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.

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.

Results of Operations

Revenue

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

                                          Three Months Ended                                  Nine Months Ended
                             September        September 30,       Change         September        September 30,       Change
                              28, 2008            2007              (%)           28, 2008            2007              (%)
Surgical products           $     11,444     $         7,587          50.8 %    $     27,208     $        21,498          26.6 %
Brachytherapy seed
Product 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: