**As
      filed with the Securities and Exchange Commission on August 22,
      2006**





**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      20-F/A** Amendment No. 1 ****




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




For
      the
      Fiscal Year Ended December 31, 2005




**0-29374**


(Commission
      file number)




**EDAP
      TMS S.A.**


(Exact
      name of registrant as specified in its charter)




**France**


(Jurisdiction
      of incorporation or organization)




**Parc
      d’Activites la Poudrette-Lamartine**


**4/6,
      rue du Dauphine**


**69120
      Vaulx-en-Velin, France**


(Address
      of principal executive offices)




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


Name
                  of each exchangeTitle
                  of each class
              on
                  which registered**None**
              **None**




Securities
      registered or to be registered pursuant to Section 12(g) of the
      Act:




**American
      Depositary Shares, each**


**representing
      one Ordinary Share**


**Ordinary
      Shares, nominal value**


**€** **0.13
      per share**




**Securities
      for which there is a reporting obligation pursuant to Section 15(d) of the
      Act:**  **None**




Outstanding
      shares of each of the issuer’s classes of capital or common stock as of December
      31, 2005:




**7,782,731
      Ordinary Shares**




Indicate
      by check mark if the registrant is a well-known seasoned issuer, as defined
      in
      Rule 405 of the Securities Act.




Yes
o No
x




If
      this
      report is an annual or transition report, indicate by check mark if the
      registrant is not required to file reports pursuant to Section 13 or 15(d)
      of
      the Securities Exchange Act of 1934.




Yes
o    
      No
      x




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
o




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):




Large
      accelerated filer o Accelerated
      filer o Non-accelerated
      filed x




Indicate
      by check mark which financial statement item the registrant has elected to
      follow.




Item
      17 o     Item
      18x




If
      this
      is an annual report, indicate by check mark whether the registrant is a shell
      company (as defined in Rule 12b-2 of the Exchange Act).




Yes
o    
      No
      x




























EXPLANATORY NOTE RELATING TO THIS FORM 20-F/A  We are filing this amended annual report on Form 20-F/A to modify our 2005 annual report on Form 20-F to reflect a "plain English" style and to correct certain typographical errors. These changes have been made to enable us to incorporate this report by reference into our registration statement on Form F-3 that we have filed with the Securities and Exchange Commission on the date hereof. For the convenience of the reader, this Amendment includes the complete text of all Items of the Form 20-F, as amended. However, other than the amendments described above, no changes have been made to our annual report on Form 20-F filed on June 6, 2006. This Amendment does not purport to amend or update the information contained in our annual report on Form 20-F filed on June 6, 2006 or reflect any events that have occurred after such report was filed.       
 2





**TABLE
      OF CONTENTS**





**Page**Presentation
                  of Financial and Other Information
              5Forward-looking
                  Information
              5**PART
                I****Item
                  1.**  Identity of Directors, Senior Management and Advisors
              6**Item
                  2.**  Offer Statistics and Expected Timetable
              6**Item
                  3.**  Key Information
              2**Item
                  4.**  Information on the Company
              13**Item
                4A.** Unresolved Staff Comments
              24**Item
                  5.**  Operating and Financial Review and Prospects
              24**Item
                  6.**  Directors, Senior Management and Employees
              36**Item
                  7.**  Major Shareholders and Related Party Transactions
              42**Item
                  8.**  Financial Information
              43**Item
                  9.**  The Offer and Listing
              44**Item
                  10.**  Additional Information
              45**Item
                  11.**  Quantitative and Qualitative Disclosures about Market
                  Risk
              57**Item
                  12.**  Description of Securities Other than Equity Securities
              58**PART
                II****Item
                  13.**  Defaults, Dividend Arrearages and Delinquencies
              59**Item
                  14.**  Material Modifications to the Rights of Security
                  Holders and Use of Proceeds
              59**Item
                  15.**  Controls and Procedures
              59**Item
                  16A.**  Audit Committee Financial Expert
              59**Item
                  16B.**  Code of Ethics
              59**Item
                  16C.**  Principal Accounting Fees and Services
              59**Item
                  16D.**  Exemptions from the Listing Standards for Audit
                  Committees
              60**Item
                  16E.**  Purchases of Equity Securities by the Issuer and
                  Affiliated Purchasers
              60**PART
                III****Item
                  17.**  Financial Statements
              61**Item
                  18.**  Financial Statements
              61**Item
                  19.**  Exhibits
              61




3























[THIS
      PAGE INTENTIONALLY LEFT BLANK]











4





**PRESENTATION
      OF FINANCIAL AND OTHER INFORMATION**




Unless the context otherwise requires, references herein to we, us or our are to EDAP TMS S.A. and its consolidated subsidiaries and references herein to the Company, EDAP or EDAP TMS are to EDAP TMS S.A.




We prepare our consolidated financial statements in conformity with United
      States generally accepted accounting principles (‘‘U.S. GAAP’’). In this Annual
      Report, references to ‘‘euro’’ or ‘‘€’’ are to the legal currency of the
      countries of the European Monetary Union, including the Republic of France,
      and
      references to ‘‘dollars,’’ ‘‘U.S. dollars’’ or ‘‘$’’ are to the legal currency
      of the United States of America. Solely for the convenience of the reader,
      this
      Annual Report contains translations of certain euro amounts into dollars at
      specified rates. These translations should not be construed as representations
      that the euro amounts actually represent such dollar amounts or could be
      converted into dollars at those rates. Unless otherwise stated, the translations
      of euro into dollars have been made at the rate of U.S.$1.00 = €0.8445, the rate
      derived from the noon buying rate in The City of New York for cable transfers
      in
      euro as certified for customs purposes by the Federal Reserve Bank of New York
      (the ‘‘Noon Buying Rate’’) on December 31, 2005. See Item 3, ‘‘Key
      Information—Exchange Rates’’ for information regarding certain currency exchange
      rates and Item 11, ‘‘Quantitative and Qualitative Disclosures about Market
      Risk’’ for a discussion of the effects of fluctuations in currency exchange
      rates on the Company.




The
      following are registered trademarks of the Company in the United States: EDAP,
      Technomed, Ablatherm, Ablasonic, Ablapak, Praktis, Pulsolith and Sonolith 2000.
      This Annual Report also makes references to trade names and trademarks of
      companies other than the Company.




**FORWARD-LOOKING
      INFORMATION**





This report includes certain forward-looking statements, usually containing words such as believe, plan, intend, estimate, expect and anticipate or similar expressions, which reflect our views about future events and financial performance. Actual events or results may differ materially from those projected in such forward-looking statements as a result of various factors that may be beyond our control. These factors include, without limitation:





-
            the effects of intense competition in markets in which we operate;


-
            the
                uncertainty of market acceptance for the our HIFU devices;


-
            the uncertainty of reimbursement status of procedures performed with our products;


-
            the
                clinical status of the our HIFU devices;


-
            the
                impact  of government regulation, particularly relating
                to
                public healthcare systems and the commercial distribution of medical
                devices;


-
            dependence
                on our strategic partners;


-
            reliance
                on patents, licenses and key proprietary technologies;


-
            product
                liability risk;


-
            risk
                of exchange rate fluctuations, particularly between the euro and
                the U.S.
                dollar and between the euro and the Japanese yen;
and


-
            fluctuations in results of operations due to the cyclical
                nature
                of demand for medical devices.





You
      should also consider the information contained in Item 3, ‘‘Key Information—Risk
      Factors’’ and Item 5, ‘‘Operating and Financial Review and Prospects,’’ as well
      as the information contained in our periodic filings with the
      Securities and Exchange Commission (including our reports on Form
      6-K), for further discussion of the risks and uncertainties that may cause
      such
      differences to occur.





5


**PART
      I**




**Item
      1. Identity of Directors, Senior Management and Advisors**




Not
      applicable.




**Item
      2. Offer Statistics and Expected Timetable**




Not
      applicable.




**Item
      3. Key Information**




**Selected
      Financial Data**




The following table sets forth selected consolidated financial data for the periods indicated.  This information is qualified by and should be read in conjunction with the Consolidated Financial Statements and the Notes thereto included in Part III of this annual report, as well as Item 5, Operating and Financial Review and Prospects. The balance sheet data as of December 31, 2003, 2004 and 2005 and the income statement data for the years ended December 31, 2003, 2004 and 2005 set forth below have been derived from our Consolidated Financial Statements included in this annual report. The balance sheet data as of December 31, 2001 and 2002 and the income statement data for the year ended December 31, 2001 and 2002 have been derived from our audited consolidated financial statements. Our Consolidated Financial Statements were prepared in accordance with U.S. GAAP. To
date, we have not been required, and presently are not required under French law, to prepare consolidated financial statements under French GAAP, nor have we done so.




**Year
                Ended and at December 31,**In
                thousands of euro, except
              per
                share data
            
            **2001**
            
            **2002**
            
            **2003**
            
            **2004**
            
            **2005********INCOME
                STATEMENT DATA**Total
                revenues
            
            
            23,965
            
            
            19,961
            
            
            18,473
            
            
            22,163
            
            
            20,810Total
                net sales
            
            
            23,804
            
            
            19,725
            
            
            18,030
            
            
            21,955
            
            
            20,717Gross
                profit
            
            
            7,979
            
            
            8,458
            
            
            5,379
            
            
            8,487
            
            
            8,497Operating
                expenses
            
            
            (13,093
            )
            
            (13,234
            )
            
            (13,500
            )
            
            (9,317
            )
            
            (9,820
            )Loss
                from operations
            
            
            (5,114
            )
            
            (4,776
            )
            
            (8,121
            )
            
            (830
            )
            
            (1,323
            )Income
                (loss) before income taxes
            
            
            8,019
            
            
            (3,873
            )
            
            (9,090
            )
            
            (871
            )
            
            (961
            )Income
                tax (expense) benefit
            
            
            (882
            )
            
            (167
            )
            
            114
            
            
            (278
            )
            
            (104
            )Net
                income (loss)
            
            
            7,137
            
            
            (4,040
            )
            
            (8,976
            )
            
            (1,149
            )
            
            (1,065
            )Basic
                earnings (loss) per share
            
            
            0.92
            
            
            (0.52
            )
            
            (1.15
            )
            
            (0.15
            )
            
            (0.14
            )Dividends
                per share(1)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Weighted
                average sharesoutstanding
                used in basic calculation
            
            
            7,760,044
            
            
            7,771,467
            
            
            7,781,731
            
            
            7,781,731
            
            
            7,782,731Weighted
                average sharesoutstanding
                used in diluted calculation
            
            
            7,941,869
            
            
            7,833,514
            
            
            7,817,303
            
            
            8,074,210
            
            
            8,373,574Diluted
                earnings (loss) per Share
            
            
            0.90
            
            
            (0.52
            )
            
            (1.15
            )
            
            (0.15
            )
            
            (0.14
            )**BALANCE
                SHEET DATA**Total
                current assets
            
            
            45,927
            
            
            34,091
            
            
            25,870
            
            
            22,041
            
            
            22,777Property
                and equipment, net
            
            
            2,233
            
            
            1,985
            
            
            2,903
            
            
            2,807
            
            
            3,130Total
                current liabilities
            
            
            11,916
            
            
            9,880
            
            
            11,074
            
            
            8,272
            
            
            9,874Total
                assets
            
            
            53,115
            
            
            39,787
            
            
            31,910
            
            
            27,901
            
            
            28,796Long-term
                debt, less current portion
            
            
            304
            
            
            95
            
            
            7
            
            
            -
            
            
            55Total
                shareholders’ equity
            
            
            38,909
            
            
            28,375
            
            
            18,961
            
            
            17,964
            
            
            17,372






(1)
            No
                dividends were paid with respect to fiscal years 2001 through 2004
                and
                subject to approval of the annual shareholders’ meeting to be held in June
                2006, the Company does not anticipate paying any dividend with respect
                to
                fiscal year 2005. See Item 8, ‘‘Financial Information — Dividends and
                Dividend Policy.’’





6


**EXCHANGE
      RATES**




Fluctuations
      in the exchange rate between the euro and the dollar will affect the dollar
      amounts received by owners of American Depositary Shares (‘‘ADSs’’) representing
      ordinary shares of the Company (‘‘Shares’’) on conversion by the Depositary of
      dividends, if any, paid on the Shares in the form of ADSs. Moreover, such
      fluctuations may affect the dollar price of our ADSs on Nasdaq.




The
      following table sets forth, for each of the years indicated, the high, low,
      average and year-end Noon Buying Rates expressed in euro per $1.00.





**Year
                ended December 31,**
            
            
            **High**
            **Low**
            **Average****(1)**
            **End**
              **of
                Year****€**
            **€**
            **€**
            **€**2001
            
            
            1.19
            1.05
            1.12
            1.122002
            
            
            1.16
            0.95
            1.05
            0.952003
            
            
            1.12
            0.79
            0.88
            0.792004
            
            
            0.85
            0.73
            0.80
            0.742005
            
            
            0.86
            0.74
            0.81
            0.84




(1)
            The
                average of the Noon Buying Rates on the last business day of each
                month
                during the year indicated. See ‘‘Presentation of Financial and Other
                Information’’ elsewhere in this annual
                report.




The
      following table sets forth, for each of the previous six months, the high and
      low Noon Buying Rates
      expressed in euro per $1.00.





**High**
            **Low**
            **Average****€**
            **€**
            **€***2005*November
            
            
            
            0.86
            0.83
            0.85December
            
            
            
            0.85
            0.83
            0.84*2006*January
            
            
            
            0.83
            0.81
            0.82February
            
            
            
            0.84
            0.83
            0.84March
            
            
            
            0.84
            0.82
            0.83April
            
            
            
            0.83
            0.79
            0.81




On
      May
      18, 2006, the Noon Buying Rate was U.S.$1.00 = €0.78.




7


**RISK
      FACTORS**




***Our future revenue growth and income depends, among other things, on the success of our HIFU technology.***




We depend on our High Intensity Focused Ultrasound (HIFU) technology for future revenue growth and net income.  Our Extracorporeal Shockwave Lithotripsy (ESWL) line of products competes in a mature market that has experienced declining unit sales prices in recent years, although total revenues have remained stable owing to increased sales volumes. In particular, we are dependent on the successful development and commercialization of other product lines, such as medical devices based on HIFU, particularly the Ablatherm, to generate significant additional revenues and achieve and sustain profitability in the future. The Ablatherm is in its commercialization phase in the European Union. The Ablatherm is not approved for commercial distribution in the United States and none of the Companys other HIFU products (excluding Ablatherm) have
obtained approval for commercial distribution anywhere in the world. In December 2001, our request for an additional Investigational Device Exemption (IDE) from the U.S. Food and Drug Administration (FDA) to conduct clinical trials in the United States for the Ablatherm as a primary therapy was rejected. To assist in the successful completion of clinical trials to obtain FDA approval for the Ablatherm, we partnered with HealthTronics Surgical Services, Inc. (HealthTronics) and signed a Distribution Agreement in February 2004 for assistance in the approval process for re-submission of an IDE to the FDA.   Trials in the United States started in May 2006, with several centers fully approved and currently enrolling patients. The identification of HealthTronics as our U.S. partner does not guarantee the successful completion of clinical trials nor does it guarantee that the FDA will grant approval to market a device even if
clinical trials are successfully completed. See Uncertainty Relating to Clinical Trials; Clinical Status of Certain Products Using HIFU Technology and Item 4, Information on the CompanyHigh Intensity Focused Ultrasound DivisionHIFU Division Clinical and Regulatory Status.




***Our clinical trials for products using HIFU technology may not be successful.***




Before obtaining regulatory approvals for the commercial sale of any of our devices under development, we must demonstrate through preclinical testing and clinical trials that the device is safe and effective for use in each indication. The results from preclinical testing and early clinical trials may not predict the results that will be obtained in large scale clinical trials, and there can be no assurance that our clinical trials will demonstrate that our products are safe, effective, and marketable. A number of companies have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. We, the FDA or other regulatory authorities may suspend or terminate clinical trials at any time and regulating agencies such as the FDA may even refuse to grant exemptions to conduct clinical trials. Our US partner HealthTronics may decide to cease its
cooperation with us under the Distribution Agreement. See Item 4, Information on the CompanyHigh Intensity Focused Ultrasound DivisionHIFU Division Clinical and Regulatory Status.




We rely on scientific, technical and clinical data supplied by academics that work with us to evaluate and develop our devices. We cannot assure you that there are no errors or omissions in such data that would adversely affect the development of such products.




The process of applying for regulatory approval is unpredictable, often lengthy and requires the expenditure of substantial resources. Our HIFU devices that have not received regulatory approval may not prove to be effective or safe in clinical trials or may not be approved by the appropriate regulatory authorities. We, through our U.S. partner HealthTronics, do not anticipate receiving FDA approval for any HIFU device, including the Ablatherm, for several years, if at all. If our HIFU devices do not prove to be effective and safe in clinical trials to the satisfaction of the relevant regulatory authorities, our business, financial condition and results of operations could be materially adversely affected.


***HIFU technology may not be accepted and adopted by the medical community.***
  Our HIFU devices represent new therapies for the conditions that they are designed to treat. Notwithstanding any positive clinical results that our HIFU devices may have achieved or may achieve in the future in terms of safety and effectiveness, and any marketing approvals that we may have obtained or may obtain in the future, there can be no assurance that such products will gain acceptance in the medical community. Physician acceptance depends, among other things, on adequate reimbursement from


8


healthcare payers, which has not been provided for our HIFU products in any country, except for partial reimbursements in Italy, Germany and the UK, and evidence of the cost effectiveness of a therapy as compared to existing therapies. Acceptance by patients depends in part on physician recommendations, as well as other factors, including the degree of invasiveness and the rate and severity of complications and other side effects associated with the therapy as compared to other therapies.




***Our cash flow is highly dependent on demand for our products.***




Our cash flow has historically been subject to significant fluctuations over the course of any given financial year due to cyclical demand for medical devices, and the resulting annual and quarterly fluctuations in trade and other receivables and inventories. This has in the past resulted in significant variations in working capital requirements and operating cash flows. In 2005, 2004 and 2003, moreover, our cash flow was negative due to the cash requirements of operating activities, which we financed using cash and cash equivalents on hand. In addition, our 2005 cash flow was negative due to the cash requirements of investing activity to expand our mobile activity and to expand the leasing of our products as part of our revenue-per-procedure model. Since we anticipate relying principally on cash flow from operating activities to meet our liquidity requirements, a decrease in the demand
for our products, or the inability of our customers to meet their financial obligations to us, would reduce the funds available to us. Our future cash flow may also be affected by the potential continued expansion of the leasing of our products, or the expansion of our mobile activity (which is invoiced on a revenue-per-procedure basis), since each of these activities generates smaller immediate revenues than device sales. In the future, our liquidity may be constrained and our cash flows may be uncertain, negative or significantly different from period to period. In 2003, we performed an extensive review of our business and adopted measures designed to address cash flow problems in the near term. There is no assurance, however, that these problems will not recur in the medium to long term.




***We have a history of operating losses and it is uncertain when and if we will reach profitability.***




We have incurred operating losses in each fiscal year since 1998 and may never achieve profitability. We expect that our marketing, selling and research and development expenses will increase as we attempt to develop and commercialize HIFU devices. We may not, however, generate a sufficient level of revenue to offset these expenses and may not be able to adjust spending in a timely manner to respond to any unanticipated decline in revenue. In 2005 and 2004, we had positive operating income in both of our operating divisions (HIFU division and UDS division), reflecting efforts to restructure our operations in late 2003 and in control costs and operating losses in our holding company (holding expenses). We cannot assure you, however, that we will realize sufficient revenue to become profitable in the future. See Item 5, Operating and Financial Review and Prospects.




***Competition in the markets in which we operate is intense and is expected to increase in the future.***




Competition in the markets in which we operate is intense and is expected to increase in the future.  In each of our main businesses, we face competition both directly from other manufacturers of medical devices that apply the same technologies that we use, as well as indirectly from existing or emerging therapies for the treatment of urological disorders.




We believe that because ESWL has long been the standard treatment for urinary tract calculus disease, competition in that market comes principally from current manufacturers of lithotripters, including Siemens, Storz and Dornier. In the markets that we target for our HIFU products, competition comes from new market entrants and alternative therapies, as well as from current manufacturers of medical devices. In the HIFU market our devices, in particular the Ablatherm, compete with all current treatments for localized tumors, including surgery, external beam radiotherapy, brachytherapy and cryotherapy. Other companies are working with HIFU for the minimally invasive treatment of tumors, including Focus Surgery, Inc. (Focus Surgery), which has developed a device called the Sonablate SB500 for the treatment of localized prostate cancer. Misonix, Inc., USHIFU and UKHIFU are also involved in the manufacturing, marketing and distribution of the Sonablate. Insightec, an Israeli company owned mainly by General Electric and Elbit Medical Imaging Ltd, has developed a device using HIFU technology to treat uterine fibroids. St. Jude Medical Inc. has developed a device using HIFU to treat atrial fibrillation. Haifu, a Chinese company developing HIFU products addressing various types of cancers, recently signed a development partnership agreement with Siemens Medical Solutions to offer a HIFU device coupled with IRM imaging system. Finally, Chinamed, a Chinese company, is also developing HIFU products for various types of cancer tumors, but the company is only marketing its HIFU products in China. See Item 4, Information on the CompanyHigh Intensity Focused Ultrasound Division HIFU Competition and Item 4, Information on the CompanyUrology Devices and Services Division.




9


Many of our competitors have significantly greater financial, technical, research, marketing, sales, distribution and other resources than us and may have more experience in developing, manufacturing, marketing and supporting new medical devices. In addition, our future success will depend in large part on our ability to maintain a leading position in technological innovation, and we cannot assure you that we will be able to develop new products or enhance our current ones to compete successfully with new or existing technologies. Rapid technological development by competitors may result in our products becoming obsolete before we recover a significant portion of the research, development and commercialization expenses incurred with respect to those products.




We also face competition for our maintenance and service contracts. Larger hospitals often utilize their in-house maintenance departments instead of contracting with equipment manufacturers like us to maintain and repair their medical equipment. In addition, third-party medical equipment maintenance companies increasingly compete with equipment manufacturers by offering broad repair and maintenance service contracts to hospitals and clinics. This increased competition for medical devices and maintenance and service contracts could have a material adverse effect on our business, financial condition and results of operations.




***We operate in a highly regulated industry and our future success depends on government regulatory approval of our products, which we may not receive or which may be delayed for a  significant period of time.***




Government regulation significantly impacts the development and marketing of our products, particularly in the United States. We are regulated in each of our major markets with respect to preclinical and clinical testing, manufacturing, labeling, distribution, sale, marketing, advertising and promotion of our products. To market and sell products still in the clinical trial stage, we are required to obtain approval or clearance from the relevant regulatory agencies, including the FDA in the United States. Moreover, regulatory approval to market a product, if granted, may include limitations on the indicated uses for which it may be marketed. Failure to comply with regulatory requirements can result in fines, suspension or withdrawal of regulatory approvals, product recalls, seizure of products, operating restrictions and criminal prosecutions. Regulatory policy may change and additional government regulations may be established that could prevent or delay regulatory approval of our products. Any delay, failure to receive regulatory approval or the loss of previously received approvals could have a material adverse effect on our business, financial condition and results of operations. For more information on the regulation of our business, see Item 4, Information on the CompanyGovernment Regulation.




It is also possible that additional statutes or regulations that affect our business will be adopted and could impose substantial additional costs or otherwise have a material adverse effect on our business, financial condition and results of operations.




***The success of our products depends on whether procedures performed by those products are eligible for reimbursement which depends on the decisions of national health authorities and third-party payers.***




Our success depends, among other things, on the extent to which reimbursement can be obtained from healthcare payers in the United States and elsewhere for procedures performed with our products. In the United States, we are dependent upon favorable decisions by the Centers for Medicare & Medicaid Services (CMS), formerly the Health Care Financing Administration (HCFA), for Medicare reimbursement, individual managed care organizations, private insurers and other payers. These decisions may be revised from time to time, which could affect reimbursement for procedures performed using our devices. Outside the United States, and in particular in the European Union and Japan, third-party reimbursement is generally conditioned upon decisions by national health authorities. In the European Union, there is no single procedure for obtaining reimbursement and, consequently, we must seek regulatory approval in each Member State. If we fail to establish reimbursement from healthcare payers or government and private healthcare payers policies change, it could have a material adverse effect on our business, financial condition and results of operations.




10


Lithotripsy procedures are reimbursed in the European Union, in Japan and in the United States. However, a decision to modify reimbursement policies for these procedures could have a material adverse effect on our business, financial conditions and results of operations. Procedures performed with our Ablatherm device are not reimbursed in the United States or in any of the European Union countries with the exception of Italy, Germany and the UK, where it is partially reimbursed. We cannot assure you that additional reimbursement approvals will be obtained. If reimbursement for our products is unavailable, limited in scope or amount or if pricing is set at unsatisfactory levels, our business could be materially harmed.




***Our manufacturing operations are highly regulated and failure to comply with those regulations would harm our business.***




Our manufacturing operations must comply with regulations established by regulatory agencies in the United States, the European Union and other countries, and in particular with the good manufacturing practices (GMP) mandated by the FDA and European Union standards for quality assurance and manufacturing process control. Failure to comply with these regulations could have a material adverse effect on our business, financial condition and results of operations.




***We depend on a single site to manufacture our products, and any interruption of operations could have a material adverse effect on our business.***




Most of our manufacturing currently takes place in a single facility located in Vaulx-en-Velin, on the outskirts of Lyon, France. A significant interruption in the operations of our sole facility for any reason, such as fire, flood or other natural disaster or a failure to obtain or maintain required regulatory approvals, could have a material adverse effect on our business, financial condition and results of operations.




***For certain components or services we depend on single suppliers that for events beyond our control may fail to deliver sufficient supplies to us, which would interrupt our production processes.***




We purchase the majority of the components used in our products from a number of suppliers, but rely on a single supplier for several components. In addition, we rely on single suppliers for certain services. If the supply of certain components or services were interrupted for any reason, our manufacturing, marketing and efforts with respect to the affected products would be delayed. These delays could be extensive, especially in situations where a component substitution would require regulatory approval. We expect to continue to depend upon our suppliers for the foreseeable future. Failure to obtain adequate supplies of components or services in a timely manner could have a material adverse effect on our business, financial condition and results of operations.




***Intellectual property rights are essential to protect our medical devices, and any dispute with respect to these rights could be costly and have an uncertain outcome.***




Our success depends in large part on our ability to develop proprietary products and technologies and to establish and protect the related intellectual property rights, without infringing the intellectual property rights of third parties. The validity and scope of claims covered in medical technology patents involve complex legal and factual questions and, therefore, may be highly uncertain. The medical device industry has been characterized by extensive litigation regarding patents and other intellectual property rights. Our products, including our HIFU devices, may be subject to litigation involving claims of patent infringement or violation of other intellectual property rights of third parties. The defense and prosecution of intellectual property suits, patent opposition proceedings and related legal and administrative proceedings are both costly and time consuming and may result in a significant diversion of effort and resources by our technical and management personnel. An adverse determination in any such litigation or proceeding to which we become a party could: subject us to significant liability to third parties; require us to seek licenses from third parties and pay ongoing royalties; require us to redesign certain products; or subject us to injunctions preventing the manufacture, use or sale of these products. In addition to being costly, drawn out litigation to defend or prosecute intellectual property rights could cause our customers or potential customers to defer or limit their purchase or use of our products until the litigation is resolved. See Item 4, Information on the CompanyHigh Intensity Focused Ultrasound DivisionHIFU Division Patents and Intellectual Property and Item 4, Information on the CompanyUrology Devices and Services DivisionUDS Division Patents and Intellectual Property.




11


We own patents covering several of our technologies and have additional patent applications pending in the United States, the European Union, Japan and elsewhere. The process of seeking patent protection can be long and expensive and there can be no assurance that our patent applications will result in patents being issued. We also cannot assure you that our current or future patents are or will be sufficient to provide meaningful protection or commercial advantage to us. Our patents or patent applications could be challenged, invalidated or circumvented in the future. The failure to maintain or obtain necessary patents, licenses or other intellectual property rights from third parties on acceptable terms or the invalidation or cancellation of material patents could have a material adverse effect on our business, financial condition or results of operations. Litigation may be necessary to enforce patents issued to us or to determine the enforceability, scope and validity of the proprietary rights of others. Our competitors, many of which have substantial resources and have made substantial investments in competing technologies, may apply for and obtain patents that will interfere with our ability to make, use or sell certain products either in the United States or in foreign markets, including our HIFU devices.




We also rely on trade secrets and proprietary know-how, which we seek to protect through non-disclosure agreements with employees, consultants and other parties. It is possible, however, that those non-disclosure agreements will be breached, that we will not have adequate remedies for any such breach, or that our trade secrets will become known to, or independently developed by, competitors. Litigation may be necessary to protect trade secrets or know-how owned by us. In addition, effective copyright and trade secret protection may be unavailable or limited in certain countries.




The
      occurrence of any of the foregoing could have a material adverse effect on
      our business, financial condition and result of operations.




***We face a significant risk of exposure to product liability claims in the event that the use of our products results in personal injury or death.***


If the use of any of our products results in personal injury or death, we may fail significant product liability claims. To date, we are a party to two product liability actions in the United States by patients claiming to have been injured in the course of a Prostatron procedure, for which we have retained liability following the sale of our Prostatron business in October 2000. See Item 5, Operating and Financial Review and ProspectsCritical Accounting PoliciesLitigation and Item 8, Financial InformationLegal Proceedings for more information about these actions. These product liability claims, if successful, could have a material adverse effect on our business, financial condition and results of operations.


We maintain separate product liability insurance policies for the United States and the other markets in which we sell our products. Product liability insurance is expensive and there can be no assurance that it will continue to be available on commercially reasonable terms or at all. In addition, our insurance may not cover certain product liability claims or our liability for any claims may exceed our coverage limits. Also, if any of our products prove to be defective, we may be required to recall or redesign the product. A product liability claim or series of claims brought against us with respect to uninsured liabilities or in excess of our insurance coverage, or any claim or product recall that results in significant cost to or adverse publicity against us could have a material adverse effect on our business, financial condition and results of operations.




***We sell our products in many parts of the world and, as a result, our business is affected by fluctuations in currency exchange rates.***




We are exposed to foreign currency exchange rate risk because the mix of currencies in which our costs are denominated is different from the mix of currencies in which we earn our revenue. In 2005, approximately 76% of our selling and general and administrative expenses and approximately 93% of our research and development expenses were denominated in euro, while approximately 42% of our sales were denominated in currencies other than euro (primarily the U.S. dollar and the Japanese yen). Our operating profitability could be materially adversely affected by large fluctuations in the rate of exchange between the euro and other currencies. For instance, a decrease in the value of the U.S. dollar or the Japanese yen against the euro would have a negative effect on our revenues, which may not be offset by an equal reduction in operating expenses and would therefore negatively impact operating profitability. From time to time we enter into foreign exchange forward sale contracts to hedge against fluctuations in the exchange rates of the principal foreign currencies in which our receivables are denominated (in particular, the U.S. dollar and the Japanese yen), but there can be no assurance that such hedging activities will limit the effect of movements in exchange rates on our results of operations. As of December 31, 2005, we had three options to hedge against Japanese yen for a total nominal amount of JPY45 million (i.e., 331 thousand), an amount of JPY15 million each, expiring on March, June and September 2006 respectively and two options to hedge against U.S. dollars for a total nominal amount of US$200 thousand (i.e., 160 thousand), an amount of US$100 thousand each, expiring on February and April 2006. As of March 31, 2006, we had three new foreign exchange sale contracts, one for the Japanese yen and two for U.S. dollars. In addition, since any dividends that we may declare will be denominated in euro, exchange rate fluctuations will affect the U.S. dollar equivalent of any dividends received by holders of ADSs.




12


***Our results of operations have fluctuated significantly from quarter to quarter in the past and may continue to do so in the future.***




Our results of operations have fluctuated in the past and are expected to continue to fluctuate significantly from quarter to quarter depending upon numerous factors, including, but not limited to, the timing and results of clinical trials, changes in healthcare reimbursement policies, cyclicality of demand for our products, changes in pricing policies by us or our competitors, new product announcements by us or our competitors, customer order deferrals in anticipation of new or enhanced products offered by us or our competitors, product quality problems and exchange rate fluctuations. Furthermore, because our main products have relatively high unit prices, the amount and timing of individual orders can have a substantial effect on our results of operations in any given quarter.





**Item
      4. Information on the Company**





We develop and market Ablatherm®, the most advanced and clinically proven choice for High Intensity Focused Ultrasound (HIFU) treatment of localized prostate cancer. HIFU treatment is shown to be a minimally invasive and effective treatment option with a low occurrence of side effects. Ablatherm-HIFU is generally recommended for patients with localized prostate cancer (stages T1-T2) who are not candidates for surgery or who prefer an alternative option. It is also used for patients who failed a radiotherapy treatment. In addition, we are developing this HIFU technology for the treatment of certain other types of tumors. We also produce and commercialize medical equipment for treatment of urinary tract stones using Extra-corporeal Shockwave Lithotripsy (ESWL).




**History
      and Development of the Company**




Founded in 1979, we originally specialized in the manufacturing and distribution of lithotripters (device which uses shockwaves to disintegrate urinary calculi) and produced the first piezo-electric lithotripter (using electric shocks produced by a piezo-component) in 1985. In 1994, we purchased most of the assets of Technomed International S.A. (Technomed) out of liquidation. Technomed was established in 1985 and launched an electrohydraulic lithotripter (using electric shocks produced by an electrode within a hydraulic system) in 1986 and the Prostatron, a medical device using TransUrethral Microwave Thermotherapy (TUMT) for the minimally invasive treatment of BPH in the European Union in 1990. The assets we acquired in Technomeds liquidation included the ownership of, and full distribution rights to, the Prostatron, the Sonolith series of lithotripters (Sonolith Praktis and Sonolith Vision) and the Ablatherm HIFU device.




In October 2000, we sold our Prostatron business to Urologix Inc. for consideration consisting of approximately $12 million in common stock and warrants to purchase additional shares of common stock and $8 million in cash.


In July 2002, we reorganized our management structure and created two separate operating divisions, the HIFU division and the UDS division. The implementation of the new corporate structure consolidated our management structure from a two-tiered management system with a Supervisory Board and a Management Board into a single Board of Directors with the consolidated management responsibilities of the two-tiered system. On February 25, 2004, we finalized a distribution agreement with HealthTronics based on the terms outlined in a letter of intent. On January 28, 2005, conforming the distribution agreement and as per the approval of the January 29, 2004 extraordinary shareholders meeting, 1,000,000 warrants were allocated to HealthTronics. These warrants can be exercised upon the completion of certain milestoneslinked to the grant of the Ablatherm PMA pre-market approval and certain minimum sales of lithotripters in the United States.




13






On December 29, 2005, we amended our distribution agreement with Healthtronics after it decided to focus all of its efforts on implementing Ablatherm clinical trials in the United States to gain FDA approval, and not to pursue distribution of our lithotripters in the United States. 200,000 warrants that had been issued to HealthTronics were then cancelled since their exercise was directly linked to future purchases of lithotriptors manufactured by us.




Our legal name is EDAP TMS S.A. and our commercial name is EDAP TMS. EDAP TMS S.A. was incorporated on December 3, 1979 as a société anonyme organized under the laws of the Republic of France for 60 years from the date of incorporation. Our principal executive offices are located at Parc dActivités la Poudrette- Lamartine, 4/6, rue du Dauphiné, 69120 Vaulx-en-Velin, France and our telephone number is +33 (0) 4 72 15 31 50. On July 1, 2004, we closed our U.S. offices, but retained EDAP Technomed Inc as a Delaware registered company. Mr. Lee Sanderson, CPA, 945 Concord Street, Framingham, MA01701, USA is our agent for service of process.




**Business
      Overview & Strategy**




Through our HIFU and UDS divisions we develop, produce and market minimally invasive medical devices, mainly for urological diseases. We believe that the creation of these two operating divisions has allowed us to expand our market share by optimizing worldwide distribution capabilities, all of which is coordinated through our subsidiaries. It also allows for cost synergies, mainly in manufacturing and administrative expenses.




EDAP TMS S.A. is a holding company and is responsible for providing common services to its subsidiaries, performing the consolidation of the financial statements, complying with the requirements of various regulatory agencies and maintaining the listing of its publicly held securities and, in conjunction with its Board of Directors, directing the overall strategy of our group.




See
      Note
      27 of the Notes to the Consolidated Financial Statements for a breakdown of
      total sales and revenue during the past three fiscal years by operating
      division.




**Organizational
      Structure**




The
      following table sets forth the fully consolidated subsidiaries of the Company
      as
      of the date of this Annual
      Report:





Name
                of the Company
            
            Jurisdiction
                of
              Establishment
            Percentage
                Owned(1)Technomed
                Medical Systems S.A
            
            France
            100%EDAP
                S.A
            
            France
            100%EDAP
                Technomed Inc.(2)
            
            United
                States
            100%EDAP
                Technomed Co. Ltd
            
            Japan
            100%EDAP
                Technomed Sdn Bhd
            
            Malaysia
            100%EDAP
                Technomed Srl
            
            Italy
            100%






(1)
            Percentage
                of equity capital owned by EDAP TMS S.A. directly or indirectly through
                subsidiaries.


