Theragenics 10-Q 2004 Q3 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(X)                       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 3, 2004

or

(   )                   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
     SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

Commission File No. 0-15443

THERAGENICS CORPORATION^®
(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	58-1528626 (I.R.S. Employer Identification Number)
5203 Bristol Industrial Way Buford, Georgia (Address of principal executive offices)	30518 (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 such filing requirements for the past 90 days. YES  X  NO ___

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES  X  NO ___

As of October 25, 2004 the number of shares of $.01 par value common stock outstanding was 29,975,354.

THERAGENICS CORPORATION^®

TABLE OF CONTENTS

	Page No.
PART I.        FINANCIAL INFORMATION:
ITEM 1.        FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets - October 3, 2004 and December 31, 2003	3
Statements of Operations for the three and nine months ended October 3, 2004 and      October 5, 2003	5
Statements of Cash Flows for the nine months ended October 3, 2004 and October 5, 2003	7
Statement of Shareholders' Equity for the nine months ended October 3, 2004	8
Notes to Financial Statements	9
ITEM 2.        MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL                       CONDITION AND RESULTS OF OPERATIONS	16
ITEM 3.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET                       RISK	26
ITEM 4.        CONTROLS AND PROCEDURES	27
PART II.       OTHER INFORMATION	27
ITEM 1.        LEGAL PROCEEDINGS	27
ITEM 6.        EXHIBITS	27
SIGNATURES	28

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THERAGENICS CORPORATION^®
BALANCE SHEETS
(Amounts in thousands, except per share data)

ASSETS
		October 3,			December	31,
		2004			2003
		(unaudited)
CURRENT ASSETS
Cash and short-term investments	$	24,914		$	45,104
Marketable securities		37,414			21,327
Trade accounts receivable, less allowance of $177 in
2004 and $118 in 2003		5,772			3,831
Inventories		3,417			1,851
Deferred income tax asset		307			189
Prepaid expenses and other current assets		5,382			4,760
TOTAL CURRENT ASSETS		77,206			77,062
PROPERTY AND EQUIPMENT
Buildings and improvements		43,613			42,344
Machinery and equipment		61,317			56,456
Office furniture and equipment		808			773
		105,738			99,573
Less accumulated depreciation and
amortization		(39,505	)		(34,418	)
		66,233			65,155
Land		822			822
Construction in progress		3,913			7,395
TOTAL PROPERTY AND EQUIPMENT		70,968			73,372
OTHER ASSETS		2,801			2,355
TOTAL ASSETS	$	150,975		$	152,789

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THERAGENICS CORPORATION^®
BALANCE SHEETS - Continued
(Amounts in thousands, except per share data)

LIABILITIES & SHAREHOLDERS' EQUITY
		October 3,			December	31,
		2004			2003
		(unaudited)
CURRENT LIABILITIES
Trade accounts payable	$	2,580		$	2,138
Accrued salaries, wages and payroll taxes		697			577
Other current liabilities		774			338
TOTAL CURRENT LIABILITIES		4,051			3,053
LONG-TERM LIABILITIES
Deferred income taxes		7,000			6,830
Asset retirement obligation		543			515
Other liabilities		63			65
TOTAL LONG-TERM LIABILITIES		7,606			7,410
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 100,000
shares authorized; issued and outstanding,
29,975 in 2004 and 29,944 in 2003		300			299
Additional paid-in capital		61,902			61,778
Retained earnings		77,218			80,240
Accumulated other comprehensive income/(loss)		(102	)		9
TOTAL SHAREHOLDERS' EQUITY		139,318			142,326
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY	$	150,975		$	152,789

        The accompanying notes are an integral part of these statements.

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THERAGENICS CORPORATION^®
STATEMENTS OF OPERATIONS
(UNAUDITED)
(Amounts in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	October 3,			October 5,			October 3,			October 5,
	2004			2003			2004			2003
REVENUE
Product sales	$	8,196		$	8,494		$	24,654		$	28,452
Licensing fees		87			25			228			118
Total revenue		8,283			8,519			24,882			28,570
COST OF SALES		3,282			3,614			10,147			12,110
GROSS PROFIT		5,001			4,905			14,735			16,460
OPERATING EXPENSES
Selling, general & administrative		4,463			3,404			13,004			10,025
Research & development		2,749			2,348			7,335			5,461
		7,212			5,752			20,339			15,486
EARNINGS/(LOSS) FROM OPERATIONS		(2,211	)		(847	)		(5,604	)		974
OTHER INCOME/(EXPENSE)
Interest income		322			257			847			784
Interest and financing costs		(42	)		(31	)		(132	)		(107	)
Other		75			(1	)		70			1
		355			225			785			678
Earnings/(loss) before income tax and cumulative
effect of change in accounting principle		(1,856	)		(622	)		(4,819	)		1,652
Income tax expense/(benefit)		(734	)		(234	)		(1,797	)		555
Earnings/(loss) before cumulative effect of change
in accounting principle		(1,122	)		(388	)		(3,022	)		1,097
Cumulative effect of change in accounting principle
(See Note F)		-			-			-			(222	)
NET EARNINGS/(LOSS)	$	(1,122	)	$	(388	)	$	(3,022	)	$	875

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THERAGENICS CORPORATION^®
STATEMENTS OF OPERATIONS - Continued
(UNAUDITED)
(Amounts in thousands, except per share data)

	Three Months Ended						Nine Months Ended
	October 3,			October 5,			October 3,			October 5,
	2004			2003			2004			2003
NET EARNINGS/(LOSS) PER COMMON SHARE
Basic:
Earnings/(loss) before cumulative effect of
change in accounting principle	$	(0.04	)	$	(0.01	)	$	(0.10	)	$	0.04
Cumulative effect of change in accounting
principle		-			-			-			(0.01	)
Net earnings/(loss) per common share	$	(0.04	)	$	(0.01	)	$	(0.10	)	$	0.03
Diluted:
Earnings/(loss) before cumulative effect of
change in accounting principle	$	(0.04	)	$	(0.01	)	$	(0.10	)	$	0.04
Cumulative effect of change in accounting
principle		-			-			-			(0.01	)
Net earnings/(loss) per common share	$	(0.04	)	$	(0.01	)	$	(0.10	)	$	0.03
WEIGHTED AVERAGE SHARES:
Basic		29,974			29,932			29,967			29,890
Diluted		29,974			29,932			29,967			30,055
Comprehensive income/(loss):
Net earnings/(loss)	$	(1,122	)	$	(388	)	$	(3,022	)	$	875
Other comprehensive income/(loss)
Unrealized gain/(loss) on securities
available for sale:		44			-			(111	)		(42	)
Total comprehensive income/(loss)	$	(1,078	)	$	(388	)	$	(3,133	)	$	833

        The accompanying notes are an integral part of these statements.

