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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002

[ ] 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)

Registrant’ telephone number, including area code:(770) 271-0233

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

Securities registered pursuant to Section 12(g) of the Act: None

        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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive Proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).

        As of June 28, 2002 the aggregate market value of the common stock of the registrant held by non-affiliates of the registrant, as determined by reference to the closing price of the Common Stock as reported on the New York Stock Exchange, was $248,357,511.

        As of March 28, 2003 the number of shares of Common Stock, $.01 par value, outstanding was 29,855,058.

        Documents incorporated by reference: Proxy Statement for the registrant’s 2003 Annual Meeting of Stockholders, to be filed with the Securities and Exchange Commission not later than 120 days after December 31, 2002, is incorporated by reference in Part III herein.

Part I

Item 1. BUSINESS

General

        Theragenics Corporation^® (“Theragenics™” or the “Company”), incorporated under Delaware law in 1981, is the manufacturer of TheraSeed®, a rice-sized FDA-cleared device used primarily in treating localized prostate cancer with a one-time, minimally invasive procedure. Theragenics™ is the world’s leading producer of Palladium-103 (Pd-103), the radioactive isotope that supplies the therapeutic radiation for its TheraSeed® implant. Theragenics™ is also involved in research and development utilizing Pd-103 for the treatment of restenosis, macular degeneration and other diseases, and has research and development programs involving other isotopes and their uses. Physicians, hospitals and other healthcare providers, primarily located in the United States, utilize the TheraSeed® product.

        The Company’s website address is “http://www.theragenics.com.” The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports are available free of charge through its website by clicking on the “Investor Relations” page and selecting “SEC Filings.” These reports will be available as soon as reasonably practicable after such material has been electronically filed with, or furnished to, the SEC. These reports are also available through the SEC’s website at “http://www.sec.gov.” The information on these websites and the information contained therein or connected thereto are not intended to be incorporated by reference into this Form 10-K.

        From May 1997 to August 2000, substantially all TheraSeed® implants for the treatment of prostate cancer were sold through an exclusive distributor. Notice of termination of that exclusive distribution agreement was received in August 2000 ending Theragenics™ contractual requirement to use an exclusive distributor. The contract was subsequently terminated in January 2001. The Company currently sells its TheraSeed® implants directly to physicians and non-exclusive third party distributors.

        In 1998 the Company received regulatory approval for the marketing of TheraSeed^® throughout the member countries of the European Union by obtaining CE Marking. Sales of TheraSeed^® in Europe were not significant in any of the three years in the period ended December 31, 2002.

        The Company has an active and ongoing program targeted at diversifying its future revenue stream. As part of this program the Company constructed a facility in the Oak Ridge, Tennessee area to house the equipment, infrastructure and work force necessary to support the production of isotopes, including Pd-103, using unique plasma separation process (PSP) technology being leased from the U.S. Department of Energy (DOE). PSP technology is a method of separating relatively large quantities of a specific isotope from a specific element. Prior to using cyclotron technology to produce Pd-103, Theragenics™ used the PSP technology to produce Pd-102 for conversion to Pd-103. In addition to possibly increasing its Pd-103 capacity, the Company also believes that the DOE technology may allow it to produce other isotopically engineered materials for use in medical and non-medical applications.

        In July 2002, the Company entered into a Market Development and Distribution Agreement for stable isotopes with Trace Sciences International, Inc. (Trace Sciences). The Agreement provides a framework under which Trace Sciences, an international supplier of enriched stable metal isotopes, has agreed to perform global market development and limited sales activities to cultivate the PSP’s unique capabilities. Also, in 2002, the Company announced an agreement for the first sale of stable isotopes to be produced by the PSP. Under this agreement, the Company expects to provide test quantities of certain gadolinium isotopes to a customer to determine their effectiveness as a fuel life extender in nuclear power generation.

        Research and development initiatives are also underway to support the Company’s diversification program. 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 patented Pd-103 device early in 2003. The Company’s device, called the TheraSource™ Intravascular Brachytherapy System, is designed to prevent restenosis or renarrowing of arteries following treatment of peripheral vascular disease by percutaneous transluminal angioplasty. The trial was initiated at the Fuqua Heart Center of Atlanta at Piedmont Hospital. A total of 30 patients in up to three centers will be enrolled to study the safety and feasibility of the system. Additionally, an animal pilot study using Pd-103 in a prototype device designed for the treatment of age-related macular degeneration, a disease that leads to loss of eyesight and in some cases complete blindness, was completed early in 2002. Theragenics™ will continue these efforts and may incur research and development expenditures based on these opportunities.

        Subsequent to the 2002 year-end the Company diversified its product line with the purchase of the U.S. Iodine-125 (I-125) prostate brachytherapy business of BEBIG Isotopen-und Medizintechnik GmbH (BEBIG), formerly distributed by IPL (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 the iodine-based medical device used in the treatment of prostate cancer. The Company also procured an automated production line that is expected to become operational in 2004. Non-exclusive rights to distribute TheraSeed® in Europe were granted to BEBIG as part of the transaction.

        The Company is also searching for additional opportunities through reviewing and evaluating external opportunities for diversification such as partnering and/or acquiring technologies, products or companies.

Industry Overview

Prostate Cancer

        Excluding skin cancer, prostate cancer is the most common form of cancer, and the second leading cause of cancer deaths, in men. It is most common in North America and northwestern Europe and less common in Asia, Africa, Central America and South America. The American Cancer Society estimates there will be about 220,900 new cases of prostate cancer diagnosed and an estimated 28,900 deaths associated with the disease in the United States during 2003.

        Prostate cancer incidence and mortality increase with age. Prostate cancer is found most often in men who are over the age of 50. More than seven out of ten men diagnosed with prostate cancer are over the age of 65. At the age of 70, the chance of having prostate cancer is 12 times greater than at age 50. Screening and earlier diagnosis in men, who otherwise had no sign of symptoms, have fostered a decline in the prostate cancer death rate since 1990.

        Weak or interrupted urine flow, an inability to urinate, frequent urination and pain during urination can all be signs of prostate cancer. Additional symptoms can include blood in the urine, continual lower back pain in the pelvis or pain the in the upper thighs. However, it should be noted that these symptoms are nonspecific and can be caused from non-malignant conditions.

        According to the American Cancer Society, approximately 70% of all prostate cancers are found while they are localized (confined to the prostate), and at least 85% have not spread beyond the surrounding tissues or lymph nodes. The 5-year survival rate for men with localized prostate cancer is 100%. According to the American Cancer Society, the survival rate for all stages of prostate cancer combined has increased from 67% to 97% over the past 20 years. Longer follow-up suggests the relative survival continues to increase after a diagnosis. Recent data indicates that the relative 10-year survival is 79%, and 15-year survival rate is 57%.

        In addition to age, other risk factors are linked to prostate cancer, such as genetics. Men who have relatives that have been affected, especially if the relatives were young at diagnosis, have an even higher risk of contracting the disease. Researchers have discovered changes in certain genes, influenced by DNA mutations inherited from a parent, may cause some men to be more inclined to develop prostate cancer. It has also been suggested that environmental factors such as exposure to cancer-causing chemicals or radiation may cause DNA mutations in many organs, but this theory has not been confirmed.

        Another factor that may contribute to prostate cancer is diet. A diet high in fat may play a part in causing prostate cancer. The American Cancer Society suggests that Lycopenes, found in vegetables and certain fruits such as tomatoes, grapefruit and watermelon, and the mineral selenium found in fish, meat, poultry, cereals and vegetables such as mushrooms and asparagus, seem to lower prostate cancer risk. An increase in prostate cancer may also be related to a diet high in calcium and low in fructose (fruit sugar).