(2)
            EDAP
                Technomed Inc is still registered in the Delaware and maintained
                as a
                dormant company. **High Intensity Focused Ultrasound (‘‘HIFU’’) Division** Our HIFU division consists of two wholly owned and fully consolidated subsidiaries: EDAP S.A. (‘‘EDAP’’), a French corporation, and EDAP Technomed Srl, an Italian Corporation. The HIFU division also has branch offices in Germany and Russia. The HIFU division is engaged in the development and marketing of medical devices based on HIFU technology for the minimally invasive treatment of urological and other clinical indications. The HIFU division had total revenues of €7.9 million during the fiscal year ended December 31, 2005
 ***HIFU Division Business Overview***
 14
 
     The HIFU division currently develops and markets devices for the minimally invasive destruction of certain types of localized tumors using HIFU technology. HIFU technology uses a high-intensity convergent ultrasound beam generated by high power transducers to produce heat. HIFU technology is intended to allow the surgeon to destroy a well-defined area of diseased tissue without damaging surrounding tissue and organs, thereby eliminating the need for incisions, transfusions and general anesthesia and associated complications. The Ablatherm is a HIFU-based device developed and marketed by the HIFU division for the treatment of organ-confined prostate cancer, referred to as T1-T2 stage. Ablatherm can be used for patients who are not candidates for surgery or who have failed a radiotherapy treatment. Ablatherm is approved for commercial distribution in the European Union, Canada, South Korea and Russia, and clinical trials in the United States have started, with the assistance of our U.S. partner, HealthTronics. The HIFU division had a fixed installed base of 49 Ablatherm machines worldwide and 106 clinical sites were using this technology as of March 31, 2006. In addition to developing and marketing HIFU devices, the HIFU division also generates revenues from the leasing equipment, as well as from the sale of disposables, spare parts and maintenance services. We are developing a HIFU mobile treatment option which provides access to the HIFU devices without requiring hospitals and clinics to make an up-front investment in the equipment. Instead, hospitals and clinics perform treatments using these devices and remunerate us on a revenue-per-procedure (RPP) basis (i.e., on the basis of the number of individual treatments provided). With this model, once the treatment is established in the medical community, a permanent installation may become more attractive, leading to the sale of the device in some of the larger locations.
   ***HIFU
      Division Business Strategy***
  The
      HIFU
      division’s business strategy is to capitalize on its expertise in HIFU and its
      position in urology to achieve long-term growth as a leader in the development,
      marketing and distribution of minimally invasive medical devices for urological
      and other indications, using HIFU technology, while preserving patient quality
      of life. The HIFU division believes that minimally invasive treatments using
      HIFU could provide an alternative to current invasive therapies on the basis
      of
      reduced cost and reduced morbidity for a number of different indications. The
      key elements of the HIFU division’s strategy to achieve that objective
      are:
  ·
            Provide Minimally Invasive Solutions to Treat Prostate Cancer using HIFU. Building upon our established position in the ESWL market of the UDS division, our HIFU division is striving to become the leading provider of our minimally invasive treatment option for prostate cancer. We believe that there is a large market opportunity with an increase in incidence linked to the aging male population, an increase in screening and recent campaigns to increase awareness. We also believe that HIFU could represent a credible alternative to surgery, external beam radiotherapy, brachytherapy and cryotherapy for the treatment of organ-confined prostate cancer without the cost, in-patient hospitalization and adverse side effects associated with those therapies. The HIFU division intends to achieve this through a direct sales network in key European countries and through selected distributors in other European countries, through the distribution platform of the UDS division in Asia, and in partnership with HealthTronics in the United States. The HIFU division has built a strong clinical credibility based on clinical articles published in peer-reviewed journals. We ensure effective patient and physician education through a focused communication program.
  ·
            Achieve Long-Term Growth by Expanding HIFU Applications Beyond Prostate Cancer. The HIFU divisions long-term growth strategy is to apply our HIFU technology toward the minimally invasive treatment of indications beyond prostate cancer. We believe that HIFU could represent an alternative to surgery and radiotherapy for the treatment of many tumors without the cost, in-patient hospitalization and adverse side effects associated with those therapies. The HIFU division is working on various other applications where HIFU could provide an alternative to current invasive therapies. See HIFU Products. The HIFU division increased spending on research and development (R&D) projects in 2005 to develop HIFU applications beyond prostate cancer. The division is considering increasing R&D spending in 2006 and future years to strengthen its technological leadership in HIFU and expand its application beyond urology.
 ***HIFU
      Products***
  15
  Currently, the only commercial product produced by the HIFU division utilizing HIFU technology is the Ablatherm, an ultrasound guided HIFU device for the treatment of organ-confined prostate cancer. The Ablatherm is cleared for distribution in the European Union, South Korea, Canada, Australia, New Zealand and Russia. Clinical trials are underway in the United States, in partnership with HealthTronics. The Ablatherm consists of a treatment module, a control table with a computer and a computer screen, and a diagnostic ultrasound device connected to the treatment module. After insertion of an endorectal probe, the physician visualizes the prostate and defines the area to be treated. The computer automatically calculates the optimum treatment distribution of lesions. During the treatment, the transducer automatically moves and fires at each predefined lesion until the entire volume has been treated, while controlling and imaging the treatment in real time thanks to its integrated imaging system. Cell destruction by HIFU is accomplished by a combination of thermal and cavitation effects caused by focused application of piezoelectric-generated high-intensity ultrasound. The procedure is generally performed under spinal anesthesia.
  ***HIFU
      Division Patents and Intellectual Property***
  As of March 31, 2006, the HIFU divisions patent portfolio contained 56 patents (consisting of 26 in the United States, 23 in the European Union and Japan and 7 in Israel) covering key technologies relating to HIFU systems and associated software.
  During 2005, one patent covering obsolete technology has been abandoned in the United States. Two new patents, one covering the HIFU dedicated coupling liquid and the other one covering a new probe design for extracorporeal use, have been obtained in Europe. An additional patent covering transducer design has been granted in Israel. Finally, a new patent covering the combination of thermal and cavitation effect for tissue necrosis has been granted in Japan.
  Additional patents covering certain other aspects of our HIFU technology in the European Union, the United States and Japan are still in the examination process. Some of these pending applications are dedicated to the development of small transducers for High Intensity Contact Ultrasound (HICU).
  Although we believe that our HIFU patents are valid and should be enforceable against third parties and that our patent applications should, if successfully pursued, result in the issuance of additional enforceable patents, there can be no assurance that any or all of these patents or patent applications will provide effective protection for the HIFU divisions proprietary rights in such technology. The HIFU divisions HIFU devices, as they are currently or may in the future be designed, may also be subject to claims of infringement of patents owned by third parties, which could result in an adverse effect on the HIFU divisions ability to market HIFU systems.
  As part of our reorganization into two separate operating units, we transferred the assets and related intellectual property of the HIFU research program to the HIFU division.
  In August 2004, we licensed our HIFU technology for the specific treatment of the cervicofacial lesions, including the thyroid, to Theraclion, a French company created by our former R&D Director. This license agreement allows for the payment of certain royalties calculated on the basis of Theraclions future sales of devices. We determined that we could not invest in these specific applications for the time being, and this license agreement therefore allows Theraclion to pursue the development of HIFU for this application. We own no interest in Theraclion.
 ***HIFU Division Clinical and Regulatory Status***
  The HIFU division has conducted an extensive clinical trial for the Ablatherm in the European Union. This trial, the European Multicentric Study, involved a total of 652 patients suffering from localized prostate cancer and included six sites in France, Germany and The Netherlands. The primary goals of the trial were to assess the safety and effectiveness of the Ablatherm.
  There are primarily two methods to evaluate the presence of cancerous tissue in the prostate. The first method is based on biopsies. A sextant biopsy is performed inside the prostate to reveal the presence of a tumor. The second method is based on a blood test for the Prostate Specific Antigen (‘‘PSA’’), which, although not specific to cancer tumors, measures the proliferation of cells inside the prostate.
 16
  An
      interim analysis performed on the first 559 patients included 402 patients
      treated with the Ablatherm device as a first-line therapy. Of these patients,
      81.4% had a normal PSA and 87.2% had negative biopsies at the last follow-up
      and
      were considered as cancer free. The trials also included 157 patients who
      underwent an Ablatherm treatment as a salvage therapy after a previous failed
      therapy (hormonotherapy, radiation or prostatectomy). Of these patients, 80.7%
      and 67.9% had negative biopsies and normal PSA after treatment,
      respectively.
  Based on these results, we obtained in May 1999 a CE Marking that allows us to market the Ablatherm in the European Union.
  In June 2000, the HIFU division applied for an approval by the Japanese Ministry of Health for the Ablatherm to be marketed in Japan. We retrieved the application in 2005 to update it and review the process. The process of requesting approval to market the Ablatherm in Japan might be long and may never result in the approval to market the Ablatherm in Japan. See Item 3, Key InformationRisk FactorsDependence on HIFU Technology.
  In 2001, the French Urology Association (AFU) conducted an independent clinical trial to confirm the efficacy and safety results observed in the European Multicentric Study, and to evaluate the therapy-related costs. Patient recruitment was successfully performed at eight investigational sites. Patient enrollment was completed in an 11-month period with 117 patients included. Patient follow-up is ongoing, with intermediate assessment at one year. The two-year follow-up results were presented at the AFU congress in November 2004. Follow-up with these patients will continue for the next two years to evaluate the long-term efficacy of the treatment.
  In March 2004, French authorities approved a new treatment protocol concerning the treatment of patients who failed radiotherapy. We obtained CE Marking, which currently allows us to market this new Ablatherm treatment option.
  In February 2004, we entered into a distribution agreement with a subsidiary of HealthTronics Surgical Services, Inc. (HealthTronics). The terms of the distribution agreement grant HealthTronics the right to pursue market approval from the FDA for the Ablatherm. When and if HealthTronics receives market approval from the FDA, HealthTronics will be granted exclusive distribution rights for the Ablatherm in the United States. We continue to work with HealthTronics in pursuit of clinical trials for the Ablatherm device. HealthTronics has obtained FDA approval for starting a clinical trial of Ablatherm versus cryotherapy. The clinical trial will enroll 402 localized prostate cancer patients in 13 centers. The first patient was enrolled on May 4, 2006.
 
 In 2005, a clinical trial was started in France to validate the efficacy and safety of Ablatherm as rescue treatment in patients after brachytherapy failure. Results will be ready by December 2006.
  ***HIFU
      Division Manufacturing***
  The
      HIFU
      division’s policy is to subcontract the manufacture of its devices and
      accessories, including disposables. The HIFU division purchases all of the
      devices and accessories, including disposables used in its marketing and sales
      functions, from a single supplier, Technomed, part of the UDS division of the
      Company. It is the HIFU division’s belief that, since its only supplier is also
      a subsidiary of the same parent, there is no significant risk associated with
      the use of a single supplier.
  
 ***HIFU
      Division Quality and Design Control***
  The
      HIFU
      division has obtained the ISO 9001 (V:2000) and ISO 13485 (V:2003)
      certifications which indicate compliance with international standards for
      quality and design control.
  The
      Ablatherm is available for commercial distribution in Canada, the European
      Union, South Korea, Russia, Australia and New Zealand.
  ***HIFU
      Division Market Potential***
  Prostate
      cancer is currently the first or second most common form of cancer among men
      in
      many populations. In the United States, the American Cancer Society estimates
      that approximately 232,090 new cases of prostate cancer were diagnosed in 2005
      and that there will be approximately 234,460 new cases of prostate cancer
      diagnosed in 2006, out of which an estimated 70% are diagnosed with localized
      prostate cancer. Additionally, the HIFU division believes, based on figures
      provided by the World Health Organization, that the worldwide incidence of
      localized prostate cancer is approximately twice this U.S. figure. A more
      effective diagnostic method for prostate cancer, the PSA test, has increased
      public awareness of the disease in developed countries since its introduction.
      The PSA test measures the blood level of a protein, the PSA, which is produced
      only by the prostate. PSA levels jump sharply when cancer is present. Prostate
      cancer is an age-related disease, and its incidence in developed countries
      is
      expected to increase as the population ages.
  17
 If the efficacy of HIFU therapy is established, the HIFU division believes that its application could be expanded to other indications, such as certain localized thyroid, breast, gynecological, bladder, kidney, liver, brain, pancreatic and retroperitoneal tumors. However, the expansion of HIFU to other indications will require a significant investment in research and development, an investment which we will be undertaking gradually while focusing on the acceptance of HIFU as a treatment for localized prostate cancer.
  ***HIFU
      Competition***
  The
      principal current therapies for prostate cancer carry side effects that can
      very
      seriously affect a patient’s quality of life. One of the current therapies is
      radical prostatectomy (surgery), which involves the ablation of the entire
      prostate gland. Radical prostatectomy requires several days of hospital stay
      and
      several weeks of recovery, usually with catheterization, and may result in
      partial and/or total urinary incontinence. In addition, it almost invariably
      renders patients impotent. A new surgical technique, nerve-sparing
      prostatectomy, has been developed to address that problem. However, the
      procedure can only be applied when the tumor is not located close to the surface
      of the prostate and requires a very skilled surgeon. Other therapies for
      localized prostate cancer include brachytherapy, a therapy that involves the
      implantation of radioisotopes into the prostate gland, external beam
      radiotherapy and cryotherapy.
  Our HIFU divisions devices compete with all current treatments for localized tumors, which include surgery, brachytherapy, radiotherapy, cryotherapy and hormonotherapy. We believe that HIFU competes against those treatments on the basis of efficacy, limited side effects and cost-effectiveness.
  Other companies are working with HIFU for the minimally invasive treatment of tumors, including Focus Surgery, which has developed a device called the Sonablate SB500 for the treatment of localized prostate cancer. Misonix, USHIFU and UKHIFU are also involved in the manufacturing, marketing and distribution of the Sonablate. Insightec, an Israeli Company held mainly by General Electric and Elbit Medical Imaging, have developed a device using HIFU technology to treat uterine fibroids. St. Jude Medical has developed a device using HIFU to treat atrial fibrillation; Haifu, a Chinese company developing HIFU products addressing various cancers recently signed a development partnership agreement with Siemens Medical Solutions to offer a HIFU device coupled with IRM imaging system. Finally, Chinamed, a Chinese company is also developing HIFU products for various types of cancer tumors, but the company is only marketing its HIFU products in China. Certain existing and potential competitors of our HIFU division may have substantially greater financial, research and development, sales and marketing and personnel resources than us and may have more experience in developing, manufacturing, marketing and supporting new products. We believe that an important factor in the potential future market for HIFU treatments will be the ability to make the substantial investments in research and development in advancing the technology beyond the treatment of prostate cancer. This future investment is wholly dependent on the successful acceptance of the device for the treatment of prostate cancer.
  
 ***HIFU
      Division Sales and Distribution of Products***
  The HIFU division markets and sells its products through its own direct marketing and sales organization as well as through third-party distributors and agents. The HIFU division has direct marketing and sales forces in France, Germany, Russia and Italy, which currently represent EDAPs largest markets. We have also opened a direct representative office in Moscow to increase our penetration of this large, key market. Additionally, the HIFU division markets and sells its products through our UDS divisions distribution platform in South Korea and South East Asia and further markets its products through selected agents and third-party distributors in several countries. We finalized our partnership in the United States with HealthTronics in February 2004. HealthTronics is now responsible for U.S. clinical trials, and it has exclusive distribution rights in the United States for the Ablatherm, if and when it receives FDA approval.
 18
 The
      HIFU
      division’s customers are located worldwide and have historically been
      principally public and private hospitals and urology clinics. The HIFU division
      believes that as it increases its customer base it will gain further access
      to
      the urological community, which will enable it to monitor the urological market,
      introduce new products and conduct trials under satisfactory conditions. No
      single customer of the HIFU division represents a significant portion of the
      division’s installed base; however, if the partnership with HealthTronics is
      successful, HealthTronics could become a significant customer of the HIFU
      division in the future.
  The HIFU divisions marketing efforts include the organization of training programs for urologists worldwide and a comprehensive media and web program to educate patients on the availability of HIFU technology to treat localized prostate cancer.
  **Urology
      Devices and Services (‘‘UDS’’) Division**
  Our     division consists of four wholly owned and fully consolidated subsidiaries: TechnomedMedical Systems S.A. (‘‘TMS’’), a French corporation, EDAP
      Technomed Co. Ltd, a Japanese corporation, EDAP Technomed Sdn Bhd, a Malaysian
      corporation and EDAP Technomed Inc., a U.S. corporation. The UDS division also
      includes a South Korean branch office, Technomed Korea. The UDS division is
      engaged in the development, marketing, manufacturing and servicing of medical
      devices for the minimally invasive diagnosis or treatment of urological and
      other clinical indications. The UDS division had total revenues of €16.2 million
      during the fiscal year ended December 31, 2005.
  ***UDS
      Division Business Overview***
  The UDS divisions primary business is producing and marketing devices, known as lithotripters, for the treatment of urinary tract stones by means of ESWL technology. ESWL uses extracorporeal shockwaves, which can be focused at urinary stones within the human body to fragment the stones, thereby permitting their natural elimination and preventing the need for incisions, transfusions, general anaesthesia, and the resulting complications. The UDS division currently manufactures two models of lithotripters: the Sonolith Praktis, which is available for commercial distribution in the European Union, Japan, Canada and the United States; and the Sonolith Vision, which is available for commercial distribution in the European Union, Japan and Canada only. The UDS division had an installed base of 424 ESWL lithotripters worldwide as of March 31, 2006.
  In
      addition to its manufacturing and selling of lithotripters, the UDS division
      also generates revenues from the leasing of lithotripters, as well as from
      the
      sale of disposables, spare parts and maintenance services, including the
      maintenance and services business of HIFU-related devices and accessories on
      behalf of the HIFU division. The UDS division, as an additional part of its
      contract manufacturing business, manufactures HIFU related devices and
      accessories, including disposables, on behalf of the HIFU division. It also
      derives revenues from the distribution of Prostatron parts and related services,
      in Japan and Italy under the Distribution Agreement entered into with Urologix
      in October 2000.
  Under the Supply Agreement entered into with Urologix in connection with the sale of our Prostatron business in October 2000, the UDS division previously manufactured certain components of the Prostatron. Although the Supply Agreement expired in October 2003, the UDS division continued to manufacture machines on behalf of Urologix in 2004 to produce the machines that had been ordered before the expiration of the Agreement. In 2005, no more machines were manufactured and the UDS division does not expect to generate any additional revenues from the supply of machines to Urologix. The UDS division expects to derive only a small amount of revenues related to the sales of Prostatron parts.
  
 ***UDS
      Division Business Strategy***
  The
      UDS
      division’s business strategy is to capitalize on its expertise in ESWL and its
      position in urology to achieve long-term growth as a leader in the development,
      production, marketing and distribution of minimally invasive medical devices
      for
      urological and other clinical indications. To achieve this strategic goal,
      the
      UDS division intends to capitalize and expand on its expertise as the
      manufacturer of minimally invasive devices such as its ESWL lithotripters and
      HIFU devices. The UDS division manufactures the Ablatherm and the disposable
      Ablapack on behalf of the HIFU division. All the costs related to the
      manufacturing of these machines are supported by the UDS division, which
      invoices the HIFU division at cost plus a margin and records the sales of the
      devices as revenues. The key elements of the UDS division’s strategy
      are:
 19
 ·
            Capitalize on the Current ESWL Installed Base. The UDS divisions long-term growth strategy relies on its ability to capitalize on its extensive installed base of ESWL lithotripters to recognize ongoing revenue from sales of disposables, accessories, services and replacement machines. We believe that a combination of continued investment in lowering end-user costs and offering units that are easily adaptable to various treatment environments, and a commitment to quality and service will allow the UDS division to achieve this goal. See UDS Division Products.
  ·
            Capitalize on an Established Distribution Platform in Urology by Expanding Distribution Possibilities. We believe that we can achieve additional long-term growth by offering our established distribution platform in urology to other developers of medical technologies and acting as a distributor for their devices. The UDS divisions distribution platform in urology consists of a series of well-established subsidiaries in Europe and Asia as well as a network of third-party distributors worldwide.
  ·
            Provide Manufacturing Solutions to Other Developers of Medical Technologies. Building upon its established position in the high-tech medical devices market, we believe that the UDS division can become a provider of manufacturing alternatives to other developers of medical technologies that do not have or do not wish to invest in their own manufacturing facilities. We believe that its FDA-inspected and ISO 9001 (V:2000) and ISO 13485 (V:2003) certified facilities allow it to offer manufacturing services to a wide range of potential medical equipment developers.
  ***UDS
      Division Products***
  The
      UDS
      division offers the Sonolith Praktis to small and mid-size hospitals, while
      the
      Sonolith Vision is offered to large hospitals that can afford a fully dedicated
      and integrated lithotripter. The UDS division also sells disposable parts for
      lithotripters, including the piezo-electric elements of the LT02 (although
      the
      manufacturing of new machines was discontinued in 2002) and the electrodes
      of
      the Sonolith line, which need to be replaced approximately every year and
      approximately every ten treatments, respectively. These parts incorporate key
      proprietary technologies, and the UDS division has retained sole marketing
      rights for these parts.
  **Product**
                **Procedure**
                **Development
                    Stage**
                **Clinical
                    and Regulatory Status**Sonolith
                Electroconductive
                Commercial
                Approved
                    for distribution:Praktis
                treatment
                    of
                Production
                European
                    Unioncompact
                    lithotripter
                urinary
                    stones
                
                JapanUnited
                    StatesCanadaRussiaSouth
                    KoreaAustraliaNew
                    ZealandSonolith
                    Vision
                Electroconductive
                Commercial
                Approved
                    for distribution:treatment
                    of
                Production
                European
                    Unionurinary
                    stones
                
                JapanCanadaSouth
                    KoreaAustraliaNew
                    Zealand
  The Sonolith Praktis and the Sonolith Vision rely on an electroconductive technology for shockwave generation. The electroconductive technology, which is derived from the electrohydraulic technology on which the first ESWL lithotripters were based, permits improved focusing of the shockwave, reduces the variability in the shockwave pressure and allows a better transfer of energy to the calculus. These features result in faster, more effective treatment as compared to electrohydraulic lithotripters.
 20
 The UDS divisions ESWL customers are located worldwide and have historically been principally large hospitals, urology clinics and research institutions. To increase its penetration of the market segment of smaller hospitals and outpatient clinics, the UDS division developed the Sonolith Praktis, an electroconductive lithotripter designed for smaller clinics which is more compact than the Sonolith Vision, a fully dedicated and integrated electroconductive lithotripter for larger hospitals.
  ***UDS
      Division Patents and Intellectual Property***
  As
      of
      March 31, 2006, the UDS division’s patent portfolio contained 16 patents
      (consisting of 6 in the United States, 8 in the European Union and Japan and
      2
      in Israel) covering key technologies relating to ESWL systems and associated
      software capabilities.
  During
      2005, one patent covering obsolete technology has been abandoned in the United
      States.
  Additional
      patents covering certain other aspects of our ESWL electroconductive
      and piezoelectric technologies in the European Union, the United States and
      Japan are still in the examination process.
  The
      UDS
      division’s patents in ESWL cover certain technologies relating to the
      association of a piezoelectric treatment head with an ultrasound imaging probe,
      as well as the electrodes for the Sonolith line. Following the settlement in
      1989 of patent infringement actions against Richard Wolf GmbH and Diasonics
      Inc., TMS granted both companies a non-exclusive license to use its patented
      technology. The related patent expired in 2004, and thus the corresponding
      license is no longer valid. The UDS division’s ongoing research and development
      objectives in ESWL are to further increase the cost-effectiveness and clinical
      efficacy of its products.
  ***UDS
      Division Regulatory Status***
  The Sonolith Praktis is available for commercial distribution in the United States, Canada, the European Union, South Korea, Australia, New Zealand and Japan. The Sonolith Vision is available for commercial distribution in the European Union, Canada, South Korea, Australia, New Zealand and Japan. The UDS division continues to provide disposables, replacement parts and services for the current installed base of LT02 machines, even though we discontinued the manufacture of these machines.
  ***UDS
      Division Market Potential***
  We estimate that roughly 2% to 3% of the world population suffers from kidney or urethral stones during their lifetime. Urinary calculi are responsible for 10% of urological hospital admissions worldwide. Although urinary calculi may be eliminated naturally by the body, natural elimination is frequently accompanied by considerable pain and very often by serious complications, such as obstruction and infection of the urinary tract.
  21
 Since its introduction in clinical practice nearly 20 years ago, ESWL has become the standard treatment for urinary calculi. ESWL consists of fragmenting calculi within the body using extracorporeal shockwaves without any surgery. We believe that the market for lithotripters includes both buyers looking for a sophisticated, higher-priced machine (generally hospitals and larger urology clinics) and buyers looking for simpler and less expensive machines (typically smaller clinics). We also believe that after a period of fast growth in the mid-1980s and early 1990s, the market for lithotripters is now mature and has become primarily a replacement and service and maintenance market.
  We believe that companies with a large installed base of ESWL lithotripters will be most successful in the replacement market. Consequently, we intend to capitalize on our share of the installed base of ESWL lithotripters to gain a significant position in the replacement market for those machines. We expect the ESWL business to continue to contribute, at historically consistent levels, to the UDS divisions financial results despite the mature nature of the market, due to revenues from maintenance contracts and demand for replacement machines. See Item 5, Operating and Financial Review and Prospects.
  ***UDS
      Division Competition***
  The
      ESWL
      market is characterized by severe price competition among manufacturers, with
      the result that, in recent years, the average unit price of ESWL lithotripters
      has declined. The UDS division expects this trend to continue. See Item 5,
      ‘‘Operating and Financial Review and Prospects.’’ The UDS division’s major
      competitors in developed countries are Siemens, Storz and Dornier.
  ***UDS
      Division Sales and Distribution of Products***
  The UDS division markets, sells and services its products through its own direct sales and service organization as well as through third-party distributors and agents. The UDS division has an established direct sales and service platform in France, Italy, Japan, South Korea and Malaysia and markets its products through agents and third-party distributors in several other countries. In December 2002, the UDS division closed its direct sales and service office in the United States. As of February 2004, HealthTronics has been appointed distributor in the United States for our Sonolith Praktis lithotripters. As part of our agreement with HealthTronics related to their responsibility in obtaining the FDA approval for the Ablatherm device, HealthTronics had been entitled to exercise part of the warrants granted to them if they purchased a certain number of lithotripters per year. On December 29, 2005, HealthTronics decided to focus all its efforts on implementing Ablatherm clinical trials in the United States to gain FDA approval, and not to pursue distribution of our lithotripters in the United States. The 200,000 warrants that had been issued to HealthTronics were then cancelled, as their exercise was directly linked to future purchases of lithotripters manufactured by us.
  The UDS divisions customers are located worldwide and have historically been mainly public and private hospitals and urology clinics. We believe that the divisions customer base provides it with excellent access to the urological community and enables it to monitor the urological market, introduce new products and conduct trials under satisfactory conditions. No single customer of the UDS division represents a significant portion of the divisions installed base. The UDS divisions marketing efforts include the organization of training programs for urologists worldwide.
  ***UDS
      Division Manufacturing Services and Distribution***
  The UDS division manufactures the Ablatherm on behalf of the HIFU division and Prostatron spare parts for Urologix. We believe that it can extend its outsourced services to provide device and disposable development and manufacturing services to a wide range of medical equipment development companies. The UDS divisions current operations consist of custom design, development and manufacture of medical products in its manufacturing facility that is FDA-approved and certified under international standards ISO 9001 and ISO 13485.
  The UDS division is also pursuing various distribution options that use its strong network of worldwide subsidiaries and agents. Currently, the UDS division distributes products on behalf of Urologix in Italy and Japan, on behalf of Andromeda in Japan, and on behalf of the HIFU division in Malaysia and South Korea. We believe that the UDS division can successfully market its worldwide distribution platform to a wide range of medical equipment development companies, thus allowing for quick, easy and economically sound entry for these companies into markets, covering most of the world.
  
 ***UDS
      Division Manufacturing***
  The
      UDS
      division’s policy is to manufacture the critical components for its devices and
      accessories (unless a subcontractor can manufacture the component more
      cost-effectively), perform final assembly and quality control processes and
      maintain its own set of production standards. The UDS division purchases the
      majority of the raw materials used in its products from a number of suppliers,
      but for several components of its products, relies on a single source. The
      UDS
      division’s policy is to conduct regular quality audits of suppliers’
manufacturing facilities. The UDS division’s principal suppliers are located in
      France, Germany, Denmark, Korea and the United States. Management believes
      that
      the relationships between the UDS division and its suppliers are
      good.
  In
      addition, the manufacturing operations of TMS (a French corporation that is
      the
      primary manufacturing organization of the UDS division) must comply with the
      GMP
      regulations enacted by the FDA, which establish requirements for assuring
      quality by controlling components, processes and document tractability and
      retention, among other things. TMS’s facilities are also subject to scheduled
      inspections by the FDA. TMS has obtained the ISO 9001 (V:2000) and ISO 13485
      (V:2003) certifications, which indicate compliance by TMS’s manufacturing
      facilities with international standards for quality assurance, design and
      manufacturing process control. TMS also complies with the applicable
      requirements that will allow it to affix the CE Marking to certain of its
      products. See ‘‘—Government Regulation—Healthcare Regulation in the United
      States’’ and ‘‘—Government Regulation—Healthcare Regulation in the European
      Union.’’
  22
 **Property
      and Equipment**
  We have one principal facility, which is located in Vaulx-en-Velin, on the outskirts of Lyon, France. The premises comprise 3,740 square meters and are rented under a renewable nine-year commercial lease agreement. We believe the terms of the lease reflect commercial practice and market rates. The manufacturing facility, and principal offices, which we utilize to manufacture and/or assemble all of our products, has ISO 9001 and ISO 13485 certifications. We are not aware of any environmental issues that could affect utilization of the facility.
 
 In addition, we rent office and/or warehouse facilities in Kuala Lumpur (Malaysia), Rome (Italy), Flensburg (Germany), Moscow (Russia), Seoul (South Korea), Fukuoka, Osaka, Saporo and Tokyo (Japan).
  **Government
      Regulation**
  Government regulation in our major markets, in particular the United States, the European Union and Japan, is a significant factor in the development and marketing of our products and in our ongoing research and development activities. We are principally subject to regulation of medical devices and of the healthcare system.
  ***Healthcare
      Regulation in the United States***
  The Company and its products are regulated in the United States by the FDA under a number of statutes including the Federal Food, Drug and Cosmetic Act (FDC Act). Pursuant to the FDC Act, the FDA regulates the preclinical and clinical testing, manufacturing, labeling, distribution, sale, marketing, advertising and promotion of medical devices in the United States. Medical devices are classified in the United States into one of three classes - Class I, II or III - on the basis of the controls reasonably necessary to ensure their safety and effectiveness. Class I devices are those whose safety and effectiveness can be ensured through general controls, such as labeling, pre-market notification (known as 510(k)) and adherence to FDA-mandated GMP. Class II devices are those whose safety and effectiveness can reasonably be ensured through the use of special controls, such as performance standards, post-market surveillance, patient registries and FDA guidelines. Class III devices are those that must receive pre-market approval (PMA) by the FDA to ensure their safety and effectiveness. Except for the lithotripsy range of products, which has been recently reclassified by the FDA as a Class II device, all of our products are classified as Class III products. Before a new Class III device may be introduced on the market, the manufacturer generally must obtain FDA approval of a PMA. The PMA process is expensive and often lengthy, typically requiring several years, and may never result in approval. The manufacturer or the distributor of the device must obtain an IDE from the FDA before commencing human clinical trials in the United States in support of the PMA.
  
 Advertising and promotional activities in the United States are subject to regulation by the FDA and, in certain instances, by the Federal Trade Commission. The FDC Act also regulates our quality control and manufacturing procedures by requiring us to demonstrate and maintain compliance with current GMP regulations. Our manufacturing facilities are in compliance with GMP regulations. No major deficiencies have been observed during inspections carried out by FDA auditors in the past few years.
  ***Healthcare
      Regulation in the European Union***
  In the European Union, we have received the ISO 9001 (V:2000) and ISO 13485 (V:2003) certifications, showing that we comply with standards for quality assurance and manufacturing and design process control. In the European Union, our products are also subject to legislation implementing the European Union Council Directive concerning medical devices (the Medical Device Directive). The Medical Device Directive provides that medical devices that meet certain safety standards must bear a certification of conformity, the CE Marking. Except in limited circumstances, Member States may not prohibit or restrict the sale, free movement or use for its intended purpose of a medical device bearing the CE Marking. Medical devices marketed throughout the European Union must comply with the requirement of the Medical Device Directive to bear a CE Marking (subject to certain exceptions). All of our products bear the CE Marking.
 23
 Pursuant to the Medical Device Directive, medical devices are classified into four classes, Class I, Class IIa, Class IIb and Class III, on the basis of their invasiveness and the duration of their use. The classification serves as a basis for determining the conformity assessment procedures that apply to medical devices to be eligible to receive a CE Marking. The conformity assessment procedures for Class I devices can be carried out, as a general rule, under the sole responsibility of the manufacturer, while for devices of other classes, the involvement of an authorized supervisory body is required. The extent of the involvement of such body in the development and manufacturing of a device varies according to the class under which it falls, with Class III devices being subject to the greatest degree of supervision. All of the devices currently marketed by us are Class IIb devices.
  ***Healthcare
      Regulation in Japan***
  The import and sales of medical devices in Japan is regulated by the Ministry of Health, Labour and Welfare (the MHLW) under the license "Marketing Authorization" for the importer. Our Japanese subsidiary has obtained a general license as well as specific approvals to import our products that have been approved in Japan. The MHLW also administers various national health insurance programs to which each Japanese citizen is required to subscribe. These programs cover, among other things, the cost of medical devices used in operations. The MHLW establishes a price list of reimbursable prices applicable to certain medical devices under the national health insurance programs and, until a new device is included in this list, its costs are not covered by the programs. The LT02, the SONOLITH Praktis, the SONOLITH Vision and the Prostatron are all included on the MHLWs list for reimbursement.
   **Item
      4A. Unresolved Staff Comments.**
  None.
  
 **Item
      5. Operating and Financial Review and Prospects**
  The following discussion of our results of operations and liquidity and capital resources for the fiscal years ended December 31, 2005, 2004 and 2003 is based on, and should be read in conjunction with, the Consolidated Financial Statements included elsewhere in this annual report. The Consolidated Financial Statements have been prepared in accordance with U.S. GAAP.
  The
      following discussion contains certain forward-looking statements that involve
      risks and uncertainties. See ‘‘Forward-Looking Information’’ elsewhere in this
      Annual Report.
  **Critical
      Accounting Policies**
  The discussion and analysis of our financial condition and results of operations are based upon the Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, accounts receivable, bad debts, inventories, warranty obligations, litigation and deferred tax assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These estimates and assumptions form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
  We believe our more significant judgments and estimates used in the preparation of its Consolidated Financial Statements are made in connection with the following critical accounting policies.
 24
 ***Revenue Recognition***
  We recognize revenues from the sale of equipment at the point where no
      significant vendor obligation, payment contingent upon customer financing or
      acceptance criteria that can be subjectively interpreted or tied to the use
      of
      the equipment exist, and when title to the machine passes (depending on the
      terms of the contract, either upon shipment or delivery) to the customer who
      has
      the intent and ability to pay in accordance within the fixed and determinable
      contract terms. For sales that do not immediately meet all of the criteria
      for
      recognition at the time of shipment or delivery (as the contract terms dictate)
      revenue is recognized when the contingency is resolved.
  Revenues
      related to service and maintenance contracts are recognized when services are
      rendered. Billings or cash receipts in advance of service due under maintenance
      contracts are recorded as deferred revenue and are recognized in equal monthly
      installments over the course of the contract.
  Revenues
      related to the leasing of devices are recognized on a linear basis. Revenues
      related to the sale of Ablatherm treatments invoiced on a
      "revenue-per-procedure" (‘‘RPP’’) basis are recognized once the treatment has
      been completed.
  ***Warrants***
  In accordance with EITF 96-18, we account for the warrants issued to HealthTronics under the distribution agreement based on their fair value measured at the date of milestone achievement. The related amount, which is a non-cash charge, is then recorded either as an operating expense (specifically, a clinical trial expense) for warrants that vest when HealthTronics achieves a milestone in the FDA approval process for the Ablatherm, or as a reduction of revenue if the warrants vest as a result of HealthTronics purchase of a specified number of lithotripters or Ablatherm.
  We use the Black-Scholes options pricing model to determine the fair value of the warrants that vest pursuant to the distribution agreement. The model was developed to estimate the fair value of traded options that have no vesting restrictions and are fully transferable. The application of the model to the warrants therefore requires the use of subjective assumptions, including historical share price volatility, the expected life of the warrants and our risk-free interest rate. A change in one or more of these assumptions could result in a material change to the estimated fair value of the vested warrants.
  
 ***Warranty***
  We provide for the estimated cost of equipment warranties, which are generally for a period of one year, in full at the time revenue from the equipment sale is recognized. While we engage in product quality programs and processes, our warranty obligation is affected by product failure rates, material usage and service delivery costs incurred in correcting a product failure. Should actual product failure rates, material usage or service delivery costs differ from our estimates, revisions to the provision for estimated warranty liability would be required.
  ***Accounts
      Receivable***
  We generate a majority of our revenues and corresponding accounts receivable from sales of medical equipment, spare parts, maintenance and service to public and private hospitals and physicians worldwide. We perform initial credit evaluations of our customers and adjust credit terms based upon customers creditworthiness as determined by such things as their payment history, credit ratings and our historical experiences.
  ***Allowance
      for Doubtful Accounts***
  We evaluate the collectibility of our accounts receivable based on the individual circumstances of each customer on a quarterly basis. In circumstances where we are aware of a specific customers inability to meet its financial obligations to us (e.g., bankruptcy filings, substantial downgrading of credit scores), we record a specific reserve for bad debts against amounts due to reduce the net recognized receivable to the amount we reasonably believes we will collect. If circumstances change (i.e. higher than expected defaults or an unexpected material adverse change in a major customers ability to meet its financial obligations to us), our estimates of the recoverability of amounts due to us could be reduced by a material amount.
  25
 ***Inventories***
  On an annual basis, we analyze our inventories for obsolescence and, upon identification of obsolete stock, we record a full valuation reserve. Inventories are stated at the lower of costs, determined by the first-in, first-out (FIFO), or market. Our inventory valuation policy is based on a review of forecasted demand compared with existing inventory levels. At December 31, 2003, we determined certain inventories were not appropriately valued and therefore reserved 0.6 million against these inventories. At December 31, 2004, we determined that certain inventories were not appropriately valued and therefore reserved 0.3 million against these inventories. At December 31, 2005, we determined that certain inventories were not appropriately valued and therefore reserved 0.4 million against these inventories.
  ***Litigation***
  We are currently a defendant in two legal proceedings, both of which are associated with product liability matters. During 2004, we settled a claim alleging a patient was injured during a Prostatron treatment procedure. The cost for settling this claim, $0.5 million, was covered by our product liability insurance. Additionally, in 2003, we settled one claim (at a cost that was not material) and were found not guilty on another claim alleging fraud related to the sale of medical equipment brought, separately, against two of our subsidiaries. We believe that the patients claims in the product liability matters currently pending against us are without merit. In addition, if the claims against us are successful, we believe any potential damages assessed against us would be covered by insurance and/or by a contribution obligation of the physicians and/or the organization which provided services with the product. However, these product liability claims could have a material adverse impact on the Company. It is possible, moreover, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions related to these proceedings. It is our policy in the case of product liability litigation to recognize the full amount of the self-insurance portion of our product liability insurance, unless a separate indemnification is being sought.
  
 ***Deferred
      Tax***
  As of December 31, 2005, we had approximately 7 thousand deferred tax liabilities principally related to the impact of temporary differences between the amounts of assets and liabilities reported for financial reporting purposes and such amounts as measured in accordance with tax laws.
  We also have a history of operating loss carryforwards with various future expirations. However, it is our policy to recognize a full valuation reserve against these deferred tax assets because we cannot be assured of future operating profits sufficient to utilize these assets before their expiration.
  **Operating
      Results**
  **Overview**
  Total revenues include sales of our medical devices and sales of disposables, spare parts, supplies and services, both net of commissions, as well as other revenues.
  Net sales of medical devices have historically been comprised of net sales of Prostatrons, ESWL lithotripters and Ablatherms. With respect to lithotripter revenues, we booked in 2004 and 2005 a non-cash charge as a reduction of revenue as the warrants we granted to HealthTronics under the distribution agreement vested as a result of the purchase by Healthtronics of a certain number of lithotripters. On December 29, 2005, HealthTronics decided not to pursue the distribution of our lithotripters in the U.S. Therefore, net sales of lithotripters will not be impacted anymore in the future by the vesting of warrants to HealthTronics upon the purchase of a specified number of lithotripters. With respect to Ablatherm revenues from sales of Ablatherm devices in 2005, we incurred a non-cash charge as a reduction of revenue as a specific category of warrants we granted to HealthTronics under the distribution agreement vested as a result of the purchase by Healthtronics of an Ablatherm device in 2005. No more warrants are directly linked to the purchase of additional Ablatherm devices and future revenues from sales of Ablatherm will not be offset by charges for the vesting of warrants. Other warrants are linked to milestones reached in pursuing FDA approval and will be recorded as a non-cash charge in operating expenses directly related to FDA trials.
 26
 The sale price of our medical devices is subject to variation based on a number of factors, including market competitive environment, warranties and payment terms. Consequently, a particular sale of a medical device may, depending on its terms, result in significant fluctuations in the average unit sale price of the product for a given period, which may not be indicative of a market trend.
  We are developing our HIFU mobile treatment activity by initially providing devices to clinics and hospitals for free for a limited period, rather than selling the devices. These hospitals and clinics perform treatments using the devices and pay us on a revenue-per-procedure (RPP) basis (i.e., on the basis of the number of individual treatments provided). Net sales from this RPP activity include only the revenues arising from the sale of Ablatherm treatment procedures. The treatment procedure is invoiced and paid only when it is performed. With this business model, the hospital or clinic makes no initial investment until the increase in patient demand justifies the purchase of an Ablatherm. As a consequence, we are able to make Ablatherm treatments available to a larger number of hospitals and clinics, which should serve to create more long-term interest in the product. Compared to the sale of devices, this business model initially generates a smaller, but more predictable stream of revenue and, if successful, should lead to more purchases of Ablatherms in the long term.
  Net sales of spare parts, supplies and services include revenues arising from maintenance services furnished by us for the installed base of Prostatrons, ESWL lithotripters and Ablatherms, and from sales of disposable parts for Prostatrons, ESWL lithotripters and Ablatherms, net of commissions, as well as from operating leases of our medical devices and RPP revenue related to the HIFU mobile treatment activity.
 
 We derive a significant portion of both net sales of medical devices and net sales of spare parts, supplies and services from our operations in Asia, through our wholly owned subsidiaries or representative offices in Japan (Edap Technomed Co. Ltd), Malaysia (Edap Technomed Sdh Bhd) and Korea (Edap Technomed Korea). Revenue derived from our operations in Asia represented approximately 33% of our total revenue in 2005. Net sales of medical devices in Asia represented approximately 31% of such sales in 2005 and consisted primarily of sales of ESWL lithotripters. Net sales of spare parts, supplies and services in Asia represented approximately 34% of such sales in 2005 and related primarily to ESWL lithotripters, reflecting the fact that approximately 44% of the installed base of our ESWL lithotripters are located in Asia. We sell our products in many parts of the world and, as a result, our business is affected by fluctuations in currency exchange rates. We are exposed to foreign currency exchange rate risk because the mix of currencies in which our costs are denominated is different from the mix of currencies in which we earn revenues. In 2005, approximately 76% of our selling, marketing and general and administrative expenses and approximately 93% of our research and development expenses were denominated in euro, while approximately 42% of our sales were denominated in currencies other than euro (primarily the U.S. dollar and the Japanese yen). Our operating profitability could be materially affected by large fluctuations in the rate of exchange between the euro and such other currencies. To minimize our exposure to exchange rate risks, we use certain financial instruments for hedging purposes.
  Reserves for slow-moving and obsolete inventory are determined based upon quarterly reviews of all inventory items. Items which are not expected to be sold or used in production, based on managements analysis, are written down to their net realizable value, which is their fair market value or zero in the case of spare parts or disposable parts for devices that are no longer in commercial production.
  In December 2003, we decided to restructure our organization and implemented a headcount reduction in 2004 in our two French operational divisions. This reorganization mainly entailed a reduction of operating expenses in research and development, marketing and manufacturing during these two years.
  Consolidated research and development expenses include all costs related to the development of new technologies and products and the enhancement of existing products, including the costs of organizing clinical trials and of obtaining patents and regulatory approvals. We do not capitalize any of our research and development expenses, except for the expenses relating to the production of machines to be used in clinical trials and that have alternative future uses as equipment or components for future research projects.
  Consolidated research and development expenses, as described above, amounted to 1.8 million, 1.5 million and 3.1 million in 2005, 2004 and 2003, respectively, representing approximately 9%, 7% and 17% of total revenues in 2005, 2004 and 2003, respectively. The increase in research and development in 2005 compared to 2004 was primarily due to an increase in HIFU and ESWL development activities and the launch of new clinical studies to maintain our leadership in HIFU for prostate cancer. Beginning 2006, management expects the budget for research and development expenses to increase to approximately 10% of total revenues, in line with our strategy to launch new clinical studies (thus strengthening our clinical credibility) to focus our efforts on getting regulatory approvals and reimbursement in key countries and to fund projects to expand the use of HIFU beyond the treatment of prostate cancer. Because we are likely to book a non-cash charge as an operating expense (specifically, a clinical trial expense) for warrants that would vest when HealthTronics achieves a milestone in the FDA approval process for the Ablatherm, R&D expenses could be affected in the future by the vesting of the HealthTronics warrants.
 27
 Selling and marketing expenses amounted to 3.8 million in 2005, 3.4 million in 2004 and 4.2 million in 2003. The increase of 10% from 2004 to 2005 was primarily due to our focus on Ablatherm-HIFU marketing. Management expects marketing expenses to grow in line with efforts to increase awareness and educate patients and physicians on the availability of the Ablatherm-HIFU technology for treating localized prostate cancer.
  In 2005, we did not record any non-recurring operating expense. In 2004, we recorded a non-recurring operating expense of 0.3 million reflecting mainly the costs associated with the reduction of headcount initiated in 2003. In 2003, we recorded a non-recurring operating expense of 2.1 million reflecting mainly the costs associated with the reduction of headcount at our two French operating divisions. See Note 18 of the Notes to the Consolidated Financial Statements.
  In accordance with Statement of Financial Accounting Standards No. 142 (SFAS No. 142), Goodwill and Other Intangible Assets, we no longer amortize our goodwill on a straight-line basis over its estimated useful life but, instead, tests it for impairment on an annual basis and/or whenever indicators of impairment arise. We did not record any charge in 2005, 2004 or 2003 for the impairment of goodwill. See Note 7 of the Notes to the Consolidated Financial Statements. On February 25, 2004, we entered into a distribution agreement with HealthTronics granting it, among other things, (i) the right to begin clinical trials in the U.S. with the Ablatherm, (ii) the right to seek PMA for the Ablatherm from the FDA and (iii) exclusive Ablatherm distribution rights in the United States, when and if a PMA is granted. Under the terms of the distribution agreement, we also granted HealthTronics 1 million warrants on January 28, 2005, each entitling HealthTronics to purchase a share of our Company at a price of U.S.$1.50 upon their vesting. The distribution agreement allows HealthTronics to exercise specified numbers of warrants as it meets various specified milestones set out in the distribution agreement, some of which relate to HealthTronicss commitment to purchase a specified number of lithotripter units and others which relate to the completion of various stages of the clinical trials and the regulatory process leading to the PMA for the Ablatherm. On December 29, 2005, the Parties agreed to amend the distribution agreement. HealthTronics wishes to focus its efforts on obtaining the PMA for Ablatherm and on developing the HIFU market potential on the US territory, and does not want to pursue the distribution of ourlithotripters in the US. Therefore, the Parties decided to amend the terms and conditions of some warrants and 200,000 warrants directly linked to the purchase of lithotripters for the years to come were then cancelled. In accordance with EITF 96-18, we account for the warrants issued to HealthTronics under the distribution agreement based on their fair value, measured at the date that the warrants vest (which corresponds to the date that a milestone in the distribution agreement is achieved). The related amount, which is a non-cash charge, is then recorded either as an operating expense for warrants that vest when HealthTronics achieves a milestone in the FDA approval process for the Ablatherm, or as a reduction of revenue if the warrants vest as a result of HealthTronicss purchase of a specified number of devices. The non-cash charge recorded for 2004 as a reduction of revenue related to a series of warrants linked to HealthTronics's purchase of four lithotripters in 2004, in accordance with the terms of the agreement. The non-cash charge recorded for 2005 as a reduction of revenue related to the vesting of a series of warrants linked to HealthTronics's purchase of two lithotripters and one Ablatherm in 2005, in accordance with the terms of the Amendment to the distribution agreement dated December 29, 2005.
 We have no control over the pace at which HealthTronics may achieve the milestones set forth in the distribution agreement and, consequently, the dates on which the warrants may vest. Because the fair valuation of the warrants is based in part on the price of our Shares on a given vesting date, and further because the number of warrants issued to HealthTronics represents a significant portion of our share capital, the amount of the non-cash charges that may be recorded when series of warrants vest could be large and subject to significant variation from period to period. Accounting for the cost of vested warrants may therefore significantly affect our reported income statements.
 
 28
 For the last several years, we experienced declining sale prices in the market for ESWL lithotripters. We believe that the market for ESWL lithotripters is now mature and has become primarily a replacement and maintenance market, with high equipment penetration rates driving down demand and increasing price competition. In addition, the trend toward more compact devices with lower unit sale prices is driving down unit sale prices worldwide. As a result of these factors, we expect unit sale prices for ESWL lithotripters worldwide to continue to decline and total market volumes to remain stable at current levels in the foreseeable future.
  We believe that our results of operations in the near future will be affected by our ability to control expenses in connection with the development, marketing and commercial launch of HIFU applications, including the Ablatherm. See Liquidity and Capital Resources. Increases, if any, in expenses may only be offset partially in the near future by revenues arising from sale of HIFU devices.
  We believe that our partnership with HealthTronics will help in further expanding our market share in placing Ablatherm devices in the U.S., when and if the PMA is granted.
  See Item 3, Key InformationRisk FactorsRisk of Exchange Rate Fluctuations and Item 11, Quantitative and Qualitative Disclosures About Market Risk for a description of the impact of foreign currency fluctuations on the Company.
  
 In October 2000, we sold our Prostatron business to Urologix. See Item 4, Information on the Company. Historically we derived a significant proportion of net sales of medical devices and net sales of spare parts, supplies and services from our Prostatron business. Following the sale of the Prostatron business, we continued to generate revenues from the manufacturing and distribution of Prostatron units and disposable parts on behalf of Urologix under the Supply Agreement and the Distribution Agreement, although significantly less than before the sale. Revenues from sales under the Supply Agreement and the Distribution Agreement represented 0.4 million or approximately 2% of total revenues in 2003, 0.2 million or approximately 1% of total revenues in 2004, and 46 thousand in 2005. The Supply Agreement terminated in 2003 and subsequent revenue was derived from outstanding deliverables under the agreement.
 
 **Fiscal
      Year Ended December 31, 2005 Compared to Fiscal Year Ended December 31,
      2004**
  *Total
      revenues* .
      Our total revenues decreased 6% from €22.2 million in 2004 to €20.8
      million in 2005, principally due to a decline in ESWL unit sales, particularly
      in Japan.
  *HIFU
      division* .
      The
      HIFU division’s total revenues increased 14% from €7.0 million in 2004
      (including €0.3 million of internal segment revenues) to €7.9 million in 2005
      (no significant internal segment revenues), principally due to a slight increase
      in the number of Ablatherm units sold, an increase in Ablatherm RPP and revenues
      related to service activity.
  The
      HIFU
      division’s net sales of medical devices increased 5%, from €4.0 million in 2004
      (including internal segment revenues) to €4.3 million in 2005, with 10 Ablatherm
      units sold in 2005 compared to 9 in 2004. In 2005, net sales of medical devices
      included a €0.1 million charge related to the recognition of the non-cash charge
      associated with the warrants issued to HealthTronics.
  Net sales of RPPs directly related to our HIFU mobile activity increased 23%, from 1.4 million in 2004 to 1.7 million in 2005. This is primarily due to an increase in demand as a result of our efforts to increase patient and physician awareness about the availability of Ablatherm-HIFU treatment for localized prostate cancer, which has increased demand from hospitals and clinics, as well as from patients, for this HIFU treatment. As a result of the increase in activity, net sales of HIFU-related spare parts, supplies, leasing and services increased 28% from 1.5 million in 2004 to 1.9 million in 2005.
  Other
      HIFU-related revenue decreased from €34 thousand in 2004 to €14 thousand in
      2005, primarily related to a decrease in subsidies received.
 29
 *UDS
      division* .
      The UDS
      division’s total revenues decreased 7% from €17.4 million in 2004 to €16.2
      million in 2005 (including €0.1 million and €0.2 million related to the
      recognition of the non-cash charge associated with the warrants issued to
      HealthTronics in 2005 and 2004, respectively, and including €3.2 million and
€1.9 million related to internal segment revenues recorded in 2005 and 2004,
      respectively).
  The
      UDS
      division’s net sales of medical devices decreased 27% from €8.0 million in 2004
      to €5.9 million in 2005 with 39 lithotripters sold in 2004 compared to 33 in
      2005. The decrease in the number of units sold in 2005 resulted principally
      from
      the decline in ESWL unit sales in Japan.
  Net
      sales
      of UDS-related spare parts, supplies and services decreased 4% from €7.3 million
      in 2004 to €7.0 million in 2005, primarily related to a decrease in TUMT service
      revenues. See ‘‘—Operating Results—Overview.’’
  Other
      UDS-related revenue decreased 55% from €174 thousand in 2004 to €79 thousand in
      2005, primarily related to a reduction in the royalties received.
  *Cost
      of sales* .
      Cost of
      sales decreased 10% from €13.7 million in 2004 to €12.3 million in 2005, and as
      a percentage of net sales decreased from 62% in 2004 to 59% in 2005, primarily
      due to the cost reduction program initiated in 2003 and continued in 2004 and
      2005.
  Operating expenses . Operating expenses increased 5% from 9.3 million in 2004 to 9.8 million in 2005. This increase in operating expenses was mainly due to the strengthening of our strategy to focus on market education on HIFU and to enhance our Ablatherm-HIFU global leadership position. See Note 18 of the Notes to the Consolidated Financial Statements.
  HIFU division R&D expenses increased 28% from 0.8 million in 2004 to 1.0 million in 2005. HIFU division R&D expenses specifically related to the development of new technologies and products and enhancement of existing products, increased 30% from 0.5 million in 2004 to 0.6 million in 2005 as a result of our focus on strengthening our leadership on HIFU technology by developing our HIFU patent portofolio and developing HIFU for indications beyond prostate cancer. In addition, clinical trial expenses increased 24% from 0.3 million in 2004 to 0.4 million in 2005, as a result of launch of HIFU clinical studies to strengthen our HIFU clinical leadership. We anticipate these expenses will increase in the future, in line with our strategy to launch new clinical studies, thus enhancing our clinical credibility and focusing our efforts on getting regulatory approvals and reimbursement in key countries. See Operating ResultsOverview.
  
 UDS division R&D expenses remained stable at 0.7 million in 2005 and 2004. UDS division R&D expenses specifically related to the development of new technologies and products and enhancement of existing products, increased 14% from 0.3 million in 2004 to 0.4 million in 2005. We anticipate increasing these R&D expenses in the near future. See  Operating ResultsOverview.
  HIFU division marketing expenses increased 110% from 0.3 million in 2004 to 0.6 million in 2005, as a result of our continuing efforts to increase awareness and educate patients and physicians on the availability of the Ablatherm-HIFU technology for treating localized prostate cancer. We anticipate these expenses will increase in the future. See Operating ResultsOverview.
  HIFU division selling expenses increased 39% from 1.0 million in 2004 to 1.4 million in 2005, as a result of the Company's strengthening of its Sales force to develop market shares. As a percentage of net sales, HIFU division related selling expenses increased from 14% in 2004 to 18% in 2005.
  UDS division selling expenses decreased 14% from 1.7 million in 2004 to 1.4 million in 2005, primarily due to continued control of expenses. We anticipate that these expenses will remain stable in the future. As a percentage of net sales, selling expenses decreased from 10% in 2004 to 9% in 2005.
  General
      and administrative expenses, at the consolidated level, increased 4.5% from
€4.1
      million in 2004 to €4.3 million in 2005, primarily due to an increase of
      expenses related to the implementation of Sarbanes-Oxley Act, Section 404.
      As a
      percentage of net sales, general and administrative expenses increased from
      18%
      in 2004 to 20% in 2005. Our holding company continues to manage these expenses
      so that the expenses at each of the divisions remain consistent with the
      business and revenue levels of each segment.
 30
 *Operating
      loss* .
      As a
      result of the factors discussed above, we recorded a consolidated
      operating loss of €1.3 million in 2005, including the holding company expenses,
      as compared to a consolidated operating loss of €0.8 million in
      2004.
  We  realized an operating profit in its HIFU division of €0.1 million in
      2005, compared to an operating profit of €0.4 million in 2004 and an operating
      profit in its UDS division of €0.2 million in 2005, as compared to operating
      profit of €0.2 million in 2004.
  *Interest
      income, net* .
      Interest income, net remained stable at €0.1 million in 2004 and
      2005.
  *Foreign
      currency exchange gains (loss), net* .
      In
      2004, we recorded a net foreign currency exchange loss of €38,000
      compared to a gain of €0.2 million in 2005 due to a strengthening of the US
      dollar against the Euro.
  *Other
      income (expense), net* .
      Other
      income (expense), net decreased from a loss of €0.1 million in 2004 to a gain of
€9,000 in 2005.
  *Income
      taxes* .
      We recorded a corporate income tax benefit of €0.1 million in 2005 compared
      to €0.3 million in 2004, principally reflecting current income tax. In 2004,
      this income tax also reflected an exceptional exit tax in France of 2.5% (which was
      enacted in compensation for the mandatory reclassification as equity of the
      capital gains tax on participation ).
      Accordingly, in 2004, we had booked a deferred tax liability amounting to €161,000 related to
      this exit tax, which will be paid in two equal instalments in 2006 and 2007,
      pursuant to the Amended Finance Law of 2004, dated December 30, 2004.
  *Net
      loss* .
      We realized a consolidated net loss of €1.2 million in 2004 compared with
      consolidated net loss of €1.1 million in 2005, as a result of the factors
      mentioned above.
 
  **Fiscal
      Year Ended December 31, 2004 Compared to Fiscal Year Ended December 31,
      2003**
  *Total
      revenues* .
      Our total revenues increased 20.0% from €18.5 million in 2003 to €22.2
      million in 2004, principally due to a 2.5 times revenue increase in the HIFU
      division, despite the strength of the euro during the year, which reduced the
      value of sales denominated in other currencies, mainly the Japanese yen and
      the
      U.S. dollar, once converted into euro.
  
 *HIFU
      division* .
      The
      HIFU division’s total revenues increased 136% from €3.0 million in 2003 to €7.0
      million in 2004 (including €3 thousand and €0.3 million of internal segment
      revenues in 2003 and 2004, respectively), principally due to an increase in
      the
      number of Ablatherm units sold and a progression in its Ablatherm mobile
      activity.
  The
      HIFU
      division’s net sales of medical devices increased approximately 2.5 times, from
€1.1 million in 2003 to €4.0 million in 2004 (including €0.3 million of internal
      segment revenues), with 9 Ablatherm units sold in 2004 versus 3 in 2003.
  Net
      sales
      of RPPs directly related to our HIFU mobile activity increased 153%,
      from €0.6 million in 2003 to €1.4 million in 2004. This is primarily due to our efforts to increase patient and physician awareness about the
      availability of Ablatherm-HIFU treatment for localized prostate cancer, which
      has increased demand from hospitals and clinics, as well as from patients,
      for
      this HIFU treatment. Net
      sales
      of HIFU-related spare parts, supplies, leasing and services increased 31% from
      €1.2 million in 2003 to €1.5 million in 2004.
  Other
      HIFU-related revenue decreased 66% from €99 thousand in 2003 to €34 thousand in
      2004, primarily related to a decrease in subsidies received.
  *UDS
      division* .
      The UDS
      division’s total revenues were stable at €17.5 million in 2003 compared to €17.4
      million in 2004 (including €0.2 million related to the recognition of the
      expenses associated with the warrants issued to HealthTronics and €2.0 million
      and €1.9 million of internal segment revenues in 2003 and 2004, respectively).
  The
      UDS
      division’s net sales of medical devices increased 8% from €7.4 million in 2003
      to €8.0 million in 2004 (including a €174,000 reduction in revenue reflecting
      the impact of the warrants), primarily due to an increase in the number of
      units
      sold in 2004 compared to 2003. The increase in the number of units sold in
      2004
      resulted principally from our aggressive marketing strategy to take
      market share in Asia and Europe and our increased penetration of the U.S. market
      via our partner HealthTronics.
 
 31
 Net
      sales
      of UDS-related spare parts, supplies and services decreased 6% from €7.8 million
      in 2003 to €7.3 million in 2004, primarily related to a decrease in annual
      service contract revenue, as most units in the installed base were still under
      warranty after the replacement of older machines with new machines. The decrease
      was also due to the replacement of high cost service contracts for LT02
      lithotriptors, which yielded higher revenues, by lower cost, lower revenue,
      service contracts for the new Sonolith device line. See ‘‘—Operating
      Results—Overview.’’
  Other
      UDS-related revenue decreased 49% from €342 thousand in 2003 to €174 thousand in
      2004, primarily related to an accounting of an insurance reimbursement in
      2003.
  *Cost
      of sales* .
      Cost of
      sales, increased 4.4% from €13.1 million in 2003 to €13.7 million in 2004, but
      as a percentage of net sales decreased from 73% in 2003 to 62% in 2004,
      primarily due to the cost reduction program initiated in 2003 and the increase
      in net sales in 2004 compared with 2003.
  *Operating
      expenses* .
      Operating expenses decreased 31% from €13.5 million in 2003 (including a €2.1
      million one-time charge related to the restructuring) to €9.3 million in 2004.
      This decrease in operating expenses was mainly due to the restructuring of
      our two operating divisions initiated at the end of 2003. See Note 18 of
      the Notes to the Consolidated Financial Statements.
  HIFU division R&D expenses decreased 65% from 2.3 million in 2003 to 0.8 million in 2004. HIFU division R&D expenses specifically related to the development of new technologies and products and enhancement of existing products decreased 68% from 1.5 million in 2003 to 0.5 million in 2004, as a result of the restructuring of the HIFU division initiated at the end of 2003. R&D spending is primarily related to ongoing research into HIFU technologies. We anticipate that these expenses will increase in the future to fund projects to expand the use of HIFU beyond the treatment of prostate cancer. HIFU division clinical trial expenses decreased 50% from 0.7 million in 2003 to 0.3 million in 2004, as a result of the restructuring of the HIFU division initiated at the end of 2003. We anticipate these expenses will increase in the future, in line with our strategy to launch new clinical studies, thus strengthening our clinical credibility and focusing our efforts on getting regulatory approvals and reimbursement in key countries. See Operating ResultsOverview.
  UDS
      division R&D expenses remained stable at €0.7 million in 2003 and 2004 See
‘‘— Operating Results—Overview.’’
  
 HIFU division marketing expenses decreased 70% from 0.9 million in 2003 to 0.3 million in 2004, as a result of the restructuring of the HIFU division initiated at the end of 2003. We anticipate these expenses will increase in the future as part of our effort to increase awareness and educate patients and physicians on the availability of the Ablatherm-HIFU technology for treating localized prostate cancer. See Operating ResultsOverview.
  HIFU division selling expenses decreased 8% from 1.1 million in 2003 to 1.0 million in 2004, as a result of the restructuring of the HIFU division initiated at the end of 2003. As a percentage of net sales, HIFU division related selling expenses decreased from 38% in 2003 to 14% in 2004.
  UDS division selling expenses decreased 11% from 1.9 million in 2003 to 1.7 million in 2004, primarily due to continued control of expenses. We anticipate that these expenses will remain stable in the future. As a percentage of net sales, selling expenses decreased from 12% in 2003 to 10% in 2004.
  General and administrative expenses, at the consolidated level, decreased 4% from 4.1 million in 2003 to 4.0 million in 2004. As a percentage of net sales, general and administrative expenses decreased from 23% in 2003 to 18% in 2004. Our holding company continues to manage these expenses so that the expenses at each of the divisions remain consistent with the business and revenue levels of each segment.
  Operating loss . As a result of the factors discussed above, we realized an operating loss of 0.8 million in 2004, as compared to an operating loss of 8.1 million in 2003.
  We realized an operating profit in our HIFU division of 0.4 million in 2004, as compared to an operating loss of 5.8 million in 2003 and an operating profit in its UDS division of 0.2 million, as compared to operating loss of 0.7 million in 2003.
  Interest income, net . Interest income, net decreased to income of 0.1 million in 2004 compared to an income of 0.2 million in 2003, reflecting lower interest income received on our short-term cash investment due to lower cash balances and lower interest rates during the year.
 32
 *Foreign
      currency exchange losses, net* .
      Net
      foreign currency exchange losses decreased from a loss of €0.9 million in 2003
      to a loss of €38,000 in 2004.
  *Other
      income (expense), net* .
      Other
      income (expense), net decreased to a loss of €0.1 million in 2004 compared to
€0.2 million in 2003.
  Income taxes . We recorded a corporate income tax benefit of 0.3 million in 2004, principally reflecting income tax with respect to the results of various subsidiaries and an exceptional exit tax in France of 2.5% (which was enacted in compensation for the mandatory reclassification as equity of the capital gains tax on participation). We booked a deferred tax liability amounting to 161,000 related to this exit tax, which will be paid in two equal instalments in 2006 and 2007, pursuant to the Amended Finance Law of 2004, dated December 30, 2004.
  Net loss . We realized consolidated net loss of 1.2 million in 2004 compared with consolidated net loss of 9.0 million in 2003, as a result of the factors mentioned above.
  **Effect
      of Inflation**
  Management
      believes that the impact of inflation was not material to our net
      sales or loss from operations in the three years ended December 31,
      2005.
  **Liquidity
      and Capital Resources**
  Our cash flow has historically been subject to significant fluctuations over the course of any given financial year due to cyclical demand for medical devices. Cyclical demand has historically resulted in significant annual and quarterly fluctuations in trade and other receivables and inventories, and therefore led to significant variations in working capital requirements and operating cash flows that were not necessarily indicative of changes in our business. We believes our working capital is sufficient for our present working capital requirements although we have in the past experienced negative cash flows and associated risks to liquidity, and may in the future experience the same. Our negative cash flow situation, and managements plans to address it, are described in more detail below.
  We anticipate that cash flow in future periods will be mainly derived from ongoing operations and any capital raising the company undertakes. We do not have any commercial commitments nor do we employ any off-balance sheet financing. Because we anticipate relying principally on cash flow from operating activities and cash and cash flow equivalent balances to meet our liquidity requirements, a decrease in the demand for our products, or the inability of our customers to meet their financial obligations to us due to operating difficulties or adverse market conditions, would reduce the availability of funds to us.
  Our cash position as of December 31, 2005, 2004 and 2003, was 8.3 million, 9.4 million and 10.4 million, respectively. In 2005, 2004 and 2003, we experienced negative cash flows of 1.1 million, 1.0 million and 5.3 million, respectively. In 2005, our negative cash flow situation was primarily due to increased sales and marketing expenses for the promotion of the Ablatherm and the increased cash requirements associated with our strategy to develop RPP activity. We financed negative cash flows during the period using cash and cash equivalents on hand. To address our negative cash flow situation and finance increased sales and marketing and R&D expenses and the cash requirements arising from the transition to an RPP business model, we are contemplating seeking financing through a share capital increase.
  In
      2005,
      net cash used in operating activities was €0.3 million compared with net cash
      used in operating activities of €1.1 million and €3.6 million in 2004 and 2003,
      respectively. In 2005, net cash used in operating activities reflected
      principally:
  -
            a
                net loss of €1.1 million,
  -
            elimination
                of €1.8 million of net expenses without effects on
                cash,
  -
            an
                increase in trade accounts receivable of €1.5 million, principally
                reflecting an increase in revenue in the fourth quarter of
                2005,
  -
            an
                increase in inventories of €0.7 million related to an increase in
                both the inventory of finished goods and spare parts, primarily
                due to an increase in spare parts inventory, itself reflecting anticipated
                revenue growth greater than actual
                growth,
  -
            an
                increase in trade accounts payable of €0.7 million, also primarily due to
                the increase in activity in the fourth quarter of
                2005 and,
  -
            an
                increase in accrued expenses and other current liabilities of €0.4
                million.
 33
 In
      2004,
      net cash used in operating activities reflected principally a net loss of €1.2
      million, a decrease in inventories of €2.3 million related to both a reduction
      of the inventory of finished goods and work-in-progress and the retirement
      of
      previously depreciated spare parts assets, a decrease in trade accounts payable
      of €0.4 million and a decrease in accrued expenses and other current liabilities
      of €1.9 million, primarily related to severance packages linked to the
      restructuring that took place at the end of 2003.
  In
      2003,
      net cash used in operating activities reflected principally a net loss of €9.0
      million, elimination of €0.8 million of expenses and benefits without effects on
      cash, a decrease in trade accounts receivable of €3.1 million, a decrease in
      inventories of €1.1 million, a decrease in trade accounts payable of €1.0
      million and an increase in accrued expenses and other current liabilities of
      €1.4 million.
  In 2005, net cash used in investing activities was 1.1 million compared with no net cash used in investing activities in 2004 and 0.5 million in 2003. In 2005, net cash used in investing activities reflected principally an increased investment of 1.0 million in capitalized assets produced by the company (specifically devices), an investment of 0.4 million in property and equipment, net proceeds from sales of lease-back assets of 0.2 million and net proceeds from sales of assets of 0.1 million. In 2004, net cash used in investing activities reflected principally an increased investment of 0.8 million in capitalized assets produced by the Company, net proceeds from sales of devices produced by the Company of 0.7 million, an investment of 0.2 million in property and equipment, net proceeds from sales of lease-back assets of 0.3 million and a decrease in deposits and guarantees of 0.1 million. In 2003, net cash used in investing activities reflected principally an increased investment of 0.8 million in capitalized assets produced by the Company (specifically devices), an investment of  0.4 million in property and equipment, net proceeds from sales of lease-back assets of 0.3 million and a decrease in financial assets of 0.4 million.
  In 2005, net cash provided by financing activities was 0.2 million compared with net cash used in financing activities of 0.1 million and 0.7 million in 2004 and 2003 respectively. In 2005 net cash provided by financing activities reflected principally a short-term debt increase of 0.4 million, an increase in long term borrowing for 0.3 million reimbursed of 0.1 million and repayment of capital lease obligations totalling 0.4 million. In 2004, net cash used in financing activities was 0.1 million, reflecting mainly the repayment of capital lease obligations totalling 0.3 million and long-term debt repayment of 0.1 million. In 2003, net cash used in financing activities was  0.7 million, reflecting mainly scheduled long-term debt repayment totalling 0.4 million, a decrease in short-term borrowings of 0.2 million and repayments of obligations under a capital lease totalling 0.1 million.
  We anticipate that cash flows from operations, together with our current cash balances, will provide us with sufficient resources to meet our expenditure requirements for approximately eighteen to twenty four months. As discussed above, we are contemplating raising additional equity capital to finance the growth of our HIFU business and our transition to an RPP business model. If we are unsuccessful in our plan to raise additional capital, we may have to sell non-strategic assets to obtain liquidity.
  Our future cash flow may also be affected to the extent we decide to continue to expand the leasing of our products and to grow our mobile RPP business. In 1999, in an effort to increase the availability of our equipment, we implemented a new marketing strategy of leasing our medical devices on a monthly, quarterly or yearly basis, rather than selling them directly to end-users, and in 2002, we began to develop our mobile activity by making certain devices available to hospitals and clinics free of charge, charging instead on the basis of each procedure that was performed. Relative to the sale of devices, these business models initially generate smaller, but more predictable cash flows. We anticipate continuing to make these options available.
  Our policy is that the treasury function should maintain liquidity with the use of short-term borrowings and the minimal use of long-term borrowings. The treasury function currently adheres to this objective with the use of fixed-rate debt, which normally consists of long-term borrowing from a Japanese bank and with certain long-term borrowings consisting of sale-leaseback equipment financing. Currently the majority of our short-term debt is based on an annual variable rate: Eonia+0.5. We maintain bank accounts, at each of our subsidiaries, in the local currencies of each subsidiary. The primary currencies in which we maintain balances are the euro, the U.S. dollar and the Japanese yen. To minimize our exposure to exchange rate risks, we use certain financial instruments for hedging purposes. As of March 31, 2006, we had six foreign exchange sale contracts, three for the Japanese yen and three for the U.S. dollar.
 34
 **Contractual
      Obligations and Commercial Commitments (in thousands of
      euro)**
  **Payments
                Due by Period****Total**
            **Less
                than**
              **1
                year**
            **1-3
                years**
            **4-5
                years**
            **More
                than**
              **5
                years**Short-Term
                Debt
            
            899
            899
            —
            —
            —Long-Term
                Debt
            
            202
            147
            55
            —
            —Capital
                Lease Obligations
            
            859
            385
            474
            —
            —Operating
                Leases
            481
            428
            53
            —
            —
  **New
      Accounting Pronouncements**
 
 In
      December 2004, the FASB issued Statement 153, Exchanges of Non-monetary Assets,
      an Amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions
      (FAS 153). This Statement eliminates the exception from fair value measurement
      for non-monetary exchanges of similar productive assets and replaces it with
      an
      exception for exchanges that do not have commercial substance. FAS 153, is
      effective for non-monetary asset exchanges occurring in fiscal periods beginning
      after June 15, 2005 and is not expected to have a material impact on our results of operations, cash flows or financial position.
  On
      June
      7, 2005, the FASB issued Statement No. 154, “Accounting Changes and Error
      Corrections”, a replacement of APB Opinion No. 20, “Accounting Changes”, and
      Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”.
      Statement 154 changes the requirements for the accounting for and reporting
      of a
      change in accounting principle. Previously, most voluntary changes in accounting
      principles were required recognition via a cumulative effect adjustment within
      net income of the period of the change. Statement 154 requires retrospective
      application to prior periods' financial statements, unless it is impracticable
      to determine either the period-specific effects or the cumulative effect of
      the
      change. Statement 154 is effective for accounting changes made in fiscal years
      beginning after December 15, 2005; however, the Statement does not change the
      transition provisions of any existing accounting pronouncements. We do not
      believe adoption of Statement 154 will have a material effect on our
      consolidated financial position, results of operations or cash
      flows.
 
 
 On
      December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB
      Statement No. 123 (revised 2004), *Share-Based
      Payment* ,
      which
      is a revision of FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* .
      Statement 123(R) supersedes APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      amends FASB Statement No. 95, *Statement
      of Cash Flows* .
      Generally, the approach in Statement 123(R) is similar to the approach described
      in Statement 123. However, Statement 123(R) *requires* all
      share-based payments to employees of the Company, including grants of employee
      stock options, to be recognized in the income statement based on their fair
      values. Pro forma disclosure is no longer an alternative.
 
 Statement
      123(R) must be adopted no later than the first fiscal year beginning after
      June
      15, 2005. Early adoption will be permitted in periods in which financial
      statements have not yet been issued. We will adopt Statement 123(R)
      as
      of January 1, 2006.
 
 Statement
      123(R) permits public companies to adopt its requirements using one of two
      methods:
 
 1.
            A
                “modified prospective” method, in which compensation cost is recognized
                beginning with the effective date (a) based on the requirements of
                Statement 123(R) for all share-based payments granted after the effective
                date and (b) based on the requirements of Statement 123 for all awards
                granted to employees before the effective date of Statement 123(R)
                that
                remain unvested on the effective
                date.
 2.
            A
                “modified retrospective” method, which includes the requirements of the
                modified prospective method described above, but also permits entities
                to
                restate based on the amounts previously recognized under Statement
                123 for
                purposes of pro forma disclosures either (a) all prior periods presented
                or (b) prior interim periods of the year of
                adoption.
 35
 We plan to adopt Statement 123 using the modified prospective
      method.
  As permitted by Statement 123, we currently account for share-based payments to employees using Opinion 25s intrinsic value method and, as such, generally recognize no compensation cost for employee stock options. Accordingly, the adoption of Statement 123(R)s fair value method will have a significant impact on our result of operations, although it will have no impact on  our overall financial position. The impact of the adoption of Statement 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted Statement 123(R) in prior periods, the impact of that standard would have approximated the impact of the application of the principles in Statement 123.
  **Research
      and Development, Patents and Licenses**
  See
      Item
      4, ‘‘Information on the Company—High Intensity Focused Ultrasound Division—HIFU
      Division Patents and Intellectual Property’’ and ‘‘Information on the
      Company—Urology and Services Division—UDS Division Patents and Intellectual
      Property.’’
  **Off-Balance
      Sheet Arrangements**
  The
      Company has no off-balance sheet arrangements.
  
 **Item
      6. Directors, Senior Management and Employees**
  **Senior
      Executive Officers**
  The following table sets forth the name, age and position of each of our Senior Executive Officers. Each of the persons listed below has entered into an employment contract with the Company or its subsidiaries (which permits the employee to resign subject to varying notice periods). In addition, in case of a change of control of the Company, or of a termination of their employment contract by the Company without cause, the Senior Executive Officers are entitled to receive severance packages totalling approximately  0.4 million.
 Name
              Age
              PositionPhilippe
                  Chauveau
              70
              Chairman
                  of the Board of DirectorsHugues
                  de Bantel
              36
              Chief
                  Executive Officer of EDAP TMS S.A. and President of the HIFU Division
                  and
                  the UDS DivisionThierry
                  Turbant
              45
              Chief
                  Financial OfficerPhilippe
                Chauveau
              In
                  1997, Philippe Chauveau was named chairman of EDAP-TMS S.A.'s Supervisory
                  Board, involving a two-tier board structure overseeing a Management
                  Board.
                  In 2002, both these boards were replaced by a single Board of Directors,
                  which Philippe Chauveau headed as Chairman and CEO. While remaining
                  Chairman of the Board, he was succeeded by Hugues de Bantel as
                  CEO in
                  2004. Since 2002, Philippe Chauveau has also served as founding
                  Chairman
                  of the Board of Scynexis Inc., funded by private equity, which
                  is an
                  innovative drug discovery company based in the United States, partnering
                  with major pharmaceutical companies worldwide. As of today, he
                  remains on
                  the Board as a Director. He is also personal executive coach to
                  senior
                  research leaders at Hoffmann LaRoche. Additionally, he is involved
                  in
                  management development programs at IMD, in Lausanne, Switzerland.
                  He was
                  R&D Vice-President at AT&T Bell Labs and has also served as
                  Chairman of Apple Computer Europe, preceded by increasing marketing
                  roles
                  in ITT and in Procter & Gamble. He has an Honours Degree from Trinity
                  College Dublin with a BA. and a Bsc.Hugues de
                Bantel
              Hugues
                  de Bantel joined the Company in 1996, and since then has served
                  as Asia
                  Pacific Area Manager and Manager of EDAP Technomed Malaysia from
                  its
                  founding in 1997 and, since April 2000, President of EDAP Technomed
                  Japan.
                  He was appointed President of TMS S.A. on November 6, 2002, and
                  President
                  of EDAP S.A. on November 13, 2003. Before joining EDAP Technomed,
                  Mr. de
                  Bantel was Sales Manager for Europe and Asia at AFE’s Lifts Division. He
                  previously worked at Procter & Gamble as Area Sales Manager. Mr. de
                  Bantel graduated from Ecole Superieure de Commerce, Rouen
                  (France).Thierry
                Turbant
              Thierry
                  Turbant was appointed Chief Financial Officer of the Company on
                  July 1,
                  2004. He joined the Company in 1997, and since then has served
                  as Group
                  Financial Controller. Before joining the Company, Mr. Turbant
                  was
                  Accounting Manager and Controller at Gatefossé, specialized in
                  Pharmaceutical and Cosmetic Products. He previously worked at EGL
                  and at
                  Clemessy (Civil Engineering) as a Controller. Mr. Turbant graduated
                  from
                  the Business and Management Institute (IAE) at Lyon University
                  (France).
 36
 **Board
      of Directors**
  The
      following table sets forth the names of the members of the Board of Directors
      and the background of the members of the Board of Directors who are individuals.
      The mandate for each member of the Board of Directors expires on the date of
      the
      assembly meeting of shareholders approving the financial results for fiscal
      year
      2007.
  Philippe
                Chauveau
            See biography under Senior Executive Officers.Pierre
                Beysson
              Age:
                64
            Pierre Beysson was appointed as a member of the Board of Directors in September 2002. Pierre Beysson was then the Chief Financial Officer of Compagnie des Wagons-Lits ("CWL"), the on-board train service division of Accor, a French multinational Hotel and Business Services Group. In this capacity, he sat on a number of boards of companies related to the Accor Group. He is now an M&A consultant. Before his assignment at CWL, Pierre Beysson held a number of senior financial positions with Nixdorf Computers, Trane (Air Conditioning), AM International (Office Equipment) and FMC (Petroleum Equipment). Pierre Beysson was trained as a CPA, has auditing experience and holds an MBA from Harvard Business School.Karim
                Fizazi
              Age:
                40
            Dr. Karim Fizazi was appointed as a member of the Company's Board of Directors in November 2002. He is currently Chairman of the Genito-Urinary Oncology group at Institut Gustave Roussy (IGR) in Villejuif, France, which is the biggest cancer center in Europe. He was appointed Head of Department of Medicine of Institut Gustave Roussy in 2005. He is also Assistant Professor in Medical Oncology at IGR. He was visiting Assistant Professor, Genitourinary Medical Oncology Department, MD Anderson Cancer Center in Houston, Texas, for 18 months. His residency included a position at the Institut Curie in Paris.Olivier
                Missoffe
              Age:
                49
            Olivier
                Missoffe was appointed as a member of the Company's Board of Directors
                in
                November 2002. He is Chairman and CEO of Société Services de Santé (SSS),
                a services and support provider to hospitals and clinics. He is an
                advisor
                to the Management Board of the French healthcare group "Générale de
                Santé." He was Chief Executive Officer of the Company until
                1998.Siemens
                France S.A., represented by Holger
              Schmidt
              Age:
                40
            Siemens
                France S.A. was appointed as a member of the Company's Supervisory
                Board
                in January 1997 following Siemens purchase of 1,003,250 shares of
                the
                Company, representing 12.0% of the Company's total share capital.
                Siemens became a member of the Company's Board of Directors in July
                2002.Guy
                Vallancien
              Age:
                59
            Dr.
                Guy Vallancien was appointed as a member of the Company's Board of
                Directors in November 2002. He is Professor of Urology and Chief
                of the
                Urology Department at the Institut Mutualiste Montsouris (Paris,
                France).
                He is a member of the Executive Committee of the French Urological
                Association (AFU) and a member of the European and International
                Urological Association.
  37
 **Compensation and Options**
  On December 17, 2002, the Board of Directors decided that the whole Board of Directors would act as a Compensation Committee to review the compensation of our Senior Executive Officers and to propose any changes to compensation paid to the Board of Directors, which under French law is the competent body to approve any such change. On July 22, 2005, to comply with Nasdaq Corporate Governance rules, the Board of Directors decided to review the composition of the Compensation Committee and appointed two members out of the six Directors: Mr. Olivier Missoffe and Mr. Pierre Beysson, to act as the Compensation Committee. Mr. Olivier Missoffe was elected Chairman of the Compensation Committee. During that meeting, the Board of Directors approved an updated version of the charter of the "Compensation Committee". Aggregate compensation paid or accrued for services in all capacities by the Company and its subsidiaries to Senior Executive Officers and to the Board of Directors as a group for the fiscal year 2005 was approximately  0.4 million. No amount was set aside or accrued by us to provide pension, retirement or similar benefits for Senior Executive Officers and to the Board of Directors as a group in respect of the year 2005.
 As of December 18, 2002, the shareholders of two of our wholly owned and fully consolidated subsidiaries, TMS S.A. and EDAP S.A., authorized the respective Boards of Directors to grant certain Senior Executive Officers warrants to subscribe to an aggregate of 604,538 new shares of TMS S.A.s and EDAP S.A.s common stock. The average exercise price of such warrants is equivalent to the higher of either (a) the share value of the capital of each company or (b) the net book value, each such amount to be calculated on the date of exercise. Following the resignation of the President of EDAP S.A. in November 2003, outstanding warrants allow today's President of both divisions, to subscribe to an aggregate of 252,111 new shares of each of TMS S.A.s and EDAP S.A.s common stock. The total number of warrants granted, if exercised, would represent 3.5% and 2.5% of the respective share capital of TMS S.A. and EDAP S.A. after subscription. These warrants begin vesting three years after their date of grant. These warrants to subscribe to shares expire on the earlier of December 18, 2007 or when employment with the Company ceases.
  As of December 31, 2005, Senior Executive Officers held an aggregate of 146,000 options to purchase or to subscribe to shares of our common stock, with a weighted average exercise price of 1.69. Of these options, 9,000 expire on December 31, 2008, 24,000 expire on September 25, 2011 and 113,000 expire on February 24, 2014.
  **Audit
      Committee**
  On
      December 17, 2002, the Board of Directors decided that the whole Board of
      Directors will act as an ‘‘Audit Committee’’ headed by Mr. Pierre Beysson. On
      July 22, 2005, in order to fully comply with Nasdaq Corporate Governance rules
      on Independence of Directors, the composition of the Company Audit Committee
      was
      reviewed. The Board of Directors elected four fully independent Members to
      the
      Audit Committee: Mr. Olivier Missoffe, Mr. Guy Vallancien, Mr. Karim Fizazi
      and
      Mr. Pierre Beysson, the latter acting as the Head of the Audit Committee. The
      Audit Committee Charter was also reviewed to reflect those changes. The purpose
      of the Committee shall be to:
 
 -
            Provide
                assistance to the Board of Directors in fulfilling their oversight
                responsibility to the shareholders, potential shareholders, the investment
                community and others relating to: the integrity of the Company’s financial
                statements, the Company’s compliance with legal and regulatory
                requirements,the
                accounting practices and financial reporting processes of the Company,
                the
                effectiveness of the Company’s disclosure controls and procedures and
                internal control over financial reporting,the
                independent auditor’s qualifications and independence, and the performance
                of the Company’s internal audit function and independent
                auditors.
 -
            Prepare
                the Audit Committee report that SEC proxy rules require to be included
                in
                our annual proxy statement.The
                Audit Committee may request any officer or employee of the Company
                or the
                Company’s outside counsel or independent auditor to attend a meeting of
                the Committee or to meet with any members of, or consultants to,
                the
                Committee.
 
 38
 **Employees**
  As
      of
      December 31, 2003, we employed 148 individuals on a full-time basis,
      employed as follows:
 
 Sales
                &
              Marketing
            Manufac-
              turing
            Service
            Research
              &
                Dvpt
            Regula-
              tory
            Clinical
              Affairs
            Adminis-
              trative
            TotalFrance
            14
            26
            25
            14
            5
            4
            14
            102Italy
            3
            0
            0
            0
            0
            0
            3
            6Japan
            11
            0
            13
            0
            1
            0
            5
            30Malaysia
            2
            0
            3
            0
            0
            0
            2
            7USA
            0
            0
            0
            0
            0
            0
            1
            1South
                Korea
            1
            0
            0
            0
            0
            0
            1
            2**Total
                =**
            31
            26
            41
            14
            6
            4
            26
            148
  
 The
      restructuring of the French operating divisions was approved as of December
      31,
      2003 and was implemented in 2004.
  As
      of
      December 31, 2004, we employed 122 individuals on a full-time basis,
      employed as follows:
 
 Sales
                &
              Marketing
            Manufac-
              turing
            Service
            Research
              &
                Dvpt
            Regula-
              tory
            Clinical
              Affairs
            Adminis-
              trative
            TotalFrance
            11
            21
            22
            8
            3
            1
            14
            80Italy
            3
            0
            0
            0
            0
            0
            2
            5Japan
            9
            0
            13
            0
            2
            0
            4
            28Malaysia
            2
            0
            3
            0
            0
            0
            2
            7South
                Korea
            1
            0
            0
            0
            0
            0
            1
            2**Total
                =**
            26
            21
            38
            8
            5
            1
            23
            122
  As
      of
      December 31, 2005, we employed 134 individuals on a full-time basis,
      employed as follows:
 
 Sales
                &
              Marketing
            Manufac-
              turing
            Service
            Research
              &
                Dvpt
            Regula-
              tory
            Clinical
              Affairs
            Adminis-
              trative
            TotalFrance
            13
            22
            24
            8
            3
            2
            15
            87Italy
            3
            0
            0
            0
            0
            0
            3
            6Germany
            2
            0
            2
            0
            0
            0
            2
            4Japan
            9
            0
            13
            0
            2
            0
            4
            28Malaysia
            2
            0
            3
            0
            0
            0
            2
            7South
                Korea
            1
            0
            0
            0
            0
            0
            1
            2**Total
                =**
            30
            22
            40
            8
            5
            2
            27
            134
  Management
      considers labor relations to be good. Employee benefits are in line with those
      specified by applicable government regulations.
 
 
 39
 **Share
      Ownership**
  As
      of
      March 31, 2006, Siemens France S.A. owned 1,003,250 Shares representing 12.0%
      of
      the total share capital and (after subtracting treasury stock which under French
      law carries no voting rights) 12.8% of the voting rights of the Company. No
      other member of the Board of Directors or Senior Executive Officers is the
      beneficial owner of securities representing or giving the right to subscribe
      for
      or purchase more than 1% of the Shares.
  As
      of
      March 31, 2006, the Board of Directors and the Senior Executive Officers of
      the
      Company hold a total of 1,014,376 Shares (including Siemens France S.A acting
      as
      a moral entity seating at the Board of Directors) representing 12.1% of the
      total share capital and (after subtracting treasury stock which under French
      law
      carries no voting rights) 13.0% of the voting rights of the
      Company.
  **Options
      to Purchase or Subscribe for Securities**
  As
      of
      March 31, 2006, we have sponsored six stock purchase and subscription
      option plans and one Free Performance Shares plan.
  On
      December 2, 1996, the shareholders of EDAP TMS S.A. authorized the Board of
      Directors to grant up to 177,750 options to purchase pre-existing Shares and
      156,625 options to subscribe to newly issued Shares at a fixed exercise price
      of
€ 6.97 per Share.
  On
      May
      14, 1998, the shareholders of EDAP TMS S.A. authorized the Board of Directors
      to
      grant up to 713,425 options to purchase pre-existing Shares at a fixed exercise
      price to be set by the Board of Directors. The shareholders also authorized
      the
      Board of Directors to cause EDAP TMS S.A. to repurchase up to 535,675 of its
      own
      Shares (treasury stock) to cover the options granted under the new plan. Up
      to
      279,000 of the 713,425 options were reserved for modification of the terms
      of
      pre-existing options.
  On
      June
      12, 2001, the shareholders of EDAP TMS S.A. authorized the Board of Directors
      to
      grant up to 300,000 options to purchase pre-existing Shares and 80,000 options
      to subscribe to new Shares, at a fixed exercise price to be set by the
      Supervisory Board.
  On
      January 29, 2004, the shareholders of EDAP TMS S.A. authorized the Board of
      Directors to grant up to 240,000 options to purchase pre-existing Shares and
      100,000 options to subscribe to new Shares, at a fixed price to be set by the
      Board of Directors. All of the Shares that may be purchased through the exercise
      of stock options are currently held as treasury stock.
  On January 29, 2004, the shareholders also authorized the Board of Directors to grant up to 1,000,000 warrants to H.T. Prostate LLC, a fully owned subsidiary of HealthTronics Surgical Services Inc, at a fixed price of U.S.$1.50. The Board of Directors granted these warrants on January 28, 2005.
  On February 17, 2005, the shareholders of EDAP TMS S.A. authorized the Board of Directors to grant up to 625,000 free shares to be issued to certain employees of the Company, subject to compliance with the conditions and performance criteria fixed by the Board of Directors. On March 30, 2005, 500,900 rights to subscribe for free shares were granted by the Board of Directors, based on certain performance criteria to be met for years 2005 and 2006. However, given the dramatic shift of business model during 2005 from the sales of Ablatherm equipment towards the sales of treatment procedures (RPPs), on January 6, 2006, the Board of Directors decided to cancel the 2005 allocation plan and to set up a new one reflecting the new business model for years 2006 and 2007. On January 6, 2006, in accordance with the Performance Stock Plan authorized by the shareholders, 564,100 rights to subscribe to new shares were distributed, including new entrants. This plan will be accounted for in compliance with FASB 123(R).See Item 5, Operating and Financial Review and ProspectsNew Accounting Pronouncements.
  On December 31, 2005, the duration of our stock option contracts was as follows:
  **months
                until expiration**
            **Number
                of**
              **Shares**24
            33,62536
            92,00048
            1,21272
            112,000
  40
 78
              14,42598
              325,000109
              15,000  
 41
 As
      of
      December 31, 2005, a summary of stock option activity to purchase or to
      subscribe to Shares under these plans is as follows:
  2005
            2004
            2003Options
            Weighted
                average exercise price
              (€)
            Options
            Weighted
                average exercise price
              (€)
            Options
            Weighted
                average exercise price
              (€)Outstanding
                on January 1,
            580,262
            2.49
            391,262
            2.68
            654,341
            2.58Granted
            15,000
            2.78
            325,000
            2.19
            0Exercised
            (1,000)
            1.62
            0
            
            0Forfeited
            (1,000)
            3.81
            (136,000)
            2.34
            (263,079)
            2.43Expired
            -
            -
            -
            -
            -
            -Outstanding
                on December 31,
            593,262
            2.50
            580,262
            2.49
            391,262
            2.68Exercisable
                on December 31,
            409,652
            2.45
            219,547
            2.99
            272,442
            2.94Shares
                purchase options available for grant on December 31
            0
            -
            0
            -
            0
            -
  The
      following table summarizes information about options to purchase Shares already
      held by the Company as treasury Shares, or to subscribe to new Shares, at
      December 31, 2005:
  Outstanding
                options
            Exercisable
                optionsExercise
                price (€)
            
            Options
            Weighted
                average remaining contractual life
            Weighted
                average exercise price
              (€)
            Options
            Weighted
                average exercise price
              (€)3.81
            
            116,625
            2.5
            3.81
            116,625
            3.812.78
            
            15,000
            9.1
            2.78
            3,750
            2.782.60
            
            240,000
            8.7
            2.60
            60,000
            2.602.08(1)
            
            112,000
            6.0
            2.08
            112,000
            2.082.02(2)
            
            14,425
            6.5
            2.02
            10,815
            2.021.83
            
            10,212
            3.5
            1.83
            10,212
            1.831.28
            
            100,000
            8.2
            1.28
            100,000
            1.281.28
                to 3.81
            
            593,262
            6.3
            2.50
            409,652
            2.11
  (1)
            All
                the 112,000 options were granted on September 25, 2001 with an exercise
                price expressed in U.S. dollars ($1.92) and converted here to euros
                based
                on the noon buying rate on September 25, 2001 ($1 = €
                1.085).
 (2)
            All
                the 14,425 options were granted on June 18, 2002 with an exercise
                price
                expressed in U.S. dollars ($1.92) and converted here to euros based
                on the
                noon buying rate on June 18, 2002 ($1 = €
                1.0545).
  **Exemptions
      from Certain Nasdaq Corporate Governance Rules**
  Nasdaq rules permit Nasdaq to provide exemptions from the Nasdaq corporate governance standards to a foreign issuer when those standards are contrary to a law, rule or regulation of any public authority exercising jurisdiction over such issuer or contrary to generally accepted business practices in the issuers country of domicile. We received from Nasdaq an exemption from compliance with one certain corporate governance standard that is contrary to the law, rules, regulations or generally accepted business practices of France. The exemption, and the practices followed by the company, are described below:
  42
 We are exempt from Nasdaqs quorum requirements applicable to meetings of shareholders. In keeping with French law and generally accepted business practices in France, the presence in person or by proxy of shareholders having not less than 25% (in the case of an ordinary general meeting or an extraordinary general meeting deciding upon any capital increase by capitalization of reserves) or 33 1/3% (in the case of an extraordinary general meeting) of the shares is necessary for a quorum. If a quorum is not present at any meeting, the meeting is adjourned. Upon recommencement of an adjourned meeting, there is no quorum requirement in the case of an ordinary general meeting or an extraordinary general meeting deciding upon any capital increase by capitalization of reserves. The presence in person or by proxy of shareholders having not less than 25% of the Shares is necessary for a quorum in the case of any other type of extraordinary general meeting. We petitioned for this exemption because there are doubts as to whether it would be legally permissible for a French company to adopt in its articles of association quorum requirements that would be more stringent than those prescribed by French law, and this would in any event be contrary to generally accepted business practice in France.
  **Item
      7. Major Shareholders and Related Party Transactions**
  **Major
      Shareholders**
  To our knowledge, we are not directly or indirectly owned or controlled by another corporation, by any foreign government, or by any other natural or legal person or persons acting severally or jointly. At March 31, 2006, to our knowledge, the following persons had beneficial ownership of more than 5% of the Shares: Siemens France S.A. owned 1,003,250 Shares representing 12.0% of the total share capital of the Company and (after subtracting treasury stock, which under French law carries no voting rights) 12.8% of voting rights and Wells Capital Management, Inc., formerly Benson Associates LLC, owned 1,313,875 Shares representing 15.7% of the total share capital of the Company and (after subtracting treasury stock, which under French law carries no voting rights) 16.8% of voting rights. The Shares owned by these persons do not carry special voting rights.
  To our knowledge, there have been no significant changes in the percentage of ownership of our Shares over the past three years.
  There are no arrangements known to us, the operation of which may at a later date result in a change of control of the Company.
  As of March 31, 2006, 8,362,821 Shares were issued, including 7,823,331 outstanding and 539,490 treasury Shares. At the same date, there were 7,353,863 ADSs, each representing one Share, all of which were held of record by 9 registered holders in the United States (including The Depository Trust Company).
  **Related
      Party Transactions**
 
 The General Manager of our Korean branch, EDAP-TMS Korea, is also the Chairman of Dae You, a company incorporated in Korea and unrelated to EDAP TMS. Dae You acts as an agent for the promotion of our medical devices in Korea. EDAP TMS Korea also subcontracts the maintenance of our medical devices installed in Korea to Dae You. Dae You also purchases medical devices from us and operates them in partnership with hospitals and clinics in Korea.
 
 In 2005, EDAP TMS Korea paid Dae You 136,000 for its services under service maintenance contracts, and Dae You purchased 396,000 of medical devices from us.
 
