement potentially restrictive
caps on reimbursement during this period.  The 2008 Act is retroactive
to July 1, 2008.  The potential for fixed Medicare reimbursement rates
after the expiration of the 2008 Act and other factors can be expected to lead
to continued pricing pressure from hospitals and other health care
providers.  Any of these factors could have an adverse effect on
brachytherapy revenue.  See “Medicare Developments”
below.
  Operating
income (loss) and costs and expenses
  Following
is a summary of operating income (loss) by segment (in thousands):
  Three
      Months Ended
              
              
              Nine
      Months EndedSeptember
      28, 2008
              
              
              September
      30, 2007
              
              
              Change
                (%)
              
              
              September
      28, 2008
              
              
              September
      30, 2007
              
              
              Change
                ($)Operating
      income (loss)Surgical
      products
              
              $
              1,170
              
              
              $
              1,160
              
              
              
              .9
              %
              
              $
              4,211
              
              
              $
              2,766
              
              
              
              52.2
              %Brachytherapy
      seed
              
              
              (35
              )
              
              
              1,244
              
              
              
              (102.8
              %)
              
              
              1,774
              
              
              
              3,335
              
              
              
              (46.8
              %)Intersegment
      eliminations
              
              
              23
              
              
              
              (7
              )
              
              
              428.6
              %
              
              
              18
              
              
              
              (12
              )
              
              
              250.0
              %Consolidated
              
              $
              1,158
              
              
              $
              2,397
              
              
              
              (51.7
              %)
              
              $
              6,003
              
              
              $
              6,089
              
              
              
              (1.4
              %)
  Operating
income in our surgical products segment for the third quarter of 2008 was flat
compared to the second quarter of 2007.  Operating income in the first
nine months of 2008 increased $1.4 million, or 52%, over the first nine months
of 2007.  Operating results for the third quarter and first nine
months of 2008 included $590,000 in non-cash NeedleTech acquisition related
charges. These charges related to amortization of fair value adjustments to
inventory and short-lived intangible assets, both arising from purchase
accounting for NeedleTech.  We expect to record another $295,000 of
these non-cash charges in the fourth quarter of 2008, and then these particular
charges will not recur in 2009.  Exclusive of these charges, we
experienced improvements in gross margins on product sales as a result of
gaining scale from growth, product mix, and, to a limited extent, price
increases in certain product lines.  The gross margins in our surgical
products business are subject to fluctuation from product and sales channel
mix.
  24
  Selling,
general and administrative (SG&A) expenses in our surgical products business
were 19% of revenue in both the third quarter of 2008 and 2007 and 21% of
revenue in both the first nine months of 2008 and
2007.    The 2008 periods included a $164,000 benefit from
an adjustment to reduce share based and long-term incentive compensation expense
based on actual forfeitures experienced. This type of benefit to operating
expenses is not expected to continue, although compensation related expenses may
be adjusted from period to period based on actual forfeitures of share-based and
long-term incentive compensation.    We expect to continue
to invest in infrastructure in our surgical products business during the
remainder of 2008 and in 2009, as investments are made to support anticipated
future growth and as products are developed to address growth
opportunities.  Looking forward, our quarterly results are expected to
be affected by the timing of these investments.
 