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THERAGENICS CORPORATION^®
STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Amounts in thousands)

		Nine Months Ended
		October 3, 2004			October 5, 2003
CASH FLOWS FROM OPERATING ACTIVITIES
Net Earnings/(Loss)	$	(3,022	)	$	875
Adjustments to reconcile net earnings/(loss) to
net cash provided by/(used by) operating activities:
Cumulative effect of change in accounting principle		-			222
Deferred income taxes		52			336
Depreciation & amortization		5,209			4,900
Provision for allowances		56			32
Stock based compensation		37			32
Income tax benefit from options		-			5
Loss on disposal of equipment		6			3
Changes in assets and liabilities:
Accounts receivable		(2,000	)		(245	)
Inventories		(1,563	)		(708	)
Prepaid expenses and other current assets		(622	)		(1,251	)
Other assets		58			(30	)
Trade accounts payable		442			(50	)
Accrued salaries, wages and payroll taxes		120			254
Other current liabilities		436			252
Other liabilities		(2	)		(2	)
Net cash provided by/(used by) operating activities		(793	)		4,625
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases and construction of property and equipment		(2,287	)		(1,181	)
Cash paid for acquisition		(1,000	)		(4,232	)
Purchases of marketable securities		(25,446	)		(18,515	)
Maturities of marketable securities		9,248			8,690
Net cash used by investing activities		(19,485	)		(15,238	)
CASH FLOWS FROM FINANCING ACTIVITIES
Exercise of stock options and stock purchase plan		88			491
Net cash provided by financing activities		88			491
NET DECREASE IN CASH AND
SHORT-TERM INVESTMENTS		(20,190	)		(10,122	)
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF PERIOD		45,104			56,344
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD	$	24,914		$	46,222

        The accompanying notes are an integral part of these statements.

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THERAGENICS CORPORATION^®
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED OCTOBER 3, 2004
(UNAUDITED)
(Amounts in thousands, except per share data)

	Common Stock									Accumulated
	Number of Shares		Par value $0.01		Additional paid-in capital		Retained earnings			other comprehensive income		Total
BALANCE, December 31, 2003	29,944	$	299	$	61,778	$	80,240		$	9	$	142,326
Exercise of stock options	18		1		29							30
Employee stock purchase plan	13				58							58
Equity incentive plan (See Note E)					37							37
Unrealized loss on securities
available for sale										(111 )		(111	)
Net loss for the period							(3,022	)				(3,022	)
BALANCE, October 3, 2004	29,975	$	300	$	61,902	$	77,218		$	(102 )	$	139,318

        The accompanying notes are an integral part of these statements.

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THERAGENICS CORPORATION^®

NOTES TO FINANCIAL STATEMENTS
OCTOBER 3, 2004
(Unaudited)

NOTE A – BASIS OF PRESENTATION

The interim financial statements included herein have been prepared by the Company without audit. These statements reflect all adjustments that are, in the opinion of management, necessary to present fairly the financial position, results of operations, cash flows and changes in shareholders’ equity for the periods presented. All such adjustments are of a normal recurring nature. Beginning with the quarter ended July 4, 2004, the Company began reflecting the quarter-end using the actual cut-off dates, rather than rounding the reporting dates to the latest calendar quarter-end. The Company’s three and nine month periods for 2004 ended on October 3, 2004. The Company’s three and nine month periods for 2003 ended on October 5, 2003. 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. The Company believes that the financial statements and disclosures are adequate to make the information not misleading. It is suggested that these financial statements and notes be read in conjunction with the audited financial statements and notes for the year ended December 31, 2003, included in the Form 10-K filed by the Company. The results of operations for the nine months ended October 3, 2004 are not necessarily indicative of the results to be expected for a full year.

NOTE B – DISTRIBUTION AGREEMENTS AND MAJOR CUSTOMERS

The Company sells its TheraSeed^® device directly to health care providers and to third party distributors. Theragenics^™ also manufactures and distributes I-Seed, an iodine-125 based medical device, directly to health care providers. At the beginning of 2003, the Company had non-exclusive distribution agreements in place with four companies. During the first quarter of 2003, the distribution agreement with one distributor was discontinued upon notification of the acquisition of the distributor by another TheraSeed^® distributor. In addition, during the second quarter of 2003, Theragenics^™ was notified that this same distributor acquired another TheraSeed^® distributor. Currently, the Company has non-exclusive distribution agreements in place with two companies for the distribution of the TheraSeed^® device, C. R. Bard and Oncura (a company formed by a merger of the prostate cancer businesses of Amersham plc and Galil Medical Ltd.). The non-exclusive distribution agreements for the distribution of the TheraSeed^® device give each distributor the right to distribute the TheraSeed^® device in the U.S., Canada and Puerto Rico for the treatment of prostate cancer and other solid localized cancerous tumors. These non-exclusive agreements give the distributors the option to distribute the TheraSeed^® device internationally. The domestic and international distribution agreements with one distributor allow each party the right to give notice of non-renewal at the end of December 2004, which would be effective December 31, 2005. The Company is currently evaluating its relationship with this distributor to determine whether to continue it thereafter. The Company’s other distributor has exercised its option to extend its distribution agreement with the Company through December 2006.

Sales to the two non-exclusive distributors represented 79.5% and 81.1% of total product revenue for the three and nine months ended October 3, 2004, respectively, with each of the two non-exclusive distributors, C. R. Bard and Oncura, each exceeding 10% of total revenue during those

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THERAGENICS CORPORATION^®

NOTES TO FINANCIAL STATEMENTS - CONTINUED
OCTOBER 3, 2004
(Unaudited)

periods.

Sales to the original four non-exclusive distributors represented 77.8% and 80.3% of total product revenue for the three and nine months ended October 5, 2003, respectively, with sales to two of the four non-exclusive distributors, C. R. Bard and Oncura, each exceeding 10% of total revenue during those periods.

Accounts receivable from the two non-exclusive distributors represented approximately 74% and 74% of accounts receivable at October 3, 2004 and December 31, 2003, respectively, with each of the two non-exclusive distributors noted above each exceeding 10% of total accounts receivable.

NOTE C — CONSTRUCTION IN PROGRESS AND PURCHASE COMMITMENTS

The U.S. Department of Energy (DOE) has granted Theragenics^™ access to unique DOE technology (plasma separation process or “PSP”) for use in production of isotopes, including palladium-102. The Company has constructed a facility in Oak Ridge, Tennessee to house the equipment, infrastructure and work force necessary to support the production of isotopes, including palladium-102, using this DOE technology. The building and the PSP became operational during the latter half of 2002. Additional equipment in the amount of $1.7 million has not yet been placed in service and is recorded as construction-in-progress on the accompanying balance sheets. Due to delays by the DOE’s primary contractor in Oak Ridge, the Company currently anticipates that this additional equipment will become operational during the first half of 2005.

In December 2003 the Company entered into an asset purchase agreement with a contractor for the design and manufacture of certain equipment. The capital asset purchase agreement in the amount of $1.2 million is expected to be completed in late 2004. As of October 3, 2004, progress payments in the amount of approximately $900,000 had been paid in relation to the purchase agreement.

NOTE D – CONTINGENCIES

In January 1999, the Company and certain of its officers and directors were named as defendants in certain securities actions alleging violations of the federal securities laws, including Sections 10(b), 20(a) and Rule 10b-5 of the Securities and Exchange Act of 1934, as amended. These actions have been consolidated into a single action pending in the U.S. District Court for the Northern District of Georgia. The complaint, as amended, purports to represent a class of investors who purchased or sold securities during the time period from January 29, 1998 to January 11, 1999. The amended complaint generally alleges that the defendants made certain misrepresentations and omissions in connection with the performance of the Company during the class period and seeks unspecified damages. On May 14, 1999 a stockholder of the Company filed a derivative complaint in the Delaware Court of Chancery purportedly on behalf of the Company, alleging that certain directors breached their fiduciary duties by engaging in

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THERAGENICS CORPORATION^®

NOTES TO FINANCIAL STATEMENTS - CONTINUED
OCTOBER 3, 2004
(Unaudited)

the conduct that is alleged in the consolidated federal class action complaint. The derivative action has been stayed by the agreement of the parties. On July 19, 2000, the Court granted the Company’s motion to dismiss the consolidated federal class action complaint for failure to state a claim against the Company, and granted the plaintiffs leave to amend their complaint. On August 21, 2000, the plaintiffs filed a second amended complaint and on March 30, 2001, the Court denied the defendant’s motion to dismiss the plaintiffs’ second amended complaint. The Court also denied the Company’s motion for reconsideration. Subsequently, the Court certified the class and the parties commenced discovery. Discovery in the case is complete. The Company filed a motion for summary judgment on September 30, 2003.

On July 1, 2004, while the summary judgment motion was pending, the Company, the Company’s directors and officers’ liability insurance carrier, and the plaintiffs’ counsel reached an agreement to settle the consolidated federal class action for an amount within the remaining limits of the Company’s directors and officers’ liability insurance. The plaintiffs will dismiss their lawsuit against the defendants and, on behalf of the settling class, release defendants from any and all liability arising from the incidents alleged in the second amended complaint. The Company will not be required to make any financial contribution toward the settlement. On September 29, 2004, the Court gave final approval to the settlement, with no objectors and no requests for exclusion. The final approval allows the right to appeal the final order until November 1, 2004. Barring any appeal of the final order, the case will be over as of that date. The derivative lawsuit is still pending. Its status is currently being reevaluated in light of the settlement of the securities class action lawsuit.

The Company and Oncura are currently arbitrating claims arising in connection with the Company’s non-exclusive distribution agreement with Oncura. Oncura claims that the Company has not addressed Oncura’s concerns about pricing by renegotiating pricing in good faith. Oncura is seeking a change in the pricing terms of the distribution agreement through the arbitration proceeding, and has indicated that it will seek to recover a portion of payments previously made. The Company filed a counterclaim against Oncura alleging that Oncura breached its obligations under the distribution agreement concerning marketing brachytherapy products and the use of the Company’s trademarks. The arbitrators have been appointed and the parties are conducting discovery. Management believes that Oncura’s claims are without merit and is opposing them vigorously. Management believes the Company has meritorious counter-claims.

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

NOTE E – ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company provides stock-based compensation under equity incentive plans approved by stockholders. The plans collectively provide for the granting of stock options, restricted stock and other equity incentives. As of October 3, 2004 there were 2,562,083 options and restricted stock

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THERAGENICS CORPORATION^®

NOTES TO FINANCIAL STATEMENTS - CONTINUED
OCTOBER 3, 2004
(Unaudited)

rights outstanding and 316,979 shares of Common Stock remaining available for issuance under the Company’s equity incentive plans.

Stock option grants to date have required the exercise price of the options granted to be at least equal to 100% of market value on the date granted. Stock options granted to date provide for the expiration of options ten years from the date of grant and become exercisable over a three to five-year vesting period. At the May 11, 2004 meeting of the Board of Directors, the Board approved the vesting of all underwater options (defined as those options with exercise prices greater than the closing price for the Company’s stock on May 11, 2004) as of May 11, 2004. This approval resulted in 352,000 of previously unvested options immediately becoming vested on May 11, 2004. Each of these options had exercise prices greater than $4.73, the closing price of the Company’s stock on May 11, 2004. This acceleration of vesting did not result in any charge to the Company’s results of operations, but is reflected in the stock-based compensation amounts presented below on a pro forma basis.

Beginning in 2003, each non-officer director began receiving 1,000 shares of restricted stock per year, with one year vesting, as one component of director compensation. The Company issued 7,000 shares of restricted stock to the non-officer directors in November, 2003 which will vest in November, 2004. The total compensation cost associated with these restricted shares, $37,000, is being recognized over the vesting period and is included in selling, general and administrative expense in the accompanying statements of operations for the three and nine months ended October 3, 2004. The Company intends to issue an additional 7,000 restricted shares to the non-officer directors in November, 2004 with one year vesting. The compensation cost related to these restricted shares will be recognized over the vesting period.

In August 2004, the Board of Directors granted restricted stock rights to the Company’s executive management. The Company granted an aggregate of 48,000 restricted stock rights on August 10, 2004, to executive management. Each right represents one share of common stock to be issued upon vesting, provided that the executive remains in the Company’s employ until the vesting date of December 31, 2005. The Company recognized $22,000 of stock-based compensation related to these restricted stock rights in the three and nine months ended October 3, 2004. In June 2004, the Company also granted performance restricted stock rights to executive management as part of a long-term incentive program. Under the long-term incentive program, the number of shares issuable upon vesting of each performance restricted stock right will depend on the company’s stock price appreciation plus dividends paid (total shareholder return, or “TSR”) relative to an industry peer group based on a fixed schedule. Each performance restricted stock right represents the right to a minimum of 0.30 of a share of common stock provided that the executive remains in the Company’s employ as of the vesting date, and a maximum of two shares of common stock depending on the Company’s TSR. TSR will be measured for the period from January 1, 2004 through December 31, 2006, and rights will vest under the program as of December 31, 2006. The performance restricted rights will vest at the target achievement level upon a change of control. The number of shares that could be earned in respect of the performance restricted stock rights ranges from 13,950 shares to 93,000 shares based on TSR performance. The Company recognized $15,000 of stock-based compensation related to the 13,950 share minimum in the three and nine months ended October 3, 2004. Management will monitor

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THERAGENICS CORPORATION^®

NOTES TO FINANCIAL STATEMENTS - CONTINUED
OCTOBER 3, 2004
(Unaudited)

the TSR of the Company, compared to the industry peer group, during the vesting period for the June 2004 grants and recognize additional, or adjust previously recorded compensation expense, as appropriate. As of October 3, 2004, no additional stock-based compensation expense was recorded based on TSR during the three and nine months ended October 3, 2004.

In December 2002, the Financial Accounting Standards Board (FASB) issued Statement No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” FAS 148 amends FAS 123 “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, FAS 148 amends the disclosure requirement of FAS 123 to require more prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The additional disclosure requirements of FAS 148 are effective for fiscal years ending after December 15, 2002. The Company accounts for stock-based compensation for employees under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and elected the disclosure-only alternative under SFAS No. 123, “Accounting for Stock-Based Compensation.” No stock-based compensation cost related to options issued to employees is included in net earnings, as all such options granted have an exercise price equal to the market value of the stock on the date of grant. Stock-based compensation costs of $9,000 and $37,000 are included in the results for the three months ended October 3, 2004 related to the restricted stock issued to directors and the restricted stock rights granted to executive management, respectively. Stock-based compensation costs of $28,000 and $37,000 are included in the results for the nine months ended October 3, 2004 related to the restricted stock issued to directors and the restricted stock rights granted to executive management, respectively. In accordance with SFAS No. 148, “Accounting for Stock Based Compensation-Transition and Disclosure,” the following table presents the effect on net earnings and net earnings per share had compensation cost for the Company’s stock plans been determined consistent with SFAS No. 123 (in thousands, except per share data):