        The prostate is a walnut-sized gland surrounding the male urethra, located below the bladder and adjacent to the rectum. The two most prevalent prostate diseases are benign prostatic hyperplasia (BPH) and prostate cancer. BPH is a non-cancerous enlargement of the innermost part of the prostate. Prostate cancer is a malignant tumor that begins most often in the periphery of the gland and, like other forms of cancer, may spread beyond the prostate to other parts of the body. If left untreated, prostate cancer can metastasize to the lung or bone, resulting in death.

        The American Cancer Society recommends that men without symptoms, risk factors and a life expectancy of at least ten years should begin regular annual medical exams at the age of 50, and believes that health care providers should offer as part of the exam the prostate-specific antigen (PSA) blood test and a digital rectal examination (DRE). The PSA blood test determines the amount of prostate specific antigen present in the blood. PSA is found in a protein secreted by the prostate, and elevated levels of PSA can be associated with either prostatitis (a noncancerous inflammatory condition) or a proliferation of cancer cells in the prostate. Industry studies have shown that the PSA test can detect prostate cancer as many as five years earlier than the digital rectal exam. Transrectal ultrasound tests and biopsies are typically performed on patients with elevated PSA readings to confirm the existence of cancer.

        A tumor found by a prostate biopsy is usually assigned a grade by a pathologist. The most common prostate cancer grading system is called the Gleason grading system. A Gleason score, which ranges from 2 to 10, usually is used to estimate the tumor’s growth rate. The lower the score, the slower the cancer grows. Most localized cancers of the prostate gland are an intermediate score ranging from Gleason scores 4, 5 or 6.

        Staging is the process of determining how far the cancer has spread. The treatment and recovery outlook depend on the stage of the cancer. The TNM system is the staging process used most often. The TNM descriptions can be grouped together with stages labeled 0 through IV (0-4). The higher the number, the more the cancer has spread. The following table summarizes the various stages of prostate cancer.

         Stages Characteristics of prostate cancer

Treatment Options

        In addition to seeding, localized prostate cancer is most commonly treated with radical prostatectomy (RP), external beam radiation therapy (EBRT), cryosurgery, hormone therapy, and watchful waiting. Some of these therapies may be combined in special cases to address a specific cancer stage or patient need. For example, TheraSeed® has been used in combination with EBRT to treat some locally advanced cases of prostate cancer. The treatments that have been most successful are those that remove or kill all of the cancerous tissue while avoiding excessive damage to the surrounding healthy tissue. When the cancerous tissue is not completely eliminated, the cancer typically returns to the primary site, often with metastases to other areas. The following is a summary of treatment options for prostate cancer other than seeding.

         Radical Prostatectomy is the most common surgical procedure. Radical Prostatectomy involves the complete removal of the prostate gland and has been used for over 30 years in treating early-stage, localized tumors. RP typically requires a three-day average hospital stay and a lengthy recovery period (generally three to five weeks). Possible side effects include impotence and incontinence. The cost of RP ranges from $19,000 to $25,000 per procedure, excluding treatment for side effects and postoperative complications.

        External Beam Radiation Therapy involves directing a beam of radiation at the prostate gland from outside the body to destroy tumorous tissue and has been a common technique for treating many kinds of cancer since the 1950s. EBRT has typically been reserved for early-stage prostate cancer in locally advanced cases where the patient is an inappropriate surgical risk. Patients are usually treated five days per week in an outpatient center over a period of six to seven weeks. Rectal complications resulting from damage to the rectal wall caused by the radiation beam as it travels to the prostate are the most common side effects. Other possible side effects also include incontinence and impotence, but these side effects generally occur with less frequency than they do following RP. EBRT is estimated to cost between $13,000 to $17,000 per patient.

        Newer forms of external beam radiation include three-dimensional conformal radiation therapy (3DCRT), Intensity Modulated Radiation Therapy (IMRT) and conformal proton beam radiation. Three-dimensional conformal radiation utilizes computerized mapping and a fitted plastic body mold to keep the patient still so the radiation can be aimed more accurately at the prostate. The objective of 3DCRT is to minimize the risk of damage to healthy tissue caused by radiation. However, long-term results are needed to confirm this theory. Intensity Modulated Radiation Therapy (IMRT) is an advanced form of 3D therapy. In addition to aiming beams from several directions, the intensity (or strength) of the beams can be adjusted to decrease the dose of radiation reaching the sensitive normal tissues while delivering a uniformly high dose to the cancer. Conformal proton radiation therapy uses a similar approach, but instead of using x-rays, this technique focuses proton beams on the cancer. Protons cause little damage to tissues and may be able to deliver more radiation to the prostate. While preliminary results are promising, proton beam radiation is expensive and there are very few proton beam devices in the U.S. at this time.

        Cryosurgery involves placing a small metal tool into the tumor and killing the cancer by freezing the entire prostate. Patients usually remain in the hospital for one to two days. There will be some bruising and soreness of the area where the probe was inserted. Side effects of cryosurgery may include damage to nerves near the prostate that may cause impotence and incontinence, damage to bladder and intestines, and a fistula (an abnormal opening) between the rectum and bladder. This option is considered most appropriate for men with serious medical conditions that make them unable to endure surgery or radiation therapy.

        Ancillary Therapies, primarily consisting of hormone therapy and chemotherapy, are used to slow the growth of cancer and reduce tumor size, but are generally not intended to be curative. Ancillary therapies are often used during advanced stages of the disease to extend life and relieve symptoms. Side effects of hormonal drug therapy include increased development of breasts, impotence and decreased libido. In addition, many hormone pharmaceuticals artificially lower PSA levels in patients, which can interfere with staging the disease and monitoring its progress. Side effects of chemotherapy include nausea, hair loss and fatigue. Drug therapy and chemotherapy require long-term, repeated administration of medication on an outpatient basis.

        Watchful Waiting is recommended by some physicians in certain circumstances based on the severity and growth rate of the disease, as well as on the age and life expectancy of the patient. The aim of watchful waiting is to monitor the patient, treat some of the attendant symptoms and determine when more active intervention is required. Watchful waiting has gained popularity among those patients refusing treatment due to side effects associated with radical prostatectomy. Watchful waiting requires periodic physician visits and PSA monitoring.

        A trial study with 18,000 men enrolled is currently underway to determine the efficacy of the drug finasteride, which prevents the prostate from using male hormones. The drug inhibits male hormones called androgens that are known to be important in the growth of normal and cancerous prostate cells and may be important in the promotion of prostate cancer. It will take several years, however, before the results of the study are known due to the fact that prostate cancers form slowly.

        In addition to the treatment options described above, other forms of treatment as well as prevention are being developed and tested in clinical settings.

The Theragenics Solution

        Theragenics™ produces TheraSeed®, an FDA-cleared device for treatment of all solid localized tumors and currently used principally for the treatment of prostate cancer. In the prostate application, TheraSeed® devices are implanted throughout the prostate gland in a minimally invasive surgical technique under ultrasound guidance. The radiation emitted by the seeds is contained within the immediate prostate area, killing the tumor while sparing surrounding organs of significant radiation exposure. The seeds, whose capsules are biocompatible, remain in the prostate after delivering their radiation dose. TheraSeed® is best suited for solid localized tumors and is typically classified as a treatment for early-stage disease.

        Management believes TheraSeed® offers significant advantages over RP and EBRT. Recent multi-year clinical studies indicate that seeding offers success rates for early-stage prostate cancer that are comparable to or better than those of RP or EBRT and is associated with reduced complication rates. In addition, the TheraSeed® treatment is a one-time outpatient procedure with a typical two to three day recovery period. By comparison, RP is an inpatient procedure typically accompanied by an average three day hospital stay and a three to five week recovery period, and EBRT involves six to seven weeks of daily radiation treatments. The Company estimates that treatment with TheraSeed® generally costs $13,000 to $17,000 per procedure, which is lower than the cost of RP and comparable to the cost of EBRT.

        TheraSeed® is a radioactive “seed” approximately 4.5 millimeters long and 0.8 millimeters wide, or roughly the size of a grain of rice. Each seed consists of biocompatible titanium that encapsulates the radioactive substance Pd-103. The half-life of Pd-103, or the time required to reduce the emitted radiation to one-half of its initial level, is 17 days. The half-life characteristics result in the loss of almost all radioactivity in less than four months.

Treatment Protocol

        Prostate cancer patients electing seed therapy first undergo a transrectal ultrasound test or CT scan, which generates a two-dimensional image of the prostate. With the assistance of a computer program, a three dimensional treatment plan is created that calculates the number and placement of the seeds required for the best possible distribution of radiation to the prostate.

        Once the implant model has been constructed, the procedure is scheduled and the seeds are ordered. The number of seeds implanted normally ranges from 40 to 100, with the number of seeds varying with the size of the prostate. The procedure is usually performed under local anesthesia in an outpatient setting. An ultrasound probe is first positioned in the rectum to guide needle placement and seed location. Correct needle placement is facilitated by a template, or grid, that covers the perineum (the area between the scrotum and rectum through which the needles are inserted). This template is attached to the ultrasound probe. Implant needles loaded with seeds are assigned to the appropriate template holes as indicated in the treatment plan. Each needle is guided through the template and then through the perineum to its predetermined position within the prostate under direct ultrasound visualization. The seeds are implanted as the needle is withdrawn from the prostate. When all seeds have been inserted, the ultrasound image is again reviewed to verify seed placement. An experienced practitioner typically performs the procedure in approximately 60 to 90 minutes, with the patient often returning home at day’s end.

        Seeding has been used as a treatment for prostate cancer for more than 20 years. Twenty years ago, seeds containing the radioactive isotope I-125 were implanted in prostate tumors under open surgery. However, this technique fell into disfavor because the seeds were often haphazardly arranged resulting in radiation not reaching all of the targeted cancerous prostate. Compounding this was that often an unintended radiation dose was delivered to healthy surrounding tissues, particularly the urethra and rectum. Clinical results indicate that the computer modeling, advanced imaging and other techniques used in seeding today have significantly ameliorated these drawbacks.

Clinical Results

        Strong Efficacy Results. Clinical data indicates that seeding offers success rates for early-stage prostate cancer treatment that are comparable to or better than those of RP or EBRT. The vast majority of published studies on the use of seeding in the treatment of early-stage prostate cancer have been very positive. A nine-year clinical study published in the March 2000 issue of International Journal of Radiation Oncology, Biology and Physics, reported that 83.5% of the patients treated with TheraSeed® were cancer-free at nine years. The study was conducted by Dr. John Blasko of the Seattle Prostate Institute and included 230 patients with clinical stage T1 and T2 prostate cancer. Only 3% experienced cancer recurrence in the prostate. Because of Dr. Blasko’s extensive experience in the treatment of cancer and brachytherapy, the Company retained him as a medical and cancer advisor in 1998. In the June 2002 issue of Current Science, Inc., a study by Dr. Jerrold Sharkey, Dr. Alan Cantor et al. compared the effectiveness of brachytherapy and radical prostatectomy in 1,305 men with stage T1 and T2 prostate cancer. From 1993 to 2002, data from the treated patients were reviewed and classified by initial PSA level and Gleason scores. According to the publication, “The results failed to show any superiority of prostatectomy over brachytherapy with Pd-103 (TheraSeed®) with respect to time until relapse indicated by PSA level increase. In fact, any differences between treatments favor brachytherapy, particularly for intermediate and high-risk groups.”

        Seeding treatment in combination with EBRT has also recorded impressive results in the treatment of higher risk prostate cancer patients. In their paper published for the Seminars in Surgical Oncology 1997, Drs. Blasko, Ragde, Grimm, et al. presented an eight-year actuarial local and distal disease-free rate of 91% and 83%, respectively for 231 patients who were considered to represent higher risks of locally advanced prostate cancer and were treated with a combination of Pd-103 or I-125 seeding and a modified dose of EBRT. A study by Dr. Michael Dattoli of University Community Hospital, Tampa, Florida, and Dr. Kent Wallner of Memorial Sloan-Kettering Cancer Center, New York, New York, published in the International Journal of Radiation Oncology, Biology and Physics in July 1996 found a three-year actuarial freedom from biochemical failure (based on PSA scores) of 79% among 73 patients with clinically localized, high risk prostate cancer who were treated with EBRT in combination with Pd-103. This compares favorably to results reported for patients treated with conventional dose EBRT alone. These locally advanced cases are significant because typical RP protocols would not classify them as suitable for surgical treatment.

        Recent results from a 10-year study conducted by Dr. Datolli and Dr. Wallner published in the International Journal of Radiation Oncology, Biology and Physics in September 2002, were presented at the October 2002 American Society of Therapeutic Radiology and Oncology (ASTRO) conference confirming the effectiveness of TheraSeed® in patients with aggressive cancer who previously were considered poor candidates for seeding. The 10-year study, comprised of 175 patients with Stage T2a-T3 prostate cancer treated from 1991 through 1995. Of these patients 79 percent remained completely free of cancer without the use of hormonal therapy or chemotherapy.

        Reduced Incidence of Side Effects. Because TheraSeed® delivers a highly concentrated and confined dose of radiation directly to the prostate, healthy surrounding tissues and organs are spared excessive radiation exposure. This results in significantly fewer and less severe side effects and complications than are incurred with other conventional therapies. RP generally results in a 50% to 90% impotence rate and an incidence rate as high as 65% for incontinence, and EBRT generally results in impotence and incontinence rates of 40% to 60% and 8% to 18%, respectively. Conversely, brachytherapy patients experience 5% to 15% erectile dysfunction while there is a close to zero incidence of incontinence according to Wessels, Arnold, and Henderson Industry Data. According to a 1995 study by the Northwest Tumor Institute described above, it was reported that 85% of seed therapy patients under 70 years of age who were potent before the procedure remained so. In addition, patients who had not had a previous transurethral prostate resection (TURP) suffered no incontinence. Patients having a previous TURP have compromised urinary tracts and can experience higher rates of incontinence. Patients receiving seeding can expect some urethra irritation and urinary urgency post-implantation as the Pd-103 delivers its radiation dose.

        A five-year study, using either Pd-103 or I-125 seed implants, published in the August 2001 edition of International Journal of Radiation Oncology, Biology and Physics promotes brachytherapy treatment for early-stage prostate cancer in men under 65 while indicating lower incidence of side effects such as incontinence and impotence. According to Dr. Gregory Merrick of Schiffler Cancer Center in Wheeling, West Virginia, the findings from the study involving 76 patients ranging in ages between 48 and 62 years who received seed implants between the period of 1995 to 1999 are encouraging “because it shows younger men that they can survive cancer with a significantly lower incidence of side effects.”

        Lower Treatment Cost. The total cost of seeding is approximately $15,000 per procedure. This is approximately two-thirds the cost of RP, which ranges from $19,000 to $25,000, excluding treatment for side effects and post-operative complications. Seeding cost is comparable to the cost of EBRT, which ranges from $13,000 to $17,000 for a six-to-seven week course of treatment. The purchase of the I-125 product line gives Theragenics™ exclusive rights to manufacture and distribute the iodine-based medical device used in the treatment of prostate cancer.

Production

        The production of TheraSeed® is dependent upon the availability of Pd-103, as well as Rhodium-103 (Rh-103), titanium, graphite and lead. With the exception of Pd-103, all of these raw materials are relatively inexpensive and readily available from third party suppliers. The distribution and sales of I-125 brachytherapy seeds, also used in the treatment of prostate cancer, is dependent upon the supply of the product from BEBIG.

        Pd-103 is a radioactive isotope that can be produced by neutron bombardment of Pd-102 in a nuclear reactor, or by proton bombardment of Rh-103 in a cyclotron. Following the production of Pd-103 from Rh-103 in the cyclotron, the Pd-103 is harvested from the cyclotron and moved through a number of proprietary production processes until it reaches its final seed form.

        The Company has produced Pd-103 using Company-owned cyclotrons since 1993. The Company currently has fourteen cyclotrons in production, and has no current plans to purchase additional cyclotrons. The Company’s cyclotrons were designed, built, installed and tested by a company specializing in the construction of such equipment.

        Cyclotron operations constitute only one component of the TheraSeed® manufacturing process. Because the production of TheraSeed® is highly sensitive and labor intensive, management is focusing significant attention and effort on automating and otherwise improving all aspects of the Company’s manufacturing process. Certain portions of the Company’s production processes were automated during the past six years. Through automation management believes it can continue to improve efficiency, further reduce radiation exposure to personnel and provide additional production capacity for TheraSeed® and the iodine product.

        Since 1997, the Company’s quality control system has been certified as meeting all the requirements of the International Organization for Standards’ ISO 9001/EN46001 Quality System Standard.

        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 Pd-103 (the “PSP Project”). As part of the PSP Project, the Company has leased land in the Oak Ridge, Tennessee area and equipment previously used by the government to produce isotopes. As a result of the sensitive nature of the equipment, 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 project, including reassembling and recommissioning equipment, designing and fabricating new parts and modifications to the equipment and DOE facilities, and operating and providing ongoing access to the DOE facilities. The success of the project is 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, or if unforeseen challenges arise, the project may not be successful or the costs or timeliness associated with the project could exceed current estimates. 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.

Sales and Marketing

        The Company currently has non-exclusive distribution agreements with three companies which give each distributor the right to distribute TheraSeed® in the U.S., Canada and Puerto Rico for the treatment of prostate cancer and other solid localized cancerous tumors. Two of these non-exclusive agreements gives the distributors the option to distribute TheraSeed® internationally.

        During 2002, sales to the Company's three largest distributors, C.R. Bard, MediPhysics, Inc., (d/b/a Nycomend Amersham) and Prostate Services of America, Inc. collectively represented 75% of total revenue. No other single customer or distributor accounted for more than 10% of total sales in 2002. Early in 2003, Theragenics™ was notified by one of its non-exclusive distributors of its intent to terminate its distribution agreement with Theragenics™ upon completion of an impending acquisition by another Theragenics™ non-exclusive distributor of TheraSeed®. Management has not determined the affect that the consolidation may have on future sales.

        The Company also markets TheraSeed® directly to consumers and sells TheraSeed® directly to health care providers. In 2002, the Company engaged marketing and advertising specialists with experience in healthcare and direct-to-consumer marketing, and expects direct-to-consumer activity to continue at the same rate in 2003. The Company also expects to continue other activities in an attempt to support its brand name and increase demand for TheraSeed® implants, including advertising to physicians, clinical studies aimed at showing the advantages of TheraSeed® implants in the treatment of prostate cancer, technical field support to TheraSeed® customers, and other customer service and patient information activities. During 2002, a small direct sales force comprising brachytherapy specialists was formed to promote and support the TheraSeed® brand.

        Subsequent to the 2002 year-end the Company purchased the U.S. I-125 prostate brachytherapy business of BEGIG (see the Business section of Item I above). The Company believes that the ability to provide both palladium and iodine isotopes will provide access to customers and markets not otherwise accessible with either palladium or iodine alone.

        From May 1997 until August 2000, Indigo Medical, Inc. (Indigo) held the exclusive worldwide rights to market and sell the TheraSeed® implant for prostate cancer under a Sales and Marketing Agreement with Theragenics (the “Agreement”). Under the Agreement, Indigo had the responsibility for the marketing and training related to the TheraSeed® implant. In August 2000 Indigo exercised its option and gave notice of termination of the Agreement. As a result of Indigo’s notice of termination, Theragenics regained the right to directly market and distribute its TheraSeed® product for the treatment of prostate cancer to physicians and third-party distributors.

TheraSphere®

        Theragenics has also participated in the development of TheraSphere®, a microscopic radioactive glass sphere designed for the treatment of liver cancer. The Company holds a worldwide exclusive license from the University of Missouri for the use of the technology required to produce TheraSphere®. The Company has granted to Nordion International, Inc. (Nordion) an exclusive worldwide sublicense to manufacture, distribute and sell TheraSphere® for any application. Under the terms of the sublicense, Nordion has agreed to obtain the necessary regulatory approvals for distribution of TheraSphere® in the United States and other countries. TheraSphere® has been approved for distribution in Canada and is available in other markets outside North America, though sales of TheraSphere® have not been significant. Nordion was granted a Humanitarian Device Exemption (HDE) authorization from the FDA to market TheraSphere®. The HDE does not represent full regulatory approval for distribution in the United States, and the timing for commercial development and regulatory approval of TheraSphere® in the United States and elsewhere is uncertain. Management does not anticipate significant revenues from TheraSphere® within the foreseeable future.

        A TheraSphere® treatment dose contains approximately five million Yttrium-90 glass spheres that are each approximately half the diameter of a human hair. In the treatment of liver cancer, a radiation dose is delivered to the tumor by introducing TheraSphere® by catheter into the hepatic artery, which carries arterial blood to the liver. Because of greater blood flow to tumors compared to healthy liver tissue, the microspheres concentrate in the capillaries feeding the tumor. The concentration of microspheres in healthy tissue is much lower. Because of the ability to place and concentrate the radiation source in such close proximity to the tumor, TheraSphere® can deliver a radiation dose to the tumor cells five times as strong as that which can be delivered via external beam radiation.

Patents and Licenses; Trade Secrets

        The Company holds United States patents directed to Palladium delivery devices for therapeutic uses and processes for making such devices. The Company also has corresponding patents in Canada, South Africa, Japan and the countries of the European Patent Convention, and a PCT patent application on file for Japan, Australia, New Zealand, Canada, and Europe (representing 16 European countries) as well as a direct filing in Mexico. The Company may file additional patent applications from time to time in connection with its existing business and research and development activities. The Company considers the ownership of patents important, but not necessarily essential, to its operations. The Company also uses a strategy of confidentiality agreements and trade secret treatment to provide primary protection to a number of proprietary design modifications in the cyclotrons, as well as various production processes.

        The Company also holds a worldwide exclusive license from the University of Missouri for the use of technology required for producing TheraSphere®. Theragenics™ holds the rights to all improvements developed by the University of Missouri on this technology. The Company, in turn, sublicenses exclusive worldwide rights to this technology and all improvements to Nordion. Pursuant to its license agreement with the University of Missouri, the Company is obligated to pay the University the greater of a fixed annual amount or a percentage of the gross sales amount derived from the sale of TheraSphere®.

        Theragenics™ holds patents for technology concerning methods for delivery of TheraSphere® in several countries, including the United States, Canada, Australia, Argentina, South Africa and the countries of the European Patent Convention, and has patent applications on file in other countries, including Japan. The Company exclusively licenses this technology to Nordion for worldwide use.