 In our
brachytherapy business we recorded an operating loss of $35,000 in the third
quarter of 2008, compared to $1.2 million of operating income in
2007.  For the year to date period, we recorded operating income of
$1.8 million in 2008, compared to $3.3 million in 2007. These declines were
primarily due to the lower revenue in 2008. Manufacturing related expenses in
our brachytherapy business tend to be fixed in nature.  Accordingly,
even modest declines in revenue have a negative impact on operating
income.  Gross margins and operating income in our brachytherapy seed
business are expected to continue to be highly dependent on sales levels, due to
this high fixed cost component.   We also had other items
affecting comparability of our brachytherapy results.   In the
fourth quarter of 2007 we changed the estimated useful life of our cyclotrons
from 10 years to 15 years.  This change reduced depreciation expense
in our brachytherapy segment by $318,000 and $1.2 million from what would have
been reported otherwise in the third quarter and first nine of 2008,
respectively, over the comparable 2007 periods.  The 2007 periods
included severance costs that were not incurred in 2008.  And finally,
we sold our Oak Ridge building in the third quarter of 2008, and began to
realize reduced expenses associated with maintaining that
facility.  Excluding the reduction in depreciation expense, the effect
of severance costs, and the reduction in operating expenses from the sale of our
Oak Ridge building, total operating costs for the third quarter and first nine
months of 2008 in our brachytherapy business were flat compared to
2007.  Looking forward, we expect brachytherapy operating expenses to
decline approximately $400,000 to $500,000 annually as a result of the sale of
our Oak Ridge facility in July 2008 and the elimination of the carrying costs
related to that facility (see “Asset Held for Sale” below).
  Asset
Held for Sale
  On July
23, 2008, we completed the sale of our Oak Ridge, Tennessee
facility.  At December 31, 2007, this facility was classified as a
long term “Asset Held for Sale”, with the associated “Contract Termination
Liability”, representing the underlying land sublease, classified as a
liability.  As part of this transaction, the facility was sold and the
underlying land sublease was terminated.   The $142,000 gain
realized from the completion of the sale in July, including the termination of
the sublease, was recognized as a change in the estimate of the fair value of
the Asset Held for Sale in the second quarter of 2008.
  Research
and Development
  Research
and development (R&D) expenses totaled $373,000 in the third quarter of 2008
and $667,000 in the year to date period.  In the third quarter of 2008
we implemented a R&D program to support new product development, primarily
in our surgical products business.  Our R&D expenses will increase
significantly as a result of this effort and may total up to $1.5 million
annually.  The amounts invested will be dependent upon a number of
factors, including our ability to obtain qualified personnel and the types of
activities required for our product development.  In some cases we
will develop extensions of current products.  In other cases we will
develop products that are complementary to our existing product line and also
develop new products.  We expect that this investment will accelerate
our entrance into new markets, expand our offerings to new and existing
customers, and support growth in our surgical products business.
  25
  Other
  Interest
income decreased to $173,000 in the third quarter of 2008 from $530,000 in
2007.  For the first nine months of 2008, interest income decreased to
$929,000, from $1,653,000 in 2007.  These reductions were primarily
due to fewer funds available for investment due to the use of cash for the
NeedleTech acquisition and the inclusion of $309,000 of one-time interest income
in the 2007 periods related to $1.9 million of refunded federal income
taxes.  The interest income was recognized in the second quarter of
2007 upon settlement of the IRS’ examination of the Company’s 2004 federal
income tax return. Interest income also decreased in the 2008 periods due to
lower yields on our investments.  Lower yields have been a result of
both our movement to more conservative investment, and declining yields in the
marketplace.  With the exception of certain investments in auction
rate securities (see Liquidity
- Marketable Securities, and Critical Accounting
Policies,below), our investments
consist primarily of money funds, short term U.S. Treasury Bills, and
high-credit quality corporate and municipal obligations, in accordance with our
investment policies. Funds available for investment have and will continue to be
utilized for our current and future expansion programs and strategic
opportunities for growth and diversification. As funds continue to be used for
these programs and activities, and as interest rates continue to change, we
expect interest income to fluctuate accordingly.
  The
changes in our interest expense from 2007 to 2008 are primarily a result of two
factors.  First, the effective interest rate on outstanding borrowings