 We purchase certain technological elements from Siemens AG. Total purchases amounted 547,000 in 2005, 405,000 in 2004 and 360,000 in 2003. As of December 31, 2005, payables due to Siemens AG amounted to 46,000 and as of December 31, 2004, payables due to Siemens AG amounted to  3,000.
  43
 **Item
      8. Financial Information**
  **Consolidated
      Financial Statements**
  See
      Item
      18, ‘‘Financial Statements.’’
  **Export Sales**
  As of December 31, 2005, total export sales, which we define as sales made outside of France, were 16 million, which represented 76% of total sales.
  **Legal
      Proceedings**
  To date, we are a party to two product liability actions in the United States by patients claiming to have been injured in the course of a Prostatron procedure. We retained liability for these two cases following the sale of the Prostatron business in October 2000. However, in one of the two cases, we believe that we may be able to claim indemnification from Urologix. We also believe that the patients claims against us are without merit. In addition, if the claims against us are successful, we believe any potential damages assessed against us would be covered by insurance and/or by a contribution obligation of the physicians and/or the organization that provided services with the product. However, these product liability claims could have a material adverse impact on the Company.
  **Dividends
      and Dividend Policy**
  The payment and amount of dividends depend on our earnings and financial condition and such other factors that our Board of Directors deems relevant. Dividends are subject to recommendation by the Board of Directors and a vote by the shareholders at the shareholders ordinary general meeting. Dividends, if any, would be paid in euro and, with respect to ADSs, would be converted at the then-prevailing exchange rate into U.S. dollars. Holders of ADSs will be entitled to receive payments in respect of dividends on the underlying Shares in accordance with the Deposit Agreement.
 In France, dividends are paid out of after-tax income. Dividends paid to holders of shares who are not residents of France generally will be subject to French withholding tax at a rate of 25%. Holders who qualify for benefits under an applicable tax treaty and who comply with the procedures for claiming treaty benefits may be entitled to a reduced rate of withholding tax and, in certain circumstances, certain other benefits, under conditions provided for in the relevant treaty under French law. See Item 10 Additional InformationFrench TaxationTaxation of Dividends on Shares or ADSs.
  No dividends were paid with respect to fiscal years 2001 through 2004. Subject to the approval of the shareholders meeting to be held on or before June 30, 2006, we do not anticipate paying any dividends with respect to fiscal year 2005.
  **Significant
      Changes**
  Except
      as
      otherwise disclosed in this Annual Report, there has been no material change
      in
      the financial position of EDAP TMS and its consolidated subsidiaries since
      December 31, 2005.
 
 44
 **Item
      9. The Offer and Listing**
  **Description
      of Securities**
  The
      Shares are traded solely in the form of ADSs, each ADS representing one Share.
      Each ADS is evidenced by an American Depositary Receipt issued by The Bank
      of
      New York acting as Depositary in respect thereof. The principal United States
      trading market for the ADSs, which is also the principal trading market for
      the
      ADSs overall, is the Nasdaq National Market of the Nasdaq Stock Market, Inc.
      (‘‘Nasdaq’’), on which the ADSs are quoted under the symbol ‘‘EDAP.’’ The
      principal non-U.S. trading market for the ADSs was Nasdaq Europe, formerly
      known
      as the European Association of Securities Dealers Automated Quotation System
      (‘‘EASDAQ’’), on which the ADSs were quoted under the symbol ‘‘EDAP’’. We requested and received a conditional approval from Nasdaq Europe for
      the
      delisting of its ADSs effective on April 25, 2002.
  
 **Trading
      Markets**
  The
      following tables set forth, for the years 2001 through 2005, the reported high
      and low sales prices of the ADSs on Nasdaq and Nasdaq Europe (through to April
      25, 2002 for Nasdaq Europe).
  **Nasdaq****High**
            **Low****$**2006
                (through March 31)
            
            
            
            
            21.64
            5.302005
            
            
            
            
            5.68
            3.102004
            
            
            
            
            3.92
            1.552003
            
            
            
            
            1.99
            1.002002
            
            
            
            
            2.49
            1.152001
            
            
            
            
            3.43
            0.59
  The
      following tables set forth, for the years 2004 and 2005 and the first quarter
      of
      2006, the reported high and low sales prices of the ADSs on Nasdaq for each
      full
      financial quarter:
  **Nasdaq****High**
            **Low****$**2006:First
                Quarter
            
            
            
            
            21.64
            5.302005:First
                Quarter
            
            
            
            
            5.50
            3.41Second
                Quarter
            
            
            
            
            5.00
            3.65Third
                Quarter
            
            
            
            
            4.27
            3.18Fourth
                Quarter
            
            
            
            
            5.68
            3.102004:First
                Quarter
            
            
            
            
            2.12
            1.55Second
                Quarter
            
            
            
            
            3.61
            1.95Third
                Quarter
            
            
            
            
            2.51
            1.64Fourth
                Quarter
            
            
            
            
            3.92
            1.96
  45
 The
      following table sets forth, for the most recent six months (from November 2005
      through April 2006), the reported high and low sale prices of the ADSs on Nasdaq
      for each month:
 
 NasdaqHigh
            Low$2005:November
            
            
            
            
            4.50
            3.25December
            
            
            
            
            5.68
            3.812006:January
            
            
            
            
            8.65
            5.30February
            
            
            
            
            8.88
            7.25March
            
            
            
            
            21.64
            8.43April
            
            
            
            
            19.46
            12.68
  **Item
      10. Additional Information**
  **Memorandum
      and Articles of Association**
  Set forth below is a brief summary of significant provisions of the Companys articles of association ( statuts ) and applicable French laws. This is not a complete description and is qualified in its entirety by reference to our statuts . Each time they are modified, the Company files copies of its articles of association with, and such articles of association are publicly available from, the Registry of Commerce and Companies in Lyon, France, under number 316488204 RCS-LYON.
  The Companys corporate affairs are governed by its articles of association and by Book II of the French Commercial Code, as amended.
  The Companys articles of association were last updated in July 2002 to formally comply with French Rules on Economic Regulation (the NRE law) and to reflect our new management structure.
  **Corporate
      Purposes**
  Pursuant
      to Article 2 of the articles of association, the purposes of the Company
      are:
  -
            the
                taking of financial interests, under whatever form, in all French
                or
                foreign groups, companies or businesses which currently exist or
                which may
                be created in the future, mainly through contribution, subscription
                or
                purchasing of stocks or shares, obligations or other securities,
                mergers,
                holding companies, groups, alliances or
                partnerships;
 -
            the
                management of such financial
                interests;
 -
            the
                direction, management, control and coordination of its subsidiaries
                and
                interests;
 -
            the
                provision of all administrative, financial, technical or other services;
                and
 -
            generally,
                all operations of whatever nature, financial, commercial, industrial,
                civil, relating to property and real estate which may be connected
                directly or indirectly, in whole or in part, to the Company’s purposes or
                to any other similar or related purposes which may favor the extension
                or
                development of said purposes.
  **Board
      of Directors**
  On
      July
      30, 2002, the shareholders approved a new management structure for EDAP TMS.
      The
      shareholders opted for management by a Board of Directors instead of a
      Management Board controlled by a Supervisory Board.
  The Board of Directors is currently composed of six members who were appointed by the shareholders on July 30, 2002 and November 26, 2002, for a period of three years. (See Item 6, Directors, Senior Management and Employees). However, as the Companys articles of association set the duration of the Directors' mandate at six years (one year being calculated as the period between two consecutive annual ordinary general shareholder's meetings), the next annual general shareholders meeting will acknowledge the Directors mandate as six years expiring upon the date of the general shareholders meeting approving the financial results for fiscal year 2007. The tenure of a Director terminates at the end of the ordinary general shareholders' meeting convened to vote upon the accounts of the then-preceding fiscal year and is held in the year during which the term of such Director comes to an end. Directors may always be re-elected; the Director may also be dismissed at any time at the shareholders meeting.
  46
 The mandate for each member of the Board of Directors expires on the date of the ordinary general shareholders' meeting approving the financial results for the 2007 fiscal year.
  Each Director must own at least one share during his/her term of office. If, at the time of his/her appointment, the Director does not own the required number of shares or if during his/her term, he/she no longer owns the required number of shares, he/she is considered to have automatically resigned if he/she fails to comply with the shareholding requirement within three months.
  An
      individual person cannot be on more than five Boards of Directors or Supervisory
      Boards in companies registered in France; directorships in controlled companies
      (as defined by Section L.233-16 of the French Commercial Code) by the Company
      are not taken into account.
  In case of the death or resignation of one or more Director, the Board of Directors may make provisional appointments to fill vacancies before the next general shareholders meetings. These provisional appointments must be ratified by the next following ordinary shareholders meeting. Even if a provisional appointment is not ratified, resolutions and acts previously approved by the Board of Directors nonetheless remain valid.
  When the number of Directors falls below the compulsory legal minimum, the remaining directors must convene an ordinary general shareholders meeting to reach the full complement of the Board of Directors.
  Any Director appointed in replacement of another Director whose tenure has not expired remains in office only for the remaining duration of the tenure of his predecessor.
   One of our employees may be appointed to serve as a Director. His/her contract of employment must however entail actual work obligations. In this case, he/she does not loose the benefit of his/her employment contract.
  The number of Directors who are also linked to the Company by an employment contract cannot exceed one third of the Directors then in office and in any case five members.
  Directors cannot be more than seventy years old. If one of the Directors reaches this limit during his/her tenure, such Director is automatically considered to have resigned at the next general shareholders meeting. On June 21, 2005, the shareholders approved a resolution extending the age limit for the Directors to seventy-five years old. The by-laws were then modified accordingly.
  The Board of Directors determines the direction of the Companys business and supervises its operations. Within the limits set out by the corporate purposes and the powers expressly granted by law to the general shareholders meeting, the Board of Directors may deliberate upon our operations and make any decisions in accordance with the Companys business. However, a Director must abstain from voting on matters in which the Director has an interest. The resolutions passed in a meeting of the Board of Directors are valid only if a quorum of half of the Directors is reached. A Director cannot borrow money from the Company.
  **The
      Chairman of the Board**
  The
      Board
      of Directors must elect one of its members as Chairman of the Board of
      Directors, who must be an individual person. The Board of Directors determines
      the duration of the tenure of the Chairman, which cannot exceed that of his/her
      tenure as a Director. The Board of Directors may dismiss the Chairman at any
      time. The remuneration of the Chairman is decided by the Board of Directors,
      upon recommendation of the Compensation Committee.
  The
      Chairman represents the Board of Directors and organizes its work. The general
      shareholders’ meeting must be informed of this work by the Chairman. The
      Chairman is responsible for the good functioning of our organization
      and for supervising the ability of the Board members to perform their
      mission.
  Pursuant to Section 706-43 of the French criminal proceedings Code, the Chairman may validly delegate to any person he/she chooses the power to represent us in any criminal proceedings that we may face.
  47
 As with any other Director, the Chairman cannot be over seventy years old. In case the Chairman reaches this limit during his/her tenure, he/she will automatically be considered to have resigned. However, his/her tenure is extended until the next Board of Directors meeting, during which his/her successor will be appointed. Subject to the age limit provision, the Chairman of the Board may also be re-elected. On June 21, 2005, the shareholders approved a resolution extending the age limit for the Chairman of the Board to seventy five years old. The by-laws were then modified accordingly.
  ***The
      Chief Executive Officer***
  We are managed by the Chairman of the Board of Directors or an individual elected by the Board bearing the title of Chief Executive Officer. The choice between these two methods of management belongs to the Board of Directors and must be made as provided for by the articles of association. On July 1, 2004, the Board of Directors appointed Mr. Hugues de Bantel as Chief Executive Officer.
  The Chief Executive Officer is vested with the powers to act under all circumstances on behalf of the Company, within the limits set out by the Companys corporate purposes, and subject to the powers expressly granted by law to the Board of Directors and the general shareholders meeting.
  The Chief Executive Officer represents us with respect to third parties. We are bound by any acts of the Chief Executive Officer even if they are contrary to corporate purposes, unless it is proven that the third party knew such act exceeded the Companys corporate purposes or could not ignore it in light of the circumstances. Publication of the articles of association alone is not sufficient evidence of such knowledge.
  The
      remuneration of the Chief Executive Officer is set by the Board of Directors,
      upon recommendation of the Compensation Committee. The Chief Executive Officer
      can be terminated at any time by the Board of Directors. If such termination
      is
      found to be unjustified, damages may be allocated to the Chief Executive
      Officer, except when the Chief Executive Officer is also the Chairman of the
      Board.
  The
      Chief
      Executive Officer may not hold another position as Chief Executive Officer
      or
      member of a Management Board in a company registered in France except when
      (a)
      such company is controlled (as referred to in Section L.233-16 of the French
      Commercial Code) by the Company and (b) when this controlled company’s shares
      are not quoted on a regulated market.
  The
      Chief
      Executive Officer cannot be over seventy years old. In case the Chief Executive
      Officer reaches this limit during his/her office, he/she is automatically be
      considered to have resigned. However, his/her tenure is extended until the
      next
      Board of Directors meeting, during which his/her successor must be
      appointed. ******
  ***Dividend
      and Liquidation Rights (French Law)***
  Net income in each fiscal year, as increased or reduced, as the case may be, by any profit or loss of the Company carried forward from prior years, less any contributions to legal reserves, is available for distribution to our shareholders as dividends, subject to the requirements of French law and our articles of association.
  Under French law and the Companys articles of association, we are required to allocate 5% of our net profits in each fiscal year to a legal reserve fund until the amount in such reserve fund is equal to 10% of the nominal amount of the registered capital. The legal reserve is distributable only upon the liquidation of the Company.
  The
      shareholders of the Company may, upon recommendation of the Board of Directors,
      decide to allocate all or a part of distributable profits, if any, among special
      or general reserves, to carry them forward to the next fiscal year as retained
      earnings, or to allocate them to the shareholders as dividends.
  The
      Company’s articles of association provide that, if so agreed by the
      shareholders, reserves that are available for distribution under French law
      and
      the Company’s articles of association may be distributed as dividends, subject
      to certain limitations.
  If
      the
      Company has made distributable profits since the end of the preceding fiscal
      year (as shown on an interim income statement certified by the Company’s
      statutory auditors), the Board of Directors has the authority under French
      law,
      without the approval of shareholders, to distribute interim dividends to the
      extent of such distributable profits. The Company has never paid interim
      dividends.
  48
 Under
      French law, dividends are distributed to shareholders pro-rata according to
      their respective shareholdings. Dividends are payable to holders of shares
      outstanding on the date of the shareholders' meeting deciding the distribution
      of dividends, or in the case of interim dividends, on the date of the Board
      of
      Directors meeting approving the distribution of interim dividends. However,
      holders of newly issued shares may have their rights to dividends limited with
      respect to certain fiscal years. The actual dividend payment date is decided
      by
      the shareholders in an ordinary general meeting or by the Board of Directors
      in
      the absence of such a decision by the shareholders. The payment of the dividends
      must occur within nine months from the end of the Company’s fiscal year. Under
      French law, dividends not claimed within five years of the date of payment
      revert to the French State.
  If the Company is liquidated, the Company’s assets remaining after
      payment of its debts, liquidation expenses and all of its remaining obligations
      will be distributed first to repay in full the nominal value of the shares,
      then
      the surplus, if any, will be distributed pro-rata among the shareholders based
      on the nominal value of their shareholdings and subject to any special rights
      granted to holders of priority shares, if any.
  ***Changes
      in Share Capital (French Law)***
  The
      share
      capital of the Company may be increased only with the approval of the
      shareholders entitled to vote at an extraordinary general meeting, following
      a
      recommendation of the Board of Directors. Increases in the share capital may
      be
      effected either by the issuance of additional shares (including the creation
      of
      a new class of shares) or by an increase in the nominal value of existing
      shares. Additional Shares may be issued for cash or for assets contributed
      in
      kind, upon the conversion of debt securities previously issued by the Company,
      by capitalization of reserves, or, subject to certain conditions, in
      satisfaction of indebtedness incurred by the Company. Dividends paid in the
      form
      of Shares may be distributed in lieu of payment of cash dividends, as described
      above under ‘‘—Dividend and Liquidation Rights (French law).’’ French law
      permits different classes of shares to have liquidation, voting and dividend
      rights different from those of the outstanding ordinary shares.
  The
      share
      capital of the Company may be decreased only with the approval of the
      shareholders entitled to vote at an extraordinary general meeting. The share
      capital may be reduced either by decreasing the nominal value of the shares
      or
      by reducing the number of outstanding shares. The conditions under which the
      registered capital may be reduced will vary depending upon whether or not the
      reduction is attributable to losses incurred by the Company. The number of
      outstanding shares may be reduced either by an exchange of shares or by the
      repurchase and cancellation by the Company of its shares. Under French law,
      all
      the shareholders in each class of shares must be treated equally unless the
      inequality in treatment is accepted by the affected shareholder. If the
      reduction is not attributable to losses incurred by the Company, each
      shareholder will be offered an opportunity to participate in such capital
      reduction and may decide whether or not to participate therein.
  ***Repurchase
      of Shares (French Law)***
  Pursuant
      to French law, the Company may not acquire its own shares except (a) to reduce
      its share capital under certain circumstances with the approval of the
      shareholders at an extraordinary general meeting, (b) to provide shares for
      distribution to employees under a profit sharing or stock option plan and (c)
      after obtaining approval from the shareholders at an ordinary general meeting,
      to make purchases for stabilization of quotations on a regulated stock exchange.
      In either case, the amounts to be repurchased under (b) and (c) may not result
      in the Company holding more than 10% of its shares then-issued. A subsidiary
      of
      the Company is prohibited by French law from holding shares of the Company
      and,
      in the event it becomes a shareholder of the Company, such shareholder must
      transfer all the shares of the Company that it holds.
  ***Attendance
      and Voting at Shareholders’ Meetings (French Law)***
  49
 In accordance with French law, there are two types of general shareholders’ meetings, ordinary and extraordinary. Ordinary general meetings are required for matters such as the election of directors, the appointment of statutory auditors, the approval of the report prepared by the Board of Directors and the annual accounts, the declaration of dividends and the issuance of (non-convertible) bonds.
  Extraordinary general meetings are required for approval of matters such as amendments to the Company’s articles of association, modification of shareholders’ rights, approval of mergers, increases or decreases in share capital (including a waiver of preferential subscription rights), the creation of a new class of shares, the authorization of the issuance of investment certificates or securities convertible or exchangeable into shares and for the sale or transfer of substantially all of the Company’s assets.
 The
      Board
      of Directors is required to convene an annual ordinary general shareholders
      meeting, which must be held within six months of the end of the Company’s fiscal
      year, for approval of the annual accounts. Other ordinary or extraordinary
      meetings may be convened at any time during the year. Shareholders meetings
      may
      be convened by the Board of Directors or, if the Board of Directors fails to
      call such a meeting, by the Company’s statutory auditors or by a court-appointed
      agent. The court may be requested to appoint an agent either by one or more
      shareholders holding at least 5% of the Company’s registered capital or by an
      interested party under certain circumstances, or, in case of an urgent matter,
      by the Work Council ( *Comit* *é* *d’entreprise* )
      representing the employees. The notice calling a meeting must state the agenda
      for such meeting.
  French law provides that, at least 15 days before the date set for any general meeting on first notice, and at least six days before the date set for any general meeting on second notice, notice of the meeting must be sent by mail to all holders of properly registered shares who have held such shares for more than one month before the date of the notice. A preliminary written notice ( avis de réunion ) must be sent to each shareholder who has requested to be notified in writing. Under French law, one or several shareholders together holding a specified percentage of shares may propose resolutions to be submitted for approval by the shareholders at the meeting. Holders of ADSs will receive notices of shareholders meetings and other reports and communications that are made generally available to shareholders from The Bank of New York, the Depositary for the ADSs. The Work Council may also require the registration of resolution proposals on the agenda.
  Attendance and