        The Company also relies to a significant degree on trade secrets, proprietary know-how and technological advances that are either not patentable or which the Company chooses not to patent. In particular, the Company has designed certain modifications to its cyclotrons as well as various production processes that it deems to be proprietary. The Company seeks to protect non-patented proprietary information, in part, by confidentiality agreements with suppliers, employees and consultants.

Seasonality

        Although effects from seasonality cannot be identified in relation to a specific quarter or quarters, management believes that holidays, major medical conventions and vacations taken by physicians, patients and patients’ families may have a seasonal impact on sales for TheraSeed®.

Research and Development

        Research and development (R&D) expenses were $6.5 million, $2.7 million, and $2.1 million in 2002, 2001 and 2000, respectively. R&D expenses have related primarily to restenosis and age-related macular degeneration studies, as well as development efforts to improve the Company’s proprietary production processes (see Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations, 2002 compared to 2001”).

Competition

        The Company competes in a market characterized by technological innovation, extensive research efforts and significant competition. In general, TheraSeed® competes with conventional methods of treating localized cancer, such as RP and EBRT, as well as competing permanent implant devices. RP currently represents the most common medical treatment for early-stage, localized prostate cancer. RP has a long history of favorable clinical results and physicians have developed a high degree of familiarity and comfort with this procedure. EBRT is also a well-established method of treatment and is widely accepted for patients who do not represent a good surgical risk or whose prostate cancer has advanced beyond the stage for which surgical treatment is indicated. Management cannot predict with any certainty whether general conversion from these treatment options (or other established or conventional procedures) to TheraSeed® treatment may occur. Management does, however, believe that if general conversion from these treatment options (or other established or conventional procedures) to TheraSeed® treatment does occur, such conversion will be the result of a combination of equivalent or better efficacy, reduced incidence of side effects and complications, lower cost, other quality of life issues and pressure by health care providers and patients.

        While Theragenics is in an industry that is currently experiencing market consolidation, Management continues to believe that Theragenics™ has certain competitive advantages over other Pd-103 and I-125 seed producers that include: (i) its proprietary production processes that have been developed and patented; (ii) its record of reliability and safety in its manufacturing operations and (iii) the time and resources required for competitors’ production capabilities to ramp up to commercial production on a scale comparable to Theragenics™. Furthermore, the Company expects to continue activities in an attempt support its brand-name and increase demand for TheraSeed® implants including advertising to physicians, clinical studies aimed at showing the advantages of TheraSeed® implants in the treatment of prostate cancer, technical field support to TheraSeed® customers, and other customer service and patient information activities.

        Management also believes that Pd-103 continues to have certain advantages over I-125, including: (i) higher dose rates, which can yield advantages in treating aggressive cancers; (ii) a shorter half-life, which shortens the duration of some radiation induced side effects by two-thirds; and (iii) reduces radiation exposure to medical personnel in treatment follow-up.

        At any point in time, management of Theragenics™ and/or its non-exclusive distributors may change their respective pricing policies for TheraSeed® 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 TheraSeed® and/or could have a favorable effect on market share and volumes, while failure to do so could adversely affect market share and volumes although per unit pricing could possibly be maintained.

        In addition to the competition referenced above, many companies, both public and private, are researching new and innovative methods of preventing and treating cancer. In addition, many companies, including many large, well-known pharmaceutical, medical device and chemical companies that have significant resources available to them, are engaged in radiological pharmaceutical and device research. These companies are located in the United States, Europe and throughout the world. Significant developments by any of these companies could have a material adverse effect on the demand for Theragenics’™ products.

_________________

Government Regulation

        The Company’s present and future intended activities in the development, manufacture and sale of cancer therapy products are subject to extensive laws, regulations, regulatory approvals and guidelines. Within the United States, the Company’s therapeutic radiological device must comply with the U.S. Federal Food, Drug and Cosmetic Act, which is enforced by the FDA. As a result of receiving its CE Marking during 1998, the Company must also comply with the regulations of the Competent Authorities of the European Union for TheraSeed® sold in the member nations of the European Union.

        The Company is also required to adhere to applicable FDA regulations for Good Manufacturing Practices, including extensive record keeping and periodic inspections of manufacturing facilities.

        The Company obtained FDA 510(k) clearance in 1986 to market TheraSeed® for, in general, the treatment of localized solid tumors. A new 510(k) clearance would be required for any modifications in the device or its labeling that could significantly affect the safety or effectiveness of the original product.

        The Company’s handling of radioactive materials is governed by the State of Georgia in agreement with the Nuclear Regulatory Commission (NRC). The users of TheraSeed® are also required to possess licenses issued either by the states in which they reside or the NRC (depending upon the state involved and the production process used). The Company’s expansion plans require the Company to secure additional permits and licenses from a number of environmental, health and safety regulatory agencies. The Company believes, but cannot assure, that it will be able to acquire the permits and licenses necessary for its planned expansion of its manufacturing capacity in accordance with its timetable. To date, the Company has not experienced delays in licensing any of its facilities or cyclotrons.

        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’s decommissioning obligations will increase as its production capacity is expanded.

        The Company disposes of low level radioactive waste to licensed commercial radioactive waste treatment or disposal facilities for incineration or land disposal. Management believes the Company is in compliance with all state and federal regulations in this regard. The Company provides training and monitoring of its personnel to facilitate the proper handling of all materials.

        The U.S. Department of Energy has granted Theragenics™ access to unique DOE technology, known as the PSP, for use in production of isotopes. U.S. Government Export Control Laws and Regulations govern the exporting of certain products produced in the PSP and the exporting of technology associated with the PSP.

Employees

        As of December 31, 2002, the Company had 167 full time employees (including full time temporary employees and executive personnel). Of this total, 116 were engaged in the development and production of the Company’s products. The remainder were engaged in marketing and general corporate activities. The Company’s employees are not represented by a union or a collective bargaining agreement, and management considers employee relations to be good.

Item 2. Properties

        The Company owns two manufacturing facilities located in Buford, Georgia. One facility houses cyclotrons, raw material processing, assembly and shipping operations. The second facility, which is adjacent to the first facility, houses cyclotrons. The Company also owns an administrative facility adjacent to its production facilities in Buford.

        The Company owns approximately 30 acres in Buford Georgia on which its two manufacturing facilities and administration facilities are located. Land remains available for future development adjacent to its current Buford location. Management intends to use this land for long term expansion of its manufacturing and support operations, if such expansion is required.

     The Company leases 21 acres of land in the Oak Ridge, Tennessee area, on which it has constructed a facility to house the equipment, infrastructure and workforce necessary to support operations using technology leased from the U.S. Department of Energy (see Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations”).

Item 3. Legal Proceedings

        In January 1999, the Company and certain of its officers and directors were named as defendants in certain securities actions alleging violations of the federal securities laws, including Sections 10(b), 20(a) and Rule 10b-5 of the Securities and Exchange Act of 1934, as amended. These actions 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 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 now nearing completion. Management believes these charges are without merit and is opposing the litigation vigorously; however, given the nature and stage of the proceedings; the ultimate outcome of the litigation cannot be determined at this time. Accordingly, no provision for any liability that might result from this litigation has been made. The Company maintains insurance for claims of this general nature.

        The Company may be involved in other litigation relative to claims arising out of the ordinary course of business. As of the date hereof, there are no other material legal proceedings pending, or to management’s knowledge, threatened against the Company.

Item 4. Submission of Matters to a Vote of Security Holders

         The Company did not submit any matter to a vote of its security holders during the fourth quarter of calendar year 2002.