under our Credit Facility has steadily declined during 2008.  Our
effective rate declined from 6.5% at January 1, 2008 to 4.1% at March 31,
2008.  Our rate then declined to 3.4% by September 28,
2008.  The effective rate on our borrowings is LIBOR plus
1%.  These declines reflect the decline in the LIBOR
rate.  It is impossible for us to predict the future direction of the
LIBOR rate or any interest rate, especially in the current economic and credit
environment.  The second factor affecting our interest expense was an
increase in borrowings under our Credit Facility.  On July 28, 2008,
we increased our borrowings from $7.5 million to $32.0 million in connection
with the NeedleTech acquisition. Interest expense in the year to date period
decreased from $528,000 in 2007 to $518,000 in 2008, as the effect of the
decline in our interest rate for the nine month period offset the increase in
interest resulting from two months of additional borrowings outstanding (our
additional borrowings were outstanding from July 28, 2008 to September 28,
2008).  In the third quarter interest expense increased from $177,000
in 2007 to $241,000 in 2008, due to the increased borrowings under our Credit
Facility.  The increase over 2007 would have been greater had our
effective interest rate not declined in 2008.    Looking
forward, interest expense in the fourth quarter of 2008 and in the first three
quarters of 2009 will increase as compared to their year over year periods due
to the additional amounts outstanding under our Credit
Facility.  Interest expense will also be affected by fluctuations in
our effective interest rate, and any increases in borrowings or repayments of
borrowings.
 
 Other
non-operating income in the 2008 periods totaled $209,000 in the third quarter
and $145,000 in the first nine months of the year.  These amounts
primarily consisted of gains from the sale of scrap metal from one of our
operating facilities of $213,000 in the third quarter and $457,000 in the year
to date period. Looking forward, we do not expect to continue to realize such
gains in the near future.  Offsetting this gain for the nine month
period in 2008 was a $254,000 realized loss on marketable
securities.  The investment loss resulted primarily from the
liquidation of a bond fund at less than full value.    For
more information on the risks related to our investments, see ‘Critical Accounting Policies”,
“Liquidity and Capital Resources”,and “Item 3, Quantitative and
Qualitative Disclosures About Market Risk”,all of which are included in
this report.
  Income
Tax Expense
  Our
effective income tax rate in the third quarter and first nine months of 2008 was
approximately 51% and 40%, respectively, compared to 36% and 38% for each of the
comparable 2007 periods.   This rate includes federal and state
income taxes. The tax rate in the third quarter of 2008 was significantly higher
than our normal rates because of the non-cash write off of a deferred income tax
asset related to certain non-qualified stock options.  These options
expired unexercised in the third quarter, requiring us to write off the $302,000
deferred tax asset associated with them in that period. This income tax expense
amount is not related to the amount of pre-tax income and, accordingly, has a
significant effect on the tax rate.  The 2008 year to date tax rate
was also affected by this charge.  However, the effect on the year to
date tax rate was less than the effect on the rate in the third quarter because
of the higher pre-tax income amount in the nine month period. Looking forward,
we expect our income tax rates to be comparable to those reported during 2007
and the first half of 2008.
  26
  We
previously reported that we expected to record this income tax charge related to
certain non-qualified stock options in the third quarter of
2008.   In prior periods, it appeared unlikely that these options
would be exercised prior to their expiration, as their exercise price
significantly exceeded the market price of our common stock.  However,
under Statement of Financial Accounting Standards 123R, “Share-Based Payment” (“SFAS
123R”), differences between deductible temporary differences related to share
based payments and the tax deduction that would result based on the current fair
value of our shares cannot be considered in measuring the gross deferred tax
asset or determining the need for a valuation allowance recognized under SFAS
123R.  In other words, prior to the expiration of these options, SFAS
123R prohibited the recording of a valuation allowance for the related deferred
tax asset or the writing off of this asset, even though we believed that the
asset would not ultimately be realized.  Under SFAS 123R, a company is
permitted to record these kinds of charges to an “APIC Pool”, if one
exists.  If an APIC Pool does not exist, then these amounts must be
recorded as income tax expense.  Generally speaking, an “APIC Pool” is
the cumulative amount by which income tax deductions for share-based payments
have exceeded financial statement expenses.  We did not have such an
APIC Pool when the options expired and, accordingly, the charge was recorded as
income tax expense in the period in which the options expired.
 
 Goodwill
 
 In
accordance with the provisions of Statement of Financial Accounting Standards
No. 142, Goodwill and Other
Intangible Assets (“SFAS 142”), we perform an assessment of goodwill
impairment annually, or more frequently if events or changes in circumstances
indicate that impairment in the value of goodwill recorded on our balance sheet
may exist.  We typically perform our annual assessment during the
fourth quarter of each year, which coincides with the timing of our annual
budgeting and forecasting process. In order to estimate the fair value of
goodwill, we typically make various assumptions about the future prospects for
the reporting unit that the goodwill relates to, consider market factors
specific to that reporting unit, and estimate future cash flows to be generated
by that reporting unit.  Assumptions used in these assessments are
consistent with our internal planning.
 
 We
recorded $29.2 million of goodwill in connection with our acquisition of
NeedleTech in the third quarter of 2008.  This was based on a
preliminary allocation of the purchase price, prior to a possible working
capital adjustment to the purchase price, in accordance with the terms of the
purchase agreement.  We expect any working capital adjustment and any
other adjustments to the allocation of purchase price to be completed in the
fourth quarter of 2008.
 
 The total
amount of goodwill on our balance sheet at September 28, 2008 was $67.8
million.  $65.2 million is related to our surgical products segment,
and $2.6 million is related to our brachytherapy segment.  Recent
events in the U.S. and global credit markets, banking and financial markets, and
negative economic news in general, have caused significant volatility in the
prices of common stocks listed on the U.S. and global stock
exchanges.  A significant amount of volatility has occurred in October
2008 through the current date and most commentators expect such volatility to
continue, at least in the near term, and possibly longer term.  Our
common stock is listed and traded on the New York Stock Exchange
(“NYSE”).  The trading prices of many companies, including our own,
have declined significantly during this period, along with significant declines
in the overall market value of the composite of all shares traded on the stock
exchanges.  Accordingly, we considered whether our share price, as
quoted by the NYSE, in relation to the carrying value of our net assets
indicated that our goodwill was impaired.  We considered, among other
things, our recent operating performance and results, recent and expected future
cash flows, recent events in the banking, finance, credit and stock markets, and
other factors.  As a result, we have concluded that the recent events
and circumstances as disclosed above did not require us to perform an assessment
of goodwill impairment in the third quarter.
 
 We expect
to perform our annual test of impairment of goodwill in December 2008, in
accordance with our standard policies and practices.  In accordance
with SFAS 142, we will also continue to monitor changing circumstances and
events that may indicate that impairment of the value of our goodwill may
exist.  This may result in charges to our statements of income in
future reporting periods if we determine that goodwill has been impaired at a
future date.
  27
  Critical
Accounting Policies
  The
preparation of financial statements requires us to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. The SEC defines “critical accounting policies” as those that
require application of our most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods. Our significant
accounting policies are more fully described in the notes to our consolidated
financial statements included in our Form 10-K for the year ended December 31,
2007. Certain accounting policies, as more fully described under “Critical Accounting Policies and
Estimates” included in our Form 10-K for the year ended December 31,
2007, are those which we believe are most critical in fully understanding and
evaluating our reported financial results, and are areas in which our judgment
in selecting an available alternative might produce a materially different
result.
  In
addition to those critical accounting policies and estimates set forth in Item 7
in our Form 10-K for the year ended December 31, 2007, the following critical
accounting policies and estimates should also be considered.
 
 Marketable
securities.We review our investments in marketable securities
for impairment based on both quantitative and qualitative criteria that include
the extent to which cost exceeds market value, the duration of any market
decline, our intent and ability to hold to maturity or expected recovery, and
the creditworthiness of the issuer.  We perform research and analysis,
and monitor market conditions to identify potential
impairments.  Currently, we have not recognized any impairment charges
related to our current investments in marketable securities.  However,
due to the uncertainties related to the U.S. and global investment and credit
markets, including markets related to auction rate securities, we are exposed to
the risk of changes in fair value of our marketable securities in future
periods, which may cause us to take impairment charges that we do not currently
anticipate.  In the second quarter of 2008 we realized a loss of $256,000
when a highly rated bond fund that we were invested in unexpectedly liquidated
at less than full value.  While we will continue to research, analyze
and monitor our investments, we cannot predict what the effect of current
investment and credit market circumstances might have on our portfolio going
forward.  You can find more information related to the valuation of
our marketable securities in Note K in the accompanying condensed consolidated
financial statements, “Liquidity and Capital Resources”in Management’s Discussion and Analysis, and “Item 3,Quantitative and Qualitative
Disclosures About Market Risk”, all of which are included in this
report.
  New
Accounting Pronouncements
 
