PURPOSE: Radical prostatectomy and external-beam radiation are the most common treatments for localized prostate cancer. Given the absence of clinical consensus in favor of one treatment or the other, relative costs may be a significant factor. This study compares the direct medical costs during the month before and 9 months after diagnosis for patients treated primarily with external-beam radiation or radical prostatectomy for early-stage prostate cancer. METHODS: Patients age 65 or older and coded by the Surveillance, Epidemiology, and End Results (SEER) registry as having been diagnosed with adenocarcinoma of the prostate treated primarily with external-beam radiation or radical prostatectomy during 1992 and 1993 were identified. The initial treatment costs, as measured by Medicare-approved payment amounts, for each strategy were analyzed using linked SEER-Medicare claims data after adjusting for differences in comorbidity and age. An intent-to-treat analysis was also performed to adjust for differences in staging between the two groups. RESULTS: For patients in the treatment-received analysis, the average costs were significantly different; $14,048 (95% confidence interval [CI], $13,765 to $14,330) for radiation therapy and $17,226 (95% CI, $16,891 to $17,560) for radical prostatectomy (P < .001). The average costs for patients in the intent-to-treat analysis were also significantly less for radiation therapy patients ($14,048; 95% CI, $13,765 to $14,330) than for those who underwent radical prostatectomy ($17,516; 95% CI, $17,195 to $17,837; P < .001). CONCLUSION: For patients with early-stage prostate cancer, average costs during the initial treatment interval were at least 23% greater for radical prostatectomy than for external-beam radiation. Major limitations of the research include not studying costs after the initial treatment interval and questionable current applicability, given changes in management of early prostate cancer.