PART II

Item 5. Market for Registrant’s Common Equity and RelatedStockholder
Matters

        The Company’s Common Stock, $.01 par value, (Common Stock) is traded on the New York Stock Exchange (NYSE) under the symbol “TGX”. The high and low prices for the Company’s Common Stock as reported on the NYSE for each quarterly period in 2002 and 2001 are as follows:

        As of March 11, 2003, the closing price of the Company’s Common Stock was $3.24 per share. Also, as of that date, there were approximately 589 holders of record of the Company’s Common Stock. The number of record holders does not reflect the number of beneficial owners of the Company’s Common Stock for whom shares are held by depositary trust companies, brokerage firms and others.

Dividend Policy

        The Company has never declared or paid a cash dividend on its Common Stock. It is the present policy of the Board of Directors to retain all earnings to support operations and to finance expansion. Consequently, the Board of Directors does not anticipate declaring or paying cash dividends on the Common Stock in the foreseeable future. The Company’s current credit facility restricts the Company’s ability to pay dividends if such dividend payment would cause a default under any of the credit facility’s financial covenants. Decisions on the payment and amount of any dividends on the Common Stock will depend on the Company’s results of operations, capital requirements and financial condition and other relevant factors as determined by the Board of Directors.

Item 6. Selected Financial Data

        The selected financial data set forth below as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002, have been derived from the financial statements of the Company included elsewhere herein, which have been audited by Grant Thornton LLP, independent certified public accountants. The selected financial data as of December 31, 2002, 2001 and 2000, and for each of the two years in the period ended December 31, 1999, have been derived from the financial statements of the Company, which have been audited by Grant Thornton LLP but are not included herein. The selected financial data set forth below should be read in conjunction with the financial statements of the Company and related notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein.

        On March 16, 1998, the Board of Directors approved a two-for-one Common Stock split, effected in the form of a 100% stock dividend, which was distributed on April 15, 1998, to stockholders of record on March 31, 1998. All references to shares outstanding and per share amounts contained herein have been restated to reflect the stock split.

Item 7. 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 primarily in treating localized prostate cancer with a one-time, minimally invasive procedure. Theragenics™ is the world’s leading producer of Palladium-103 (Pd-103), the radioactive isotope that supplies the therapeutic radiation for its TheraSeed® implant. Physicians, hospitals and other healthcare providers, primarily located in the United States, utilize the TheraSeed® product. TheraSeed® has also been approved for marketing throughout the member countries of the European Union by obtaining its CE Mark. Sales of TheraSeed® in Europe have not been significant.

        From May 1997 until August 2000, substantially all TheraSeed® implants for the treatment of prostate cancer were sold through an exclusive distributor. All contractual obligations in the agreement were terminated upon notice received in August 2000, ending Theragenics’™ reliance on an exclusive distributor. The contract was subsequently terminated in January 2001. The Company currently sells its TheraSeed® implants directly to physicians and non-exclusive third-party distributors.

        The Company has an active and ongoing program targeted at diversifying its future revenue stream. As part of this program the Company constructed a facility in the Oak Ridge, Tennessee area to house the equipment, infrastructure and work force necessary to support the production of isotopes, including Pd-103, using unique plasma separation process (PSP) technology being leased from the U.S. Department of Energy. PSP technology is a method of separating relatively large quantities of a specific isotope from a specific element. In the past this technology had demonstrated the ability to produce material for the U.S. Government to support nuclear power generation. In July 2002 Theragenics™ signed an agreement with an international nuclear services company to produce test quantities of certain gadolinium isotopes for purchase by such company. The gadolinium that will be produced for the international nuclear services company will be used for a non-medical application. The Company believes that the PSP technology enables current and future feasibility runs designed to validate isotope usage in various markets and industries in addition to possibly increasing the Company’s manufacturing capacity and allowing for expanded use of Pd-103 in other applications. Costs associated with the Oak Ridge facility and PSP project were capitalized for a portion of 2002. However, the results for 2003 may reflect a decline in margins as expenses related to the Oak Ridge facility and equipment are recognized for the full year.

        Research and development (R&D) initiatives are also underway to support the Company’s diversification program. Following the approval of the Investigational Device Exemption granted by the U. S. Food and Drug Administration in August 2002 to initiate the TheraP clinical trial, Theragenics™ began a clinical trial using a patented palladium-103 device early in 2003. The Company’s device, called the TheraSource™ Intravascular Brachytherapy System, is designed to prevent restenosis or renarrowing of arteries following treatment of peripheral vascular disease by percutaneous transluminal angioplasty. The trial was initiated at the Fuqua Heart Center of Atlanta at Piedmont Hospital. A total of 30 patients in up to three centers will be enrolled to study the safety and feasibility of the system. Additionally, an animal pilot study using Pd-103 in a prototype device designed for the treatment of age-related macular degeneration, a disease that leads to loss of eyesight and in some cases complete blindness, was completed early in 2002. Theragenics™ will continue these efforts and may incur research and development expenditures based on these opportunities.

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

RESULTS OF OPERATIONS

Year Ended December 31, 2002, Compared to Year Ended December 31, 2001

        Revenues were $41.9 million in 2002 compared to $50.0 million in 2001, a decrease of $8.1 million, or 16.3%. During 2002, unit sales of the TheraSeed® product decreased approximately 13%, while unit sales directly to customers decreased to 13% of total unit sales in 2002 from approximately 26% in 2001. The average selling price of TheraSeed® decreased from 2001 to 2002, which contributing to the overall decrease in revenues because direct-to-consumer sales are made at higher prices than sales to third-party.

        The Company believes that the decrease in unit sales throughout the year was a combination of several factors including disappointing sales by the Company’s non-exclusive distribution partners and uncertainty related to proposed rules for 2003 Medicare reimbursement (see “Medicare Developments” below). The change in the distribution mix, which led to a decrease in the average selling price, was a result of several factors beginning with the termination of the distribution agreement with Indigo Medical Inc. (Indigo), a Johnson and Johnson Company, in January 2001. After the termination of the agreement, Theragenics™ increased its number of direct sales and sales through other non-exclusive distributors. However, Theragenics™ sold to a significant number of former Indigo customers while publicly stating that it expected its share of direct TheraSeed® device sales to decline as its other non-exclusive distributors began to market aggressively to the former Indigo customers. The percentage of direct-to-customer sales for Theragenics™ declined from 2001 as the non-exclusive distributors began aggressively marketing to former Indigo customers.

        Early in 2003, Theragenics™ was notified by one of its non-exclusive distributors of its intent to terminate the distribution agreement with Theragenics™ upon completion of an impending acquisition by another Theragenics™ non-exclusive distributor of TheraSeed®. The acquiring distributor represented approximately 37% of total revenue during 2002 while the acquiree respresented approximately 16% during the same period. Although the Company believes that the acquiring distributor is capable of assuming customers and sales from the acquiree, there is no guarantee that this will occur. It is difficult to determine at the present time the impact the consolidation will have on future sales of TheraSeed®.

        The Company’s 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.

        At any point in time, Theragenics™ and/or its non-exclusive distributors may change their respective pricing policies for TheraSeed® 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 TheraSeed® and could have a favorable effect or prevent an unfavorable effect on market share and volumes. Failure to respond to market opportunities and competitive situations in order to maintain per unit pricing could adversely affect current or potential market share and volumes and/or result in a decrease in margins.

        Cost of sales was $14.7 million during 2002 compared to $14.6 million in 2001. Gross profit was 64.9% of revenue in 2002 , compared to 70.7% in 2001. The increase in cost of sales as a percentage of sales in 2002 over 2001 was largely due to the considerable fixed cost component of Theragenics’™ operations, partially offset by the transfer of material and resources to support research and development initiatives. In addition, approximately $2.0 million of operating expenses related to the PSP facility were recognized as cost of sales during the second half of 2002, as the facility became operational, including depreciation of approximately $500,000.