 In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) 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 was effective for us on
January 1, 2008.  However, in February 2008 the FASB released FASB
Staff Position No. FAS 157-2, Effective Date of FASB Statement
No. 157, which delayed the effective date of SFAS 157 for all
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed in the financial statements at fair value at least
annually.  Accordingly, we have adopted the provisions of SFAS 157
only with respect to our financial assets and liabilities as of January 1,
2008. We will not apply the provisions of SFAS No. 157 until January 1,
2009 for the following major categories of nonfinancial assets and liabilities:
goodwill, other intangible assets, and the decommissioning retirement
liability.  On October 10, 2008, the FASB issued FASB Staff Position
No. FAS 157-3, Determining the
Fair Value of a Financial Assets When the Market for That Asset is Not Active(which was effective upon issuance),to clarify the application
of SFAS 157 in a market that is not active.  The adoption of SFAS 157
for our financial assets and liabilities did not have a material impact on our
consolidated financial statements.  We are currently assessing the
potential effect on our consolidated financial statements of the adoption of
SFAS 157 for our non-financial assets and liabilities, which we will adopt on
January 1, 2009.
  28
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an amendment of FASB Statement No.
115 (“SFAS
159”).  SFAS 159 permits entities to choose to measure eligible items
at fair value at specified election dates and report unrealized gains and losses
on items for which the fair value option has been elected in earnings at each
subsequent reporting date.  SFAS No. 159, which we adopted on January
1, 2008, did not have a material impact on our consolidated financial
statements. As permitted under SFAS 159, we havecurrently chosen not to
elect the fair value option for any items that are not already required to be
measured at fair value in accordance with accounting principles generally
accepted in the United States.
 
 In
December 2007, the FASB issued SFAS 141R, Business Combinations, which
we will adopt on January 1, 2009. This standard will significantly change the
accounting for business acquisitions both during the period of the acquisition
and in subsequent periods. Among the more significant changes in the accounting
for acquisitions are the following:
 
 ●
              Transaction
      costs will generally be expensed. Certain such costs are presently treated
      as costs of the acquisition.●
              In-process
      research and development (IPR&D) will be accounted for as an asset,
      with the cost recognized as the research and development is realized or
      abandoned. IPR&D is presently expensed at the time of the
      acquisition.●
              Contingencies,
      including contingent consideration, will generally be recorded at fair
      value with subsequent adjustments recognized in operations. Contingent
      consideration is presently accounted for as an adjustment of purchase
      price.●
              Decreases
      in valuation allowances on acquired deferred tax assets will be recognized
      in operations. Such changes previously were considered to be subsequent
      changes in the allocation of the purchase price and were recorded as
      decreases in goodwill.
  Generally,
the effects of SFAS 141R on our consolidated financial statements will
depend on acquisitions occurring in 2009 and thereafter.  We followed
SFAS 141, Business
Combinations, as originally issued for our NeedleTech acquisition in July
2008.
  In April
2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3 (‘FSP FAS 142-3 “),
Determination of the
UsefulLife of
Intangible Assets.  FSP FAS 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other
Intangible Assets.  The intent of
the FSP FAS 142-3 is to improve the consistency between the useful life of a
recognized intangible asset under SFAS 142 and the period of expected cash flows
used to measure the fair value of the asset under SFAS 141R and other U.S.
generally accepted accounting principles (“GAAP”).  FSP FAS 142-3 is
effective beginning January 1, 2009.  The guidance for determining the
useful life of intangible assets included in this FSP will be applied
prospectively to intangible assets acquired after the January 1, 2009 effective
date.  We are evaluating the impact of FSP FAS 142-3, and the
potential impact of this statement on our consolidated financial statements has
not been determined.
  29
  Liquidity
and Capital Resources
  Cash
Flows
 
 We had
cash, cash equivalent and marketable securities of $38.5 million at September
28, 2008, compared to $48.8 million at December 31, 2007. For a description of
our marketable securities, please see “Marketable Securities” below. Working
capital was $58.7 million at September 28, 2008, compared to $62.3 million at
December 31, 2007. We believe that current cash and investment balances and cash
from future operations and credit facilities will be sufficient to meet our
current anticipated working capital and capital expenditure requirements. In the
event additional financing becomes necessary, we may choose to raise those funds
through other means of financing as appropriate.
  In July
2008, we acquired all of the outstanding common stock of NeedleTech Products,
Inc. (“NeedleTech”) for $49.3 million in cash including transaction
costs.  We retained the cash, cash equivalents and marketable
securities held by NeedleTech, which had an estimated fair value of
approximately $5.8 million at July 28, 2008.  The purchase price is
subject to a working capital adjustment, which we expect to be completed in the
fourth quarter of 2008.   We financed $24.5 million of the
purchase price with borrowings on our existing $40.0 million credit facility,
and paid the remainder from our current cash and investment
balances.
  Cash
provided by operations was $9.4 million and $13.1 million during the nine months
ended September 28, 2008 and September 30, 2007, respectively. Cash provided by
operations consists of net earnings plus non-cash expenses such as depreciation,
amortization, deferred income taxes and changes in balance sheet items such as
accounts receivable, inventories, and payables.  The primary reasons
for the decline in cash from operations in 2008 include an increase in
inventories, resulting from the growth in the surgical products segment, and an
increase in income taxes paid of approximately $3.9 million.  During
2007, we utilized net operating loss carryforwards to reduce a substantial
portion of current income taxes that would have otherwise been
payable.  We also received a federal income tax refund of $1.9 million
during 2007.  All net operating loss carryforwards for federal income
tax purposes were utilized by December 31, 2007.
  At June
30, 2008, we had a deferred tax asset of approximately $4.0 million related to
our asset held for sale and contract termination liability.  This
deferred tax asset arose because we were unable to deduct for income tax
purposes the loss we recorded in our financial statements related to the write
off of that asset.  We recorded the financial statement expense in
2005, in connection with our 2005 restructuring.  The sale of that
asset and the termination of the contract liability were completed in July
2008.  Accordingly, we expect to be able to utilize the tax deduction
in 2008 and reduce future income tax payments and/or obtain refunds of income
taxes previously paid by a total of approximately $4.0 million. This is a one
time benefit that affects our income tax payments, and we do not expect this to
have an effect on our reported amounts of income tax expense, or our effective
income tax rates.
 
 Capital
expenditures totaled $1.3 million and $1.2 million during the first nine months
of 2008 and 2007, respectively.  We expect capital expenditures in
2008 to continue to be higher than 2007 as we make investments primarily in the
surgical products business.
 
 Cash
provided by financing activities in the first nine months of 2008 consist
primarily of the $24.5 million proceeds from our Credit Facility, which was used
in our NeedleTech acquisition, offset by $691,000 for the payment of certain
expenses for which we were indemnified and reimbursed by receipt of 202,000
shares of our common stock.  Those shares were subsequently
retired.  Cash provided by financing activities was $170,000 in the
first nine months of 2007 consisting of cash proceeds from our Employee Stock
Purchase Plan and from the exercise of stock options.
 
 We
expect to use cash in 2008 for the implementation of our corporate wide R&D
program (see “Research and Development” above).  We may continue to
use cash in 2008 to support growth in the surgical products segment, for
increased marketing and TheraSeed®support
activities, and in the pursuit of additional diversification efforts such as
product development and the purchase of technologies, products or
companies.
  30
 MarketableSecurities
 
 We held
$9.6 million of marketable securities at September 28, 2008.  This
included $1.1 million of “A+” rated corporate
bond funds and “AAA” rated asset
backed securities.  These securities were valued at fair value based
on quoted market prices.
 
 The
remaining $8.5 million of marketable securities consisted of auction-rate
securities (“ARS”), of which $8.0 million are subject to a publicly announced
buy back program by one of our investment banks. During 2008, auctions for all
ARS began to fail due to insufficient buyers, as the amount of securities
submitted for sale in auctions exceeded the aggregate amount of the bids. 
For each failed auction, the interest rate on the security moves to a maximum
rate specified for each security, and generally resets at a level higher than
specified short-term interest rate benchmarks.  During the first half of
2008 we sold at par $5.4 million of ARS without incurring any realized
losses.  At September 28, 2008, our entire remaining ARS securities
portfolio, consisting of four investments in ARS, was subject to failed
auctions.  We estimated the fair value of our ARS at September 28,
2008 based on our investment banks’ estimates of value, which equals the
par value of the securities. Our investment banks have notified us that they
utilize internal models to estimate fair value based on, among other things,
security yield, credit rating, and the average life of the assets in the
portfolio.  Accordingly, we have not recorded any unrealized losses or
impairment of the ARS. The estimated fair values could change significantly
based on future market conditions. We will continue to assess the fair value of
our ARS for substantive changes in relevant market conditions, changes in
financial condition or other changes that may alter our estimates.  We
may be required to record an unrealized holding loss or an impairment charge to
earnings if we determine that our investment portfolio has incurred a decline in
fair value that is temporary or other-than-temporary, respectively.
  Three
investments in ARS totaling $8.0 million are subject to a settlement made by
Wachovia Securities, one of our investment banks, with the Securities and
Exchange Commission and various regulators.  Under the terms of that
settlement agreement, Wachovia agreed to reimburse its clients in full for the
face value of the ARS.  These reimbursements are scheduled to take
place between November 2008 and June 2009.  This $8.0 million of our
ARS qualify under the terms of this settlement, and we expect full liquidation
at par in accordance with the terms of the settlement.  Accordingly,
these ARS have been classified as current in our consolidated balance
sheet.  To date, we have collected all interest due on these $8.0
million of ARS and expect to continue to do so in the future.  These
ARS are rated as “AAA” by Moody, and the contractual maturity of these
securities range from July 2037 to June 2038.
  One
investment in ARS totaling $500,000 is not part of the Wachovia settlement noted
above.  This ARS is rated “AA3” by Moody, and has
a contractual maturity of July 2033.  To date, we have collected all
interest due on this $500,000 of ARS and expect to continue to do
so.  As a result of the continued failed auctions with this ARS and
the uncertainty of when this investment could be liquidated at par, we have
classified this security as long-term at September 28, 2008.
  We intend
to hold our ARS until they are either liquidated in accordance with the terms of
the Wachovia Settlement, successful auctions occur, a buyer is found outside of
the auction process, the issuers establish a different form of financing to
replace these securities, or final payments come due according to the
contractual maturities of the debt issues.   We believe that
issuers and financial markets are exploring alternatives that may improve
liquidity, although it is not yet clear when or if such efforts will be
successful. We intend to hold our ARS until the full principal amount
can be recovered through one of the means described above, and believe we
have the ability to do so based on other sources of liquidity.
  We review
our investments in marketable securities for impairment based on both
quantitative and qualitative criteria that include the extent to which cost
exceeds market value, the duration of any market decline, our intent and ability
to hold to maturity or expected recovery, and the creditworthiness of the
issuer.  We perform research and analysis, and monitor market
conditions to identify potential impairments.  Currently, we have not
recognized any impairment charges related to our current investments in
marketable securities.  However, due to the uncertainties related to
the U.S. and global investment and credit markets, including markets related to
auction rate securities, we are exposed to the risk of changes in fair value of
our marketable securities in future periods, which may cause us to take
impairment charges that are not currently anticipated.  In the second
quarter of 2008 we realized a loss of $256,000 when a highly rated bond fund
that we were invested in unexpectedly liquidated at less than full
value.  While we will continue to research, analyze and monitor our
investments, we cannot predict what the effect of current investment and credit
market circumstances might have on our portfolio going forward.
  31
  Credit
Agreement
 
 We have a
Credit Agreement with a financial institution that provides for revolving
borrowings of up to $40.0 million, including a $5.0 million sub-limit for
letters of credit, through a credit facility, which expires on October 31, 2009.
Borrowings of $32.0 million were outstanding under the Credit Agreement as of
September 28, 2008.  Interest is payable quarterly at LIBOR plus 1%
(effective rate of 3.5% at September 28, 2008).  Letters of credit,
representing decommission funding required by the Georgia Department of Natural
Resources, totaling $876,000 were outstanding under the Credit Agreement as of
September 28, 2008. The Credit Agreement is unsecured, but provides for a lien
to be established on substantially all of our assets (subject to certain
exceptions) in the event certain events of default occur under the Credit
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.  We were in
compliance with these covenants as of September 28, 2008.
  U.S. and
global market and economic conditions continue to be disrupted and volatile, and
the disruption has been particularly acute in the financial sector. Although we
believe we have not suffered any material liquidity issues as a result of these
recent events, the cost and availability of funds may be adversely affected by,
among other things, illiquid credit markets.  Our $40 million credit
facility expires in October 2009.  Continued disruption in U.S. and
global markets could adversely affect our ability to renew this credit facility
and any renewed facility may be under terms that are not as favorable as the
current credit facility.  The negative impact of recent adverse
changes in the credit markets generally or our inability to obtain financing on
favorable terms, if at all, may have a material adverse effect on our results of
operations and business.
  Medicare
Developments
  The
Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “2003
Act”), which went into effect on January 1, 2004, contained brachytherapy
provisions requiring Medicare to reimburse hospital outpatient
departments for each brachytherapy seed/source furnished between January 1,
2004 to December 31, 2006 based on the hospital’s costs for each patient
(calculated from the hospital’s charges adjusted by the hospital’s specific
cost-to-charge ratio). The 2003 Act also directed the U.S. Government
Accountability Office (“GAO”) to conduct a study examining future payment
policies for brachytherapy seeds. The GAO published its report on July 25, 2006,
concluding that the Centers for Medicare & Medicaid Services (“CMS”), the
regulatory body that sets Medicare reimbursement policies, could establish
separate prospective payment rates effective in 2007 for palladium-103
brachytherapy seeds/sources (such as TheraSeed®) and
iodine-125 seeds/sources using Medicare’s hospital outpatient data.
  Although
subsequently superceded by Congress, CMS posted a final rule on November 1, 2006
with fixed prospective payment rates for brachytherapy seeds for Medicare’s
hospital outpatient prospective payment system (“OPPS”) that would have applied
to calendar year 2007. The use of prospective payment rates would have fixed the
per seed rate at which Medicare would have reimbursed hospitals in 2007. We
believed that CMS’ approach to determining the fixed prospective reimbursement
rate for brachytherapy seeds was fundamentally flawed. For example, CMS did not
stratify cost data on differing seed configurations, such as loose versus
“stranded” seeds. Accordingly, we continued to work with policy makers in an
effort to rectify the shortcomings we believed to be contained in the new CMS
rule.
  In
December 2006, Congress enacted the Tax Relief and Health Care Act of 2006 (the
“2006 Act”), which extended and refined the Medicare safeguards initially
enacted by Congress in 2003 for brachytherapy seeds administered in the hospital
outpatient setting. The 2006 Act’s provisions on brachytherapy superceded the
final rule published by CMS on November 1, 2006 by extending the existing
“charges adjusted to cost” reimbursement policies (which we sometimes refer to
as a “pass-through” methodology) for brachytherapy seeds through the end of
2007, ensuring that the Medicare program would not implement potentially
restrictive caps on reimbursement during that period. In addition, the
legislation recognized that prostate cancer patients must have meaningful access
to stranded brachytherapy seeds, which increasingly are used in clinical
practice to further enhance the safety and efficacy of treatment. The 2006 Act
also established a permanent requirement for Medicare to use separate codes for
the reimbursement of stranded brachytherapy devices. Stranded seeds are becoming
a larger portion of our brachytherapy business.
  32
  Effective
July 2007, CMS issued new reimbursement codes for brachytherapy sources. The
codes are isotope specific and recognize the distinction between non-stranded
versus stranded seeds, as mandated by the 2006 Act. In early November 2007, CMS
again posted a final OPPS rule for calendar year 2008 with fixed prospective
reimbursement rates for all brachytherapy source codes, including the new codes
established in July 2007.
  In
December 2007, Congress passed the Medicare, Medicaid and SCHIP Extension Act of
2007 (the “2007 Act”), which once again superseded another CMS final OPPS rule
by extending the existing “pass-through” reimbursement policies for
brachytherapy seeds through June 30, 2008. Fixed reimbursement rates would have
become effective on January 1, 2008 without the enactment of the 2007 Act. As a
result of the 2007 Act, fixed reimbursement rates for seeds were delayed until
July 1, 2008.
  On July
15, 2008, the Medicare Improvements for Patients and Providers Act of 2008 (the
“2008 Act”) was enacted into law.  The 2008 Act extends Medicare’s
longstanding “pass through” reimbursement policies for brachytherapy seeds
administered in the hospital outpatient setting through December 31, 2009,
ensuring that the Medicare program does not implement potentially restrictive
caps on reimbursement during this period.  The 2008 Act is retroactive
to July 1, 2008.  The potential for fixed reimbursement rates after
the expiration of the 2008 Act on December 31, 2009 and other factors can be
expected to lead to continued pricing pressure from hospitals and other health
care providers. Any of these factors could have an adverse effect on
brachytherapy revenue.
  Forward
Looking and Cautionary Statements
  This
document contains certain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, the accuracy of which is
necessarily subject to risks and uncertainties, including, without limitation,
statements regarding sales, marketing and distribution efforts, ordering
patterns of customers, our direct sales organization and its growth and
effectiveness, third-party reimbursement, CMS policy, sales mix, effectiveness
and continuation of non-exclusive distribution agreements, pricing for the
TheraSeed® and
I-Seed devices, anticipated growth in the surgical products business segment,
future cost of sales and gross margins, R&D efforts and expenses (including
our centralized, corporate-wide R&D initiative), investment in additional
personnel, infrastructure and capital assets, SG&A expenses, other income,
potential new products and opportunities, the potential effect of the NeedleTech
acquisition on our surgical products business and on our consolidated results
generally, expected reductions in operating expenses from the sale of our Oak
Ridge facility, expected changes in interest income and interest expenses, the
effect on our results and cash flows from accounting for the income tax effect
of the sale of our Oak Ridge facility, future results in general, plans and
strategies for continuing diversification, valuation of auction rate
securities and other marketable securities, and the sufficiency of our
liquidity and capital resources. From time to time, we may also make other
forward-looking statements relating to such matters as well as statements
relating to anticipated financial performance, business prospects, technological
developments and similar matters. These forward-looking statements are subject
to certain risks, uncertainties and other factors which could cause actual
results to differ materially from those anticipated, including risks associated
with new product development cycles, effectiveness and execution of marketing
and sales programs of our business segments and their distributors, competitive
conditions and selling tactics of our competitors, potential changes in
third-party reimbursement (including CMS), changes in product pricing by our
brachytherapy business segment, changes in cost of materials used in production
processes, continued acceptance of our products by the market, potential changes
in demand for the products manufactured and sold by our brachytherapy and
surgical products segments, integration of acquired companies into the
Theragenics organization, capitalization on opportunities for growth within our
surgical products business segment, competition within the medical device
industry, development and growth of new applications within our markets,
competition from other methods of treatment, ability to execute on acquisition
opportunities on favorable terms and successfully integrate any acquisitions,
the ability to realize our estimate of fair value upon sale or other liquidation
of auction rate securities and other marketable securities that we
hold, volatility
in U.S. and global stock markets, economic conditions generally, potential
changes in tax rates and market interest rates, the effect of current
difficulties in the credit markets on our business, our ability to
renew  or replace our current credit facility and the current
expectation that a renewed or replacement credit facility would be on less
favorable terms than the current facility in view of current market conditions,
the impact of future events and conditions on our assessment of goodwill that
could result in recording impairment charges,and the risks identified
elsewhere in this report.  All forward looking statements and
cautionary statements included in this document are made as of the date hereof
based on information available to us, and we assume no obligation to update any
forward looking statement or cautionary statement.
  33
 Item
3. Quantitative and
Qualitative Disclosures About Market Risk
 
 We have
generated substantial cash balances, portions of which are invested in
marketable securities that meet our requirements for quality and
return.  At September 28, 2008, we had $28.9 million in cash and cash
equivalents and $9.6 million of investments in marketable
securities.  Our cash and cash equivalents represent cash deposits,
and money market funds, which are invested with four financial institutions,
commercial paper, and U.S. Treasury notes. Our marketable securities primarily
represent investments in high-credit quality corporate and municipal
obligations, in accordance with our investment policies. Certain of these cash,
cash equivalents and marketable securities investments are subject to general
credit, liquidity, market and interest rate risks, which may be exacerbated by
sub-prime mortgage defaults and other credit related problems that have affected
various sectors of the financial markets and caused credit and liquidity
issues.  These market risks associated with our investment portfolio
may have an adverse effect on our results of operations, liquidity and financial
condition.
 
 We held
$9.6 million of marketable securities at September 28, 2008.  This
included $1.1 million of “A+” rated corporate
bond funds and “AAA” rated asset
backed securities.  These securities were valued at fair value based
on quoted market prices.  We also held $8.5 million of auction-rate
securities at September 28, 2008, valued at our estimate of their fair value,
which equaled par.  During 2008, auctions for all ARS began to fail
due to insufficient buyers, and the timing and extent of the ultimate
liquidation of these securities is uncertain.  $8.0 million of our
auction-rate securities are subject to a settlement made by one of our
investment banks, and we expect full liquidation at par in accordance with the
terms of the settlement.  You can find more information related to the
valuation of our marketable securities, the settlement with our investment bank,
and other items related to these securities in Note K in the accompanying
condensed consolidated financial statements and “Critical Accounting Policies”and “Liquidity and
Capital Resources”in Management’s Discussion and Analysis, all of which
are included in this report.
  We review
our investments in marketable securities for impairment based on both
quantitative and qualitative criteria that include the extent to which cost
exceeds market value, the duration of any market decline, our intent and ability
to hold to maturity or expected recovery, and the creditworthiness of the
issuer.  We perform research and analysis, and monitor market
conditions to identify potential impairments.  Currently, we have not
recognized any impairment charges related to our current investments in
marketable securities.  However, due to the uncertainties related to
the U.S. and global investment and credit markets, including markets related to
auction rate securities, we are exposed to the risk of changes in fair value of
our marketable securities in future periods, which may cause us to take
impairment charges that are not currently anticipated.  In the second
quarter of 2008 we realized a loss of $256,000 when a highly rated bond fund
that we were invested in unexpectedly liquidated at less than full
value.  While we will continue to research, analyze and monitor our
investments, we cannot predict what the effect of current investment and credit
market circumstances might have on our portfolio going forward.
 
 As of
September 28, 2008, we had borrowings of $32.0 million and letters of credit of
approximately $876,000 outstanding under the terms of our Credit Agreement.
Interest on outstanding borrowings is payable monthly at LIBOR plus 1%
(effective rate of 3.5% as of September 28, 2008).  Accordingly, we
are exposed to changes in interest rates on these borrowings.
  U.S. and
global market and economic conditions continue to be disrupted and volatile, and
the disruption has been particularly acute in the financial sector. Although we
believe we have not suffered any material liquidity issues as a result of these
recent events, the cost and availability of funds may be adversely affected by,
among other things, illiquid credit markets.  Our $40 million credit
facility expires in October 2009.  Continued disruption in U.S. and
global markets could adversely affect our ability to renew this credit facility
and any renewed facility may be under terms that are not as favorable as the
current credit facility.  The negative impact of recent adverse
changes in the credit markets generally or our inability to obtain financing on
favorable terms, if at all, may have a material adverse effect on our results of
operations and business.
  34
 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. 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
September 28, 2008, the end of the period covered by this report. The Company
acquired NeedleTech Products, Inc. (“NeedleTech”) on July 28,
2008.  Since the date of acquisition, the Company has been focusing on
analyzing, evaluating, and implementing changes in NeedleTech’s procedures and
controls to determine their effectiveness and to make them consistent with our
disclosure controls and procedures.  Prior to our acquisition of
NeedleTech, they were not required to maintain disclosure controls and
procedures or maintain, document and assess internal control over financial
reporting, in each case as required under the rules and regulation of the U.S.
Securities and Exchange Commission.  Accordingly, we expect that it
will take several months to continue to analyze NeedleTech’s procedures and
controls and expect to make additional changes to those controls in the
future.  As permitted by guidance issued by the staff of the U.S.
Securities and Exchange Commission, NeedleTech has been excluded from the scope
of our quarterly discussion of material changes in internal control over
financial reporting below. We have performed additional procedures to
review accounting records and substantiate the financial information of
NeedleTech included in this report.  NeedleTech was included in the
Company's results of operations subsequent to its acquisition on July 28, 2008
and constituted 15.8% of the Company’s consolidated revenues for the three
months ended September 28, 2008.
  No
changes in the Company’s internal control over financial reporting were
identified as having occurred during the quarter ended September 28, 2008 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 NeedleTech. Changes to processes, information technology
systems, and other components of internal control over financial reporting
resulting from the acquisition of NeedleTech are expected as the integration
proceeds.
  PART
II. OTHER INFORMATION
  Item
1. Legal
Proceedings
  From time
to time, the Company is subject to certain legal proceedings and claims in the
ordinary course of business. Management currently is not aware of any such legal
proceedings or claims that it believes will have, individually or in aggregate,
a material adverse effect on the Company’s business, financial condition, or
operating results.
  Item
1A. Risk
Factors
 
 In
addition to the other information set forth in this report, the factors
discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K
for the year ended December 31, 2007, which could materially affect our
business, financial condition or future results, should be carefully considered.
The risks described in our Annual Report on Form 10-K are not the only risks
facing us. 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.
  U.S. and
global market and economic conditions continue to be disrupted and volatile, and
the disruption has been particularly acute in the financial sector. Although we
believe we have not suffered any material liquidity issues as a result of these
recent events, the cost and availability of funds may be adversely affected by,
among other things, illiquid credit markets.  Our $40 million credit
facility expires in October 2009.  Continued disruption in U.S. and
global markets could adversely affect our ability to renew this credit facility
and any renewed facility may be under terms that are not as favorable as the
current credit facility.  The negative impact of recent adverse
changes in the credit markets generally or our inability to obtain financing on
favorable terms, if at all, may have a material adverse effect on our results of
operations and business.
 35
 
 Item
6. Exhibits
  Exhibit
      No.
              
              Title10.1
              
              Employment
      Agreement between CP Medical Corporation and Janet Zeman dated August 6,
      2008.31.1
              
              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.
  36
 
 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
      6, 2008
              
              By:
              /s/ M.
      Christine JacobsM.
      Christine Jacobs
                Chief
      Executive OfficerDate: November
      6, 2008
              
              By:
              /s/ Francis
      J. TaralloFrancis
      J. Tarallo
                Chief
      Financial Officer








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