	Three Months Ended						Nine Months Ended
	October 3,			October 5,			October 3,			October 5,
	2004			2003			2004			2003
Net earnings/(loss), as reported	$	(1,122	)	$	(388	)	$	(3,022	)	$	875
Less: total stock-based compensation
expense determined under fair value
method for all stock options, net of
related income tax benefit		(122	)		(192	)		(366	)		(629	)
Pro forma net earnings/(loss)	$	(1,244	)	$	(580	)	$	(3,388	)	$	246
Basic net earnings/(loss) per common share:
As reported	$	(0.04	)	$	(0.01	)	$	(0.10	)	$	0.03
Pro forma	$	(0.04	)	$	(0.02	)	$	(0.11	)	$	0.01
Diluted net earnings/(loss) per common share:
As reported	$	(0.04	)	$	(0.01	)	$	(0.10	)	$	0.03
Pro forma	$	(0.04	)	$	(0.02	)	$	(0.11	)	$	0.01

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THERAGENICS CORPORATION^®

NOTES TO FINANCIAL STATEMENTS - CONTINUED
OCTOBER 3, 2004
(Unaudited)

Fair value was calculated on the grant dates using the Black-Scholes options-pricing model with the following assumptions for options issued during the nine months ended October 3, 2004 and the nine months ended October 5, 2003. No options were issued during the three months ended October 3, 2004 and the three months ended October 5, 2003.

	Nine Months Ended
	October 3,	October 5,
	2004	2003
Expected dividend yield	0.0%	0.0%
Expected stock price volatility	64.1%	75.5%
Risk-free interest rate	3.2%	3.4%
Expected life of option (years)	5.4%	5.5%

NOTE F — RETIREMENT OBLIGATIONS

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

At January 1, 2003 the Company adopted Statement 143 and recognized an initial ARO of approximately $478,000 and net capitalized costs of $126,000. The impact of adopting the Statement was recognized as a cumulative effect of change in accounting principle in the amount of $353,000 ($222,000 after income taxes). For the three and nine months ended October 3, 2004, the Company recognized an increase in the ARO of approximately $9,000 and $28,000, respectively, representing the accretion expense and approximately $8,000 and $23,000, respectively, in amortization expense related to the capitalized cost. For the three and nine months ended October 5, 2003, the Company recognized an increase in the ARO of approximately $9,000 and $23,000, respectively, representing the accretion expense and approximately $10,000 and $22,000, respectively, in amortization expense related to the capitalized cost.

NOTE G – NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46), “Consolidation of Variable Interest Entities” and amended it by issuing FIN 46R in December 2003. Among other things, FIN 46R generally deferred the effective date of FIN 46 for variable interest entities (VIEs) to the quarter ended March 31, 2004. In general, a VIE is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity

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THERAGENICS CORPORATION^®

NOTES TO FINANCIAL STATEMENTS - CONTINUED
OCTOBER 3, 2004
(Unaudited)

investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The adoption of FIN 46 did not have any impact on the Company’s financial statements since the Company currently has no variable interest entities.

In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (“SAB 104”), “Revenue Recognition,” which supersedes Staff Accounting Bulletin No. 101 (“SAB 101”), “Revenue Recognition in Financial Statements.” The primary purpose of SAB 104 is to rescind accounting guidance contained in SAB 101 related to multiple element revenue arrangements, which was superseded as a result of the issuance of Emerging Issues Task Force 00-21 (“EITF 00-21”), “Accounting for Revenue Arrangements with Multiple Deliverables.” SAB 104 also incorporated certain sections of the SEC’s “Revenue Recognition in Financial Statements—Frequently Asked Questions and Answers” document. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. Management believes that the Company’s revenue recognition policy is in compliance with SAB 104.

NOTE H – REVENUE RECOGNITION

Product sales represent orders for the TheraSeed^® and I-Seed devices and radiochemical products. The implantable radiation devices produced according to patient and procedure requirements are sold to third-party distributors, as well as to direct customers. Radiochemical products, typically used in medical nuclear imaging procedures, are sold to direct customers. All revenues from product sales are recognized upon shipment and are generally not returnable. Licensing fees are recognized in the periods to which they relate.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

Theragenics Corporation^® is the manufacturer of TheraSeed^®, a rice-sized, FDA-cleared device used to treat solid localized tumors, primarily prostate cancer, with a one-time, minimally invasive procedure. Theragenics^™ is the world’s largest producer of palladium-103, the radioactive isotope that supplies the therapeutic radiation for its TheraSeed^® device. Physicians, hospitals and other healthcare providers, primarily located in the United States, utilize the TheraSeed^® device. The TheraSeed^® device has also been approved for marketing throughout the member countries of the European Union by obtaining its CE Mark. Sales of the TheraSeed^® device in Europe have not been significant. The majority of sales are channeled through two third-party distributors. The Company also sells its TheraSeed^® devices directly to physicians.

Early in 2003 the Company diversified its product line with the purchase of the U.S. iodine-125 prostate brachytherapy business of BEBIG Isotopen-und Medizintechnik GmbH (BEBIG), formerly distributed by Isotope Products Laboratories (both subsidiaries of a publicly traded German company, Eckert & Ziegler AG). The purchase gives Theragenics^™ exclusive U.S. manufacturing and distribution rights to an FDA-cleared iodine-125-based medical device for the treatment of prostate cancer. Theragenics^™ began distribution of the iodine-125-based medical device early in 2003, and subsequently began to produce I-Seed (the Theragenics^™ iodine-125-based medical device) early in 2004, utilizing the automated production equipment procured in the business acquisition. The Company sells the I-Seed device directly to physicians, hospitals and other healthcare providers. The non-exclusive distributors of the TheraSeed^® device have no distribution rights for the I-Seed device. Non-exclusive rights to distribute the TheraSeed^® device in Europe were granted to BEBIG as part of the transaction. The Company believes that the ability to provide both TheraSeed^® and I-Seed devices enhances the Company’s ability to market to direct customers who seek a single source for both palladium-103 and iodine-125 brachytherapy seeds. The product line and equipment purchase will not affect the Company’s existing non-exclusive distribution agreements for the TheraSeed^® device.

The U.S. Department of Energy (DOE) has granted Theragenics^™ access to unique DOE technology, known as the PSP, for use in production of isotopes, including palladium-102 (the “PSP Operation”). The Company has constructed a facility in Oak Ridge, Tennessee to house the equipment, infrastructure and work force necessary to support the production of isotopes, including palladium-102, using this DOE technology. The building and the PSP became operational during the latter half of 2002. The Company also has access to and has made investments in other unique DOE resources. Additional equipment in the amount of $1.7 million, which is physically located within DOE facilities in Oak Ridge, has not yet been placed in service and is recorded as construction-in-progress on the accompanying balance sheets. Due to delays by the DOE’s primary contractor in Oak Ridge, the Company currently anticipates that this additional equipment will become operational during the first half of 2005. As a result of the sensitive nature of the PSP equipment and other unique DOE resources and facilities, the specialized technology involved and the restrictions on access to unique DOE-operated facilities, the Company has contracted with the DOE’s primary contractor for its Oak Ridge facilities to handle certain technical and operational services that are critical to the operation, including designing and fabricating new parts and modifications to the equipment and DOE facilities, operating and providing ongoing access to DOE facilities, and providing access to other DOE resources. The success of the PSP Operation is, in part, dependent on the continued cooperation of the DOE and its primary contractor, which could be adversely affected by future changes in governmental program priorities and funding. If there are problems with the operation or modification of the DOE-operated facilities, problems with access to other DOE resources, or if unforeseen challenges arise, the PSP Operation may not be successful or the costs or availability associated with the PSP Operation could be adversely affected. Additionally, as a result of the sensitive nature of the PSP equipment and the specialized technology involved, the DOE is able to terminate the Company’s access in the event of national emergency or in the interest of national defense, or require the Company to perform programmatic work involving use of the technology for the DOE in connection with carrying out its governmental mission. The Company would be entitled to compensation in the event of termination in connection with national emergency or defense or for programmatic use of the technology for the DOE. Use of the PSP by Theragenics^™ is also subject to classification and export control restrictions imposed by the DOE and the U.S. government.

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In connection with the Company’s ongoing program targeted at diversifying its future revenue stream, the Company continues to explore new applications for PSP technology. Among other things, the PSP technology enables the Company to conduct feasibility runs designed to validate isotope usage in various diverse industries and potential markets. In the first quarter of 2004 the Company’s Oak Ridge operations began to enrich palladium-102, which can be activated in a nuclear reactor to produce palladium-103. The enriched palladium-102, along with access to specialized reactor and related capabilities, can supply the palladium-103 radioisotope to support TheraSeed^® production, if necessary. In addition, the production of palladium-102 allows the Company to study the PSP and the interaction with palladium-102 in order to calibrate the PSP and determine predictable yields generated by the PSP. The initial production runs at the Oak Ridge facility did not deliver the palladium-102 yields the Company had anticipated. During the third quarter of 2004, production of palladium-102 continued with improved results in the yields produced. The Company completed production of palladium-102 at the Oak Ridge facility during October 2004. The Company sold the excess palladium metal remaining after the production of palladium-102 for approximately $431,000 in November 2004, which will reduce the carrying value of inventory by this amount. As a result of the cessation of production of palladium-102 at the Oak Ridge facility, in the fourth quarter of 2004 the company will cease capitalization of substantially all of the palladium-102 production costs.

The Company’s diversification program includes the clinical trial that utilizes a palladium-103 device, called the TheraSource^® Intravascular Brachytherapy System, designed to prevent restenosis or renarrowing of arteries following treatment of peripheral vascular disease by percutaneous transluminal angioplasty. Following the approval of the Investigational Device Exemption granted by the U. S. Food and Drug Administration (FDA) in August 2002 to initiate the TheraP clinical trial, Theragenics^™ began a clinical trial using a palladium-103 device (patent pending) early in 2003. Theragenics^™ closed enrollment in the TheraP trial early in the second quarter of 2004 at 20 patients. Seventeen patients have progressed to the six-month endpoint, one patient is yet to reach the six-month end-point, and two patients have elected to discontinue follow-up in the trial. None of the twenty patients enrolled has experienced a device-related adverse event. The Company is currently assessing the results of the trial to determine the most appropriate course of action going forward.

Additionally, an animal pilot study using palladium-103 in a prototype device designed for the treatment of exudative (wet) age-related macular degeneration (AMD), a disease that leads to loss of eyesight and in some cases complete blindness, was completed early in 2002. During the second quarter of 2004, the Company filed an Investigational Device Exemption (IDE) with the FDA to begin a human clinical trial for the TheraSight^™ device. On July 29, 2004 the Company received IDE approval granted by the FDA to initiate a human trial to test the safety and feasibility of the TheraSight^™ device. The Company has patents pending on the TheraSight^™ device and is currently enrolling patients in the clinical trial. The Company plans to run the trial at six separate clinical sites and will treat approximately 30 patients. The first patient was treated in the TheraSight^™ Trial at Emory Eye Center in Atlanta, Georgia during the week of October 18, 2004. The Company continues to be mindful of the emerging potential competition in this market. Research and development expenditures are likely to continue as these initiatives are pursued.

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The Company has also identified potential opportunities, utilizing its cyclotrons, for production of radiochemical products, which are typically used in medical nuclear imaging procedures. During the second quarter of 2004, the Company began regular shipments of one radiochemical to a single customer. The revenue recognized during the three and nine months ended October 3, 2004 was not material. The Company has submitted a Drug Master File for this product with the FDA, which will potentially allow access to a wider range of customers. The Company also continues to assess the markets for other radiochemicals it is able to produce using the existing cyclotrons. These developments could, if pursued, increase research and development expenses. Radiochemical product sales are not expected to have a material impact on revenue during 2004.

During the fourth quarter of 2003, the DOE named the Company as a participant in a project that would involve the production of medical isotopes from Cold War nuclear legacy material. The contract was awarded to Isotek Systems LLC (Isotek) and calls for Isotek to extract thorium-229 from defense legacy material during the down blending process. Theragenics’^™ proposed role would have been to extract from the thorium the isotope actinium-225 and actinium-225’s daughter product, bismuth-213, which might be used in potential medical applications and cancer research, such as the treatment of acute myologenous leukemia. After careful consideration and analysis the Company concluded that this project did not justify further participation and the Company exercised its right not to participate. The Company’s decision not to participate in this particular project does not affect the right to participate in other similar future opportunities.

The Company is also searching for, reviewing and evaluating external opportunities for diversification in the form of joint ventures, partnerships, and/or acquisitions of technologies, products and companies.

Results of Operations

Revenues for the three months ended October 3, 2004 were $8.3 million, compared to $8.5 million for the three months ended October 5, 2003, a decrease of $0.2 million, or 2.8%. Revenues for the nine months ended October 3, 2004 were $24.9 million, compared to $28.6 million for the nine months ended October 5, 2003, a decrease of $3.7 million, or 12.9%. The decline in revenue during 2004 was primarily due to a 2.8% and a 14.2% decrease in unit sales of the TheraSeed^® device during the three and nine months ended October 3, 2004, respectively, compared to the corresponding periods of 2003, partially offset by $174,000 and $631,000 of revenue recognized in the three and nine months ended October 3, 2004, respectively, for certain ancillary services to one distributor. The Company currently expects these ancillary services to generate approximately $150,000 of revenue during the fourth quarter of 2004. The average selling price of the TheraSeed^® device was consistent during 2004 as compared to the same periods of 2003. During the three and nine months ended October 3, 2004, Theragenics^™ sold approximately 18.1% and 16.7%, respectively, of unit sales directly to customers. During the three and nine months ended October 5, 2003, Theragenics^™ sold approximately 18.5% and 16.6%, respectively, of unit sales directly to customers. Total revenues from sales of the Company’s palladium-103 (TheraSeed^®) device and iodine (I-Seed) device to direct customers were 20.3% and 18.8% during the three and nine months ended October 3, 2004, respectively, compared to 21.1% and 19.3% during the corresponding periods of 2003. Revenues from distributors, including the $174,000 of revenue generated from ancillary services, decreased approximately 1.4% during the three months ended October 3, 2004 compared to the three months ended October 5, 2003. Revenues from distributors, including the $631,000 of revenue generated from ancillary services, decreased approximately 12.5% during the nine months ended October 3, 2004 compared to the nine months ended October 5, 2003.