        Selling, general and administrative (SG&A) expenses were $12.8 million in 2002, compared to $10.4 million in 2001, an increase of $2.4 million, or 22.9%. This increase was primarily due to an increase in general advertising of approximately $2.5 million in 2002 compared to 2001. Additionally, Theragenics™ incurred higher expenses from increased premiums related to insurance coverage, primarily for directors and officers liability insurance when policies were renewed late in 2002. These increases were partially offset a decrease in consulting costs compared to 2001.

        In 2002 the Company engaged marketing and advertising specialists with experience in health care and direct-to-consumer marketing, and expects direct-to-consumer advertising activity to continue at the same rate in 2003. The Company also expects to continue other activities in an attempt to support its brand-name and increase demand for TheraSeed® implants, including advertising to physicians, clinical studies aimed at showing the advantages of TheraSeed® implants in the treatment of prostate cancer, technical field support to TheraSeed® customers, and other customer service and patient information activities. During 2002 a small direct sales force comprising brachytherapy specialists was formed to promote and support the TheraSeed® brand. Also, Theragenics™ made substantial expenditures in 2002 to advocate appropriate reimbursement for brachytherapy. These efforts will continue in 2003 (see “Medicare Developments” below).

        R&D expenses increased to $6.5 million, or 15.6% of revenue in 2002, from $2.7 million, or 5.3% of revenue in 2001. The Company’s research and development initiatives are intended to expand the application of Pd-103 to other oncological and non-oncological uses, and to explore options for using the Company’s expertise and capabilities in other areas. The Company’s R&D initiatives in 2002 and 2001 were related primarily to restenosis studies and age-related macular degeneration. During 2002 Theragenics™ was granted an Investigational Device Exemption from the U.S. Food and Drug Administration to initiate its TheraP (TheraSource™ Pd-103 for the prevention of restenosis) clinical trial. The Company began the TheraP trial, a human clinical feasibility study related to restenosis in peripheral vessels, in early 2003 (see the “Overview” above).

        Also, early in 2002, the Company completed an animal pilot study using Pd-103 in a prototype device for treatment of the wet form of age-related macular degeneration and is investigating requirements necessary to proceed toward the implementation of human clinical trials. The results of the animal pilot study were favorable and in line with expectations. Management plans to continue to increase efforts in R&D as its initiatives to diversify move forward, and expects R&D expenditures to increase proportionately. 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.

        Other income, primarily comprising interest income, was $0.9 million in 2002 compared to $1.4 million in 2001. The Company’s investments consist primarily of short-term cash investments and high-credit quality municipal obligations, in accordance with the Company’s investment policies. While additional funds were available for investment during 2002, the interest rate environment during 2002 reduced the effective returns on a significant portion of the Company’s investments. Funds available for investment have been and will continue to be utilized for the Company’s current and future expansion programs and R&D activities, and may be used for the acquisition of technologies, products or companies consistent with the goals of Theragenics™. 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 approximately 36% for both 2002 and 2001. The Company’s income tax rate in each period was lower than 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.

Year Ended December 31, 2001, Compared to Year Ended December 31, 2000

        Revenues were $50.0 million in 2001 compared to $44.0 million in 2000, an increase of $6.0 million, or 13.6%. During 2001, Theragenics™ sold approximately 26% of unit sales directly to customers. In comparison, Theragenics™ sold almost all of its unit sales to third-party distributors in 2000. Because direct-to-customer sales are made at higher prices than sales to third-party distributors, the average selling price of TheraSeed® increased from 2000 to 2001. Even though units sold during 2001 decreased 2.5% from 2000, the higher average selling price caused year-over-year revenue to increase.

        From May 1997 to August 2000 the Company was a party to a Sales and Marketing Agreement with Indigo Medical, Inc., a Johnson & Johnson company, (the “Indigo Agreement” and “Indigo,” respectively) that granted Indigo exclusive worldwide marketing rights to TheraSeed® for the treatment of prostate cancer. In July 2000 the Company billed Indigo $5.4 million for shortfalls in its purchase minimum requirements, and Indigo gave notice of its intention to terminate the agreement. Subsequently, the Indigo Agreement was terminated effective January 5, 2001. After the termination of the Indigo Agreement, several customers that had been purchasing from Indigo began to purchase directly from Theragenics™, while many other former Indigo customers purchased TheraSeed® from Theragenics’™ non-exclusive distributors. As management anticipated, the non-exclusive distributors continued to aggressively market to the former Indigo customers and the percentage of direct sales of TheraSeed® units, and accordingly, its average revenue per TheraSeed® unit, began to decline.

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

        Gross profit increased to 70.7% of revenue in 2001, compared to 69.1% in 2000. However, cost of sales increased from $13.6 million in 2000 to $14.6 during 2001. The increase in cost of sales in 2001 over 2000 was due to the increase in depreciation and operating costs related to the additional cyclotrons put in operation in 2001. Salary and related expenses, due to an increase in headcount and employee mix more heavily weighted toward higher technical expertise, also contributed to the increase in cost of sales during 2001.

        Selling, general and administrative (SG&A) expenses were $10.4 million in 2001, compared to $6.9 million in 2000, an increase of $3.5 million, or 50.7%. This increase was primarily due to an increase in advertising, marketing, customer service and cancer information expenses. Prior to September 2000, these expenses were supported by Indigo under the terms of the Indigo Agreement. Additionally, the allowance for doubtful accounts receivable, compensation and benefits, and start up expenses associated with the Company’s Plasma Separation Process Project (the PSP project), contributed to the increases during the 2001 period.

        R&D expenses increased to $2.7 million, or 5.4% of revenue in 2001, from $2.1 million, or 4.8% of revenue in 2000. The Company’s R&D initiatives in 2001 and 2000 related primarily to restenosis studies carried out by the American Cardiovascular Research Institute, and development efforts to improve the Company’s proprietary production processes. Other R&D efforts included the use of Pd-103 in treating the wet form of age-related macular degeneration.

        Other income (exclusive of the $5.4 million received from Indigo, referred to above), primarily comprising interest income, was $1.4 million in 2001 compared to $1.8 million in 2000. The Company’s investments consisted primarily of short-term cash investments and high-credit quality municipal obligations, in accordance with the Company’s investment policies. While additional funds were available for investment during 2001, the interest rate environment during 2001 reduced the effective returns on a significant portion of the Company’s investments.

        The Company recognized $5.4 million of other income in 2000 related to purchase minimum shortfalls under the Indigo Agreement. This increased net earnings during 2000 by $3.5 million, or $0.12 per diluted share.

        The Company’s effective income tax rate was approximately 36% and 35% for 2001 and 2000, respectively. The increase was a result of a reduction in tax credits generated by the Company’s investments in its expansion projects and research activities during 2001. The Company’s income tax rate in each period is lower than the statutory rates primarily due to the recognition of tax credits generated by the Company’s investments in its expansion projects and research activities, and tax-exempt interest income.

Subsequent Event — Acquisition

        Subsequent to the 2002 year-end the Company diversified its product line with the purchase of the U.S. Iodine-125 (1-125) prostate brachytherapy business of BEBIG Isotopen-und Medizintechnik GmbH (BEBIG), formerly distributed by IPL (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 the iodine-based medical device used in the treatment of prostate cancer. The Company also procured an automated production line that is expected to become operational in 2004. Non-exclusive rights to distribute TheraSeed® in Europe were granted to BEBIG as part of the transaction. The Company believes that the ability to provide both palladium and iodine isotopes will provide access to customers and markets not otherwise accessible with either palladium or iodine alone. The product line and equipment purchase will not affect the Company’s existing non-exclusive distribution agreements for TheraSeed®. The agreement is not expected to have a significant impact on revenues or net income during 2003.

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 date 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:

        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 receivables balances may become uncollectible. 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 this trade accounts receivables allowance of $147,000, was approximately $4.8 million as of December 31, 2002.

        Property, Plant and Equipment. Property, plant and equipment are recorded at cost and depreciated on a straight-line basis over the estimated useful lives of such assets. The Company’s estimates can result in differences from the actual useful lives of certain assets. We currently own and operate 14 cyclotrons, the first of which entered service in 1993. Each of the Company’s cyclotrons is depreciated using an estimated 10-year life. The cyclotrons incorporate a number of proprietary design modifications that render the cyclotrons unique to commercial applications. 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, repair, refurbishment, and maintenance of the cyclotrons, Management believes there is a substantive basis for the current depreciable lives of the cyclotrons.

        The DOE has granted Theragenics™ access to unique DOE technology, known as the PSP, for use in production of isotopes, including Pd-103 (see “Overview” above). The PSP equipment was placed in service during the second half of 2002 and is depreciated using an estimated 15-year life. The PSP equipment utilizes specialized, unique technology. Management will continue to periodically examine estimates used for depreciation for reasonableness in relation to the cyclotrons and PSP equipment. If the Company determines that the useful life of property, plant or equipment should be shortened or lengthened, depreciation expense would be adjusted accordingly for the remaining useful life (lives) of the identified asset(s).

        Recently Issued Accounting Standard. Theragenics™ has identified retirement obligations associated with the decommissioning of its cyclotrons and related facilities. Management expects the adoption of SFAS No. 143 (see “Notes to the Financial Statements”) in 2003 will result in an increase to its liabilities of approximately $735,000, and a cumulative expense of approximately $338,000 before income taxes, and $213,000 after income taxes. Annual amortization of the increased asset costs and accretion expense charged to operations is expected to be approximately $70,000 before income taxes and approximately $45,000 after income taxes.

        Management is required to use estimates in determining the potential impact of SFAS No.143 on its financial statements. Factors including the regulatory environment, inflation, alternative uses of the cyclotrons, and new or alternative technologies, among other things, used in determining these estimates may change over time. Therefore, changes in these factors will require the Company to reexamine and adjust its anticipated effect of asset retirement obligations accordingly. The Company will implement SFAS No. 143 in 2003.

LIQUIDITY AND CAPITAL RESOURCES

        The Company had cash, short-term investments and marketable securities of $68.3 million at December 31, 2002, compared to $56.2 million at December 31, 2001. Marketable securities consist primarily of high-credit quality municipal obligations, in accordance with the Company’s investment policies. The increase in cash, short-term investments and marketable securities was a result of cash generated by operations, partially offset by capital expenditures. Working capital was $74.7 million at December 31, 2002, compared to $65.3 million at December 31, 2001. The Company also has an Unsecured Credit Agreement with a financial institution that provides for maximum borrowings of $40.0 million under two lines of credit, and an additional uncommitted $10.0 million line of credit. The Unsecured Credit Agreement expires in August 2003. Letters of credit totaling approximately $933,000 were outstanding under the terms of the Unsecured Credit Agreement at December 31, 2002. No other borrowings were outstanding under the Unsecured Credit Agreement as of December 31, 2002 and March 31, 2003. Cash generated by operations was approximately $15.3 million and $18.0 million in 2002 and 2001, respectively. Cash generated from operations consists of net earnings plus non-cash expenses such as depreciation, amortization and deferred income tax expense and changes in balance sheet items such as accounts receivable, inventories and payables. As a result of the direct to customer sales and non-exclusive distribution agreements, approximately $3.1 million more of 2001 income was in the form of accounts receivable rather than cash, as the Company’s accounts receivable base changed as a result of its direct to customer sales and non-exclusive distribution agreements. Depreciation and amortization increased to $6.3 million in 2002 from $5.7 million in 2001 as a result of the Oak Ridge facility and PSP equipment that was placed in service during the second half of 2002. These primary sources of cash from operations and non-cash expenses were partially offset by a decrease in net income in 2002 compared to 2001.

        The Company’s primary use of cash in 2002 and 2001 related to capital spending to increase manufacturing capacity and support diversification efforts. Capital expenditures were $3.6 million and $7.4 million in 2002 and 2001, respectively. These expenditures related primarily to the Company’s PSP Project (see below). As part of the PSP Project, the Company has constructed a facility in Oak Ridge, Tennessee to house the equipment, infrastructure and work force intended to support the production of isotopes, including Pd-103, using PSP technology. Construction costs of approximately $27.0 million were incurred on the PSP Project through December 31, 2002. The project is substantially complete, becoming operational in the second half of 2002. No significant revenues were generated from the PSP Project in 2002.

        Early in 2003, Theragenics™ acquired the exclusive U.S. manufacturing and distribution rights to an iodine-based medical device for prostate cancer treatment (see “Subsequent Event — Acquisition” above). Theragenics™ has also agreed to acquire an automated production line that is expected to become operational in 2004. Progress payments will be made to BEBIG based upon completion of pre-defined milestones. Therefore, the timing of all payments and subsequent delivery and operation of the equipment may vary based on milestone completion.

        The Company expects that R&D spending will continue to increase (see “Results of Operations”, above) and/or additional funds may be used for the PSP Project in 2003. At this time, routine capital expenditures, and the purchase of the equipment and facility renovations related to the iodine line, are expected to reach approximately $12.0 million during 2003. Cash will also be used for increased marketing and TheraSeed® support activities.

        Cash provided by financing activities was $307,000 and $362,000 in 2002 and 2001, 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, cash from future operations and credit facilities, will be sufficient to meet its currently anticipated working capital and capital expenditure requirements. In the event additional financing becomes necessary, management may choose to raise those funds through other means of financing as appropriate.

MEDICARE DEVELOPMENTS

        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 current 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.

        On November 1, 2002, CMS issued its rule for 2003 Medicare OPPS reimbursement. Under the new rule, CMS bundled the costs of the 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 in the final rule for palladium-103 seed brachytherapy (including the TheraSeed^® device) and iodine-125 seed brachytherapy, CMS made an important, positive change for our TheraSeed^® device product compared to its initial proposal published on August 9, 2002. Specifically, the per patient amount under the final rule for palladium-103 prostate brachytherapy exceeds the original payment amount proposed in August 2002 for both palladium-103 and iodine 125. The 2003 per patient amount for palladium-103 prostate brachytherapy also exceeds the payment amount for iodine-125 prostate brachytherapy. To the extent that the brachytherapy costs exceed the bundled amount, the remaining cost may no longer be submitted for reimbursement.

        While Medicare reimbursement for brachytherapy continues to create uncertainty for hospitals and doctors, at this time, Management is unable to predict the impact of the final rules on future sales. However, Management will be closely monitoring any effects of the new reimbursement structure on the brachytherapy market as it continues to evaluate pricing, marketing and distribution strategies.

Theragenics™ has been pursuing, and will continue to pursue avenues to attempt to address the reimbursement structure set forth by CMS. Theragenics™ is continuing its efforts to assist policymakers in formulating and revising Medicare policies to recognize the unique aspects of classification and reimbursement that apply to the TheraSeed® device and recognize its superior characteristics compared to other avenues of treatment. These efforts include working with policymakers to implement legislation which would create more favorable reimbursement for brachytherapy devices. Also, in 2002 the Company engaged a consulting firm specializing in reimbursement practices to help communicate brachytherapy reimbursement guidelines to customers.

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, third-party reimbursement, CMS policy, sales mix,