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Currently, the Company has non-exclusive distribution agreements in place with two companies for the distribution of the TheraSeed^® device, a reduction from the four in place at the beginning of 2003. During 2003, one of the non-exclusive distributors of the TheraSeed^® device acquired two of the other three non-exclusive distributors of the TheraSeed^® device. Comparing this consolidated distributor’s unit sales during 2004 to the same three distributors’ unit sales during 2003 shows a 10.3% increase for the three months ended October 3, 2004 compared to the three months ended October 5, 2003 and a 6.9% reduction for the nine months ended October 3, 2004 compared to the nine months ended October 5, 2003. This distributor has exercised its option to extend its distribution agreement with the Company through December 2006.

The domestic and international distribution agreements with the other distributor allow each party the right to give notice of non-renewal of the agreements at the end of December 2004, which would be effective December 31, 2005. The Company is currently evaluating its relationship with this distributor to determine whether to continue it thereafter. Sales to this distributor for the three and nine months ended October 3, 2004 declined by 30% as compared to the corresponding periods of 2003. Reduced sales to this distributor accounted for approximately 62% of the reduction in the Company’s total revenue for the nine months ended October 3, 2004 compared to the corresponding period in 2003, although this distributor accounted for only approximately 30% of total revenue during the first nine months of 2003. The Company believes that sales through this distributor have been adversely affected by the distributor’s efforts to market prostate cancer treatments other than TheraSeed^® or brachytherapy.

The Company and Oncura are currently arbitrating claims arising in connection with the Company’s non-exclusive distribution agreement with Oncura. Oncura claims that the Company has not addressed Oncura’s concerns about pricing by renegotiating pricing in good faith. Oncura is seeking a change in the pricing terms of the distribution agreement through the arbitration proceeding, and has indicated that it will seek to recover a portion of payments previously made. The Company filed a counterclaim against Oncura alleging that Oncura breached its obligations under the distribution agreement concerning marketing brachytherapy products and the use of the Company’s trademarks. The arbitrators have been appointed and the parties are conducting discovery. Management believes that Oncura’s claims are without merit and is opposing them vigorously. Management believes the Company has meritorious counter-claims.

In addition to the impact of disappointing performance by one of the two distributors of TheraSeed^®, Management believes that the brachytherapy industry continues to be affected by recent changes in medicare reimbursement, declining prices for iodine-125 and palladium-103 seeds, competitors’ selling tactics and the effects of consolidation in the industry. At any point in time, Theragenics^™ and/or its non-exclusive distributors may change their respective pricing policies for the TheraSeed^® or I-Seed (in the case of Theragenics^™) device in order to take advantage of market opportunities or respond to competitive situations. Responding to market opportunities and competitive situations could have an adverse effect on the prices of the TheraSeed^® or I-Seed device and could have a favorable effect or prevent an unfavorable effect on market share and volumes. Conversely, the Company and its non-exclusive distributors could individually and independently decide to maintain per unit pricing under certain competitive situations that could adversely affect current or potential market share and volumes.

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

Cost of sales was $3.3 million during the three months ended October 3, 2004, resulting in a gross profit margin of 60.4%, compared with cost of sales of $3.6 million and a gross profit margin of 57.6% during the three months ended October 5, 2003. Cost of sales was $10.1 million during the nine months ended October 3, 2004, resulting in a gross margin of 59.2%, compared with cost of sales of $12.1 million and a gross margin of 57.6% during the nine months ended October 5, 2003. The increased gross margin during 2004 was due primarily to the capitalization of costs associated with the first production of palladium-102 material using the PSP technology at the Company’s Oak Ridge, Tennessee facility. Total production costs capitalized were approximately $350,000 and $1.2 million during the three and nine months ended October 3, 2004, respectively. The total cost of the inventory, including the material and production costs capitalized, is $1.8 million and is included in work-in-process inventory in the accompanying October 3, 2004 balance sheet. The Company completed production of palladium-102 at the Oak Ridge facility during October 2004. The Company sold the excess palladium metal remaining after the production of palladium-102 for approximately $431,000 in November 2004, which will reduce the carrying value of inventory by this amount. As a result of the cessation of production of palladium-102 at the Oak Ridge facility, in the fourth quarter of 2004 the company will cease capitalization of substantially all of the palladium-102 production costs. The gross margin in 2004 was also favorably impacted by $174,000 and $631,000 of revenue from ancillary services to a certain distributor during the three and nine months ended October 3, 2004, respectively. Gross margin during 2004 was negatively impacted by the considerable fixed cost component of Theragenics’^™ operations in combination with lower revenue during the three and nine months ended October 3, 2004 compared to the corresponding periods of 2003.

Selling, general and administrative (SG&A) expense was $4.5 million during the three months ended October 3, 2004, compared to $3.4 million during the three months ended October 5, 2003, an increase of $1.1 million, or 31.1%. SG&A expense was $13.0 million during the nine months ended October 3, 2004, compared to $10.0 million during the nine months ended October 5, 2003, an increase of $3.0 million, or 29.7%. The increase in 2004 was primarily due to an increase in professional fees for assistance in various key strategic initiatives, an increase in marketing and advertising costs and an increase in salary and related expenses due primarily to the expansion of the direct sales force.

Research and development (R&D) expense increased to $2.7 million, or approximately 33.2% of revenue, during the three months ended October 3, 2004, from $2.3 million, or approximately 27.6% of revenue, during the three months ended October 5, 2003. R&D expense increased to $7.3 million, or approximately 29.5% of revenue, during the nine months ended October 3, 2004, from $5.5 million, or approximately 19.1% of revenue, during the nine months ended October 5, 2003. The increase in research and development expense during 2004 was primarily attributable to an increase in costs to support the Company’s peripheral vascular and macular degeneration programs (see “Overview” above).

Management plans to continue efforts in R&D as its initiatives to diversify move forward, and expects R&D expenditures to be significant. Such expenditures in R&D may negatively affect results of operations. However, R&D spending is dependent on the complex scheduling of R&D activities in progress as well as the pursuit of other appropriate opportunities as they arise. Accordingly, R&D expenses may fluctuate significantly from period to period.

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Other income, comprising interest income and non-operating expenses, was $355,000 during the three months ended October 3, 2004 compared to $225,000 during the three months ended October 5, 2003. Other income was $785,000 during the nine months ended October 3, 2004 compared to $678,000 during the nine months ended October 5, 2003. The increases during 2004 are primarily the result of better returns on the Company’s investments as a result of higher interest rates in 2004 and gains on sales of the Company’s investments during 2004. The Company’s investments consist primarily of short-term cash investments and high-credit quality corporate and municipal obligations, in accordance with the Company’s investment policies. Funds available for investment have and will continue to be utilized for the Company’s current and future expansion programs, R&D activities, and strategic opportunities for growth and diversification. As funds continue to be used for these programs and activities, and as interest rates continue to change, management expects other income to fluctuate accordingly.

The Company’s effective income tax rate was a benefit of 39.5% during the three months ended October 3, 2004 compared to a benefit of 37.6% during the three months ended October 5, 2003. The Company’s effective income tax rate was a benefit of 37.3% during the nine months ended October 3, 2004 compared to an expense of 33.6% during the nine months ended October 5, 2003. The Company’s income tax rate in each period differed from statutory rates primarily due to the recognition of tax credits generated by the Company’s investments in its expansion projects, research activities and tax-exempt interest income.

Critical Accounting Policies

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

Property, plant, equipment and goodwill. Property, plant and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of such assets. The Company’s estimates can result in differences from the actual useful lives of certain assets. The Company currently owns and operates 14 cyclotrons, the first of which entered service in 1993. Each of the Company’s cyclotrons is depreciated using an estimated 10-year life. Management’s estimate of the useful life of these cyclotrons is based on the Company’s experience to date with these cyclotrons. Based on experience gained relative to the operation, refurbishment, and maintenance of the cyclotrons, management believes there is a substantive basis for the current depreciable lives of the cyclotrons. Although the older cyclotrons require increased maintenance, all the cyclotrons remain in service, including fully depreciated cyclotrons, because the material produced by each machine is required for ongoing operations and the Company’s current research and development initiatives.

The PSP equipment was placed in service during the second half of 2002 and is depreciated using an estimated fifteen-year life. The PSP equipment utilizes specialized, unique technology.

Early in 2003 the Company entered into an agreement to purchase the brachytherapy business of BEBIG Isotopen-und Medizintechnik GmbH (BEBIG), a subsidiary company of Eckert & Ziegler AG. A total of approximately $6.3 million was paid in connection with the acquisition and the payments were allocated between the fair value of the assets in the amount of $3.7 million and $2.6 million to goodwill. The equipment became operational during the first quarter of 2004. The Company has determined that the production line will be amortized over a fifteen-year life.

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In accordance with Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets,” goodwill and intangible assets with indefinite lives are annually evaluated for impairment. The Company will review the recoverability of the carrying value of identified intangibles and other long-lived assets on an annual basis or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of these assets is determined based upon the forecast of discounted future net cash flows from the operations to which the assets relate, utilizing our best estimates, appropriate assumptions and projections at the time. These projected future cash flows may vary significantly over time as a result of increased competition, changes in technology, fluctuations in demand, consolidation of our customers and reductions in average selling prices. If the carrying value is determined not to be recoverable from future operating cash flows, the asset is deemed impaired and an impairment loss is recognized to the extent the carrying value exceeds the estimated fair market value of the asset. Intangible assets with definite lives are being amortized and this amortization is included in the accompanying statements of operations.

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

Allowance for doubtful accounts. Management judgments and estimates are made and used in connection with establishing an allowance for the possibility that portions of our accounts receivable balances may become uncollectable. Accounts receivable are reduced by this allowance. Specifically, management analyzes accounts receivable in relation to current economic trends and changes in our customer payment history in establishing this allowance. The accounts receivable balance, net of the provision for trade accounts receivables allowance of $177,000, was approximately $5.8 million as of October 3, 2004.

Stock-based compensation. The Company has granted performance restricted stock rights. The number of shares issuable upon vesting of the performance restricted stock rights will vary based on total shareholder return or TSR over the vesting period as compared to an industry peer group, as further described in Note E of the Notes to Financial Statements above. Each quarter the Company estimates TSR and records compensation expense based on TSR experienced to date. To the extent that TSR varies significantly from period to period, the Company may record additional compensation expense or adjust previously recorded compensation expense to reflect the current estimate of TSR over the vesting period.

Liquidity and Capital Resources

The Company had cash, short-term investments and marketable securities of $62.3 million at October 3, 2004, compared to $66.4 million at December 31, 2003. Cash and short-term investments were $24.9 million at October 3, 2004 compared to $45.1 million at December 31, 2003. Marketable securities were $37.4 million at October 3, 2004 compared to $21.3 million at December 31, 2003. Marketable securities consist primarily of short-term cash investments and high-credit quality corporate and municipal obligations, in accordance with the Company’s investment policies. The aggregate decrease in cash, short-term investments and marketable securities was a result of cash used by operations and capital expenditures. Working capital was $73.2 million at October 3, 2004, compared to $74.0 million at December 31, 2003. The Company also has a Credit Agreement with a financial institution that provides for revolving borrowings of up to $40.0 million, including a $5.0 million sub-limit for letters of credit, through a credit facility with a three-year term. No borrowings were outstanding under the Credit Agreement as of October 3, 2004. Letters of credit totaling $933,000 were outstanding under the Credit Agreement as of October 3, 2004. These letters of credit represent decommission funding required by the Georgia Department of Natural Resources and a utility deposit to the City of Oak Ridge, Tennessee in connection with the PSP facility.

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Cash used by operations was $793,000 during the nine months ended October 3, 2004 compared to cash provided by operations of $4.6 million during the nine months ended October 5, 2003. Cash used by or generated from operations consists of net earnings/(loss) plus non-cash expenses such as depreciation, amortization, and changes in balance sheet items such as accounts receivable, inventories, prepaid expenses and payables. Accounts receivable increased approximately $2.0 million during the first nine months of 2004 as a result of increased revenue in the third quarter of 2004 as compared to the fourth quarter of 2003 and the timing of payments received from the Company’s distributors. Inventories increased $1.6 million during the first nine months of 2004 primarily as a result of the capitalization of costs associated with the first production of palladium-102 material using the PSP technology at the Company’s Oak Ridge, Tennessee facility. Prepaid expenses and other current assets increased $622,000 during the first nine months of 2004 primarily as a result of the tax benefit generated from the loss from operations generated during the first nine months of 2004 as well as prepayments required under the Company’s advertising program, partially offset by a refund of 2003 income taxes. Trade accounts payable increased $442,000 during the first nine months of 2004 due primarily to liabilities related to the Company’s diversification efforts and advertising programs and the timing of payments for other accounts payable partially offset by the payment of liabilities associated with the Company’s I-Seed acquisition during the first quarter of 2004. Other current liabilities increased $436,000 during the first nine months of 2004 primarily as a result of property tax liabilities which are due and payable during the fourth quarter of each year.

Capital expenditures totaled $2.3 million and $1.2 million during the first nine months of 2004 and 2003, respectively. In addition, the Company made payments of $1.0 million and $4.2 million during the first nine months of 2004 and 2003, respectively, as part of the Company’s purchase of the U. S. iodine-125 prostate brachytherapy business of BEBIG (see “Overview” above). The Company procured an automated production line as part of the agreement that became operational during the first quarter of 2004. The $1.0 million payment during the first quarter of 2004 was the last payment required under the agreement.

The Company expects that R&D spending will continue at the current level during the remainder of 2004 (see “Results of Operations” above). Cash could also be used in 2004 for increased marketing and TheraSeed^® support activities and in the pursuit of diversification efforts such as the purchase of technologies, products or companies.

In addition to capital expenditures, cash used for investing activities during the nine months ended October 3, 2004 included $25.4 million used to purchase marketable securities, offset by maturities of other investments amounting to $9.2 million. Marketable securities, consisting primarily of short-term cash investments and high-credit quality corporate and municipal obligations, are purchased in accordance with the Company’s investment policies. The Company expects to continue to invest cash as available.

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Cash provided by financing activities was $88,000 and $491,000 in the first nine months of 2004 and 2003, respectively, consisting of cash proceeds from the exercise of stock options and the Company’s Employee Stock Purchase Plan.

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

Government Regulation

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

Medicare Developments

Previously, Theragenics’^™ TheraSeed^® device and other brachytherapy seeds fell within various “transitional pass-through codes,” which were separate from the procedure payment codes that comprise much of Medicare’s Outpatient Prospective Payment System (OPPS). On April 1, 2002, the Centers for Medicare and Medicaid Services (CMS) implemented changes in hospital payments for brachytherapy and other services provided under Medicare’s OPPS for the remainder of 2002. Through December 31, 2002, CMS bundled a portion of pass-through reimbursement for all brachytherapy seeds and other devices with the associated procedure codes, thereby effectively sheltering seeds from “pro rata reductions” that would otherwise have applied under Medicare Law. To the extent that these pass-through device costs exceeded the bundled amount, the remaining cost was subject to a 63.6% pro-rated reduction in reimbursement.

During 2003, CMS further revised its policies by bundling the costs of the prostate brachytherapy procedure, as well as the costs for catheters, needles and all seeds, into two new codes for prostate brachytherapy (one for palladium-103 and one for iodine-125). By creating two codes and setting separate reimbursement amounts for palladium-103 seed brachytherapy (including the TheraSeed^® device) and iodine-125 seed brachytherapy (including the I-Seed device), CMS made an important, positive change in its final rule for 2003 compared to its initial proposal published on August 9, 2002. Specifically, the per-patient reimbursement amount under the 2003 final rule for palladium-103 prostate brachytherapy exceeded the original payment amount proposed in August 2002 for both palladium-103 and iodine-125. The final 2003 per-patient amount for palladium-103 prostate brachytherapy also exceeded the 2003 payment amount for iodine-125 prostate brachytherapy. To the extent that the brachytherapy costs for an individual patient exceeded the bundled payment amount during 2003, the remaining costs could not be submitted for additional reimbursement.

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On December 8, 2003, the President signed the Medicare Prescription Drug, Improvement and Modernization Act of 2003 into law that provides for improved reimbursement and coding policies in 2004 and beyond for brachytherapy seeds/sources under Medicare’s OPPS. To reflect the changes in the statute, CMS revised its November 7, 2003 final rule by publishing a new interim final rule for 2004 on January 6, 2004.

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

With respect to coding, the legislation requires the Medicare program to create and use coding that classifies brachytherapy seeds/sources separately from all the other services and items reimbursed under the OPPS. These separate codes for brachytherapy seeds/sources must be used in a manner that reflects the type of radioactive isotope (for example, palladium-103), the radioactive intensity and the number of brachytherapy seeds/sources used to treat each patient.

Depending on the number of seeds needed to treat each prostate cancer patient, the total reimbursement (for the combination of the unbundled procedure codes and seeds) for the payment methodology in place until at least December 31, 2006 may be higher than the 2003 bundled payment amounts. The legislation enacted in 2003 also directs the U.S. General Accounting Office (GAO) to conduct a study examining future payment policies for brachytherapy seeds.

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

The Company believes that the significant number of proposed and actual changes in Medicare coding and reimbursement policy in the years preceding and during 2003, created confusion for hospitals and doctors, which may have had a detrimental impact on sales in 2003 and during the first nine months of 2004 (see “Results of Operations” above). In addition, due to the fact that the Medicare rules governing coding of brachytherapy seeds/sources have undergone significant change during the past few years, the Company believes that Medicare reimbursement may continue to create confusion for hospitals and doctors going forward. In that regard, management continues to closely monitor any effects of the reimbursement structure on the brachytherapy market as it continues to evaluate pricing, marketing and distribution strategies. The Company continues to engage a consulting firm specializing in reimbursement practices to help communicate brachytherapy reimbursement guidelines to customers.

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Forward Looking and Cautionary Statements

This document contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, without limitation, statements regarding sales, marketing and distribution efforts, the Company’s direct sales organization, including, but not limited to, its growth and effectiveness, third-party reimbursement, CMS policy, sales mix, effectiveness and continuation of non-exclusive distribution agreements, pricing for the TheraSeed^® and I-Seed devices, future cost of sales, R&D efforts and expenses, inventory investment, SG&A expenses, other income, timing and ultimate outcome of the Company’s activities in peripheral vascular and macular degeneration programs and other diversification efforts, potential new products and opportunities, the PSP-related operations, the development of new markets and technologies, the capabilities of the PSP to produce enriched isotopes, opportunities for isotopes produced by Theragenics^™, including, but not limited to, radiochemical products, the identification and development of new markets and applications for isotopes, Theragenics’^™ plans and strategies for diversification, and the sufficiency of the Company’s liquidity and capital resources. From time to time, the Company may also make other forward-looking statements relating to such matters as well as statements relating to anticipated financial performance, business prospects, technological developments, other research and development activities and similar matters. These forward-looking statements are subject to certain risks, uncertainties and other factors which could cause actual results to differ materially from those anticipated, including risks associated with research and development activities, including animal studies and clinical trials related to new products, risks associated with new product development cycles, effectiveness and execution of marketing and sales programs of Theragenics^™ and its non-exclusive distributors, risks associated with customer distribution concentration and consolidation among non-exclusive distributors and potential changes in distributor relationships, potential costs and delays in capacity expansion and start-up, potential costs and delays in PSP-related operations, effect of palladium-103 demand on cyclotron and PSP capacity and investment in inventory, the iodine-125 product line, actual or potential changes in product pricing, competitive conditions and selling tactics of the Company’s competitors, continued acceptance of TheraSeed^® or the I-Seed devices by the market, management of growth, acceptance and efficacy of palladium-103 for other applications, adverse changes in governmental program priorities and budgetary funding by the relevant governmental authorities, continuing access to unique DOE technology, the DOE’s ability to require the Company to use DOE technology for governmental purposes or terminate the Company’s use in the event of a national emergency or for national defense, government regulation of the therapeutic radiological pharmaceutical and device business, potential changes in third-party reimbursement, risks associated with market development activities, potential inability of the PSP to produce isotopes suited for a particular application, potential inability to produce selected isotopes at costs competitive to other options or potential inability to produce selected isotopes at costs to make applications economically feasible, risks associated with governmental regulations and related export controls and security requirements for PSP technology and products. All forward looking statements and cautionary statements included in this document are made as of the date hereby based on information available to the Company as of the date hereof, and the Company assumes no obligation to update any forward looking statement or cautionary statement.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

The Company’s market risk exposure related to market risk sensitive financial instruments is not material. Letters of credit totaling approximately $933,000 were outstanding under the terms of the Credit Agreement as of October 3, 2004. No borrowings were outstanding under the Credit Agreement as of October 3, 2004.

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Item 4.   Controls and Procedures

The Company’s President and Chief Executive Officer and its Chief Financial Officer are responsible for establishing and maintaining disclosure controls and procedures as defined in the rules promulgated under the Securities Exchange Act of 1934, as amended. Based upon the evaluation of the Company’s disclosure controls and procedures as of October 3, 2004, the Company’s Chief Executive Officer and President and its Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of October 3, 2004. No changes in the Company’s internal controls over financial reporting were identified as having occurred in the fiscal quarter ending October 3, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

The Company has retained a third party, independent consultant to assist management in the documentation and evaluation of its internal controls over financial reporting in preparation for the management assessment of internal controls required by Section 404 of the Sarbanes-Oxley Act of 2002 for the fiscal year ended December 31, 2004. The consultant made several recommendations to strengthen existing internal controls and to implement additional controls, which the Company is in the process of implementing.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings.

See Note D to the Company’s financial statements included in Part I, Item 1 of this report, which is hereby incorporated by reference.

Item 6.  Exhibits

Exhibit No.	Title
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to 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.

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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 CORPORATION

  /s/ M. Christine Jacobs
  M. Christine Jacobs
  Chief Executive Officer

  /s/ James A. MacLennan
  James A. MacLennan
  Chief Financial Officer

Dated: November 4, 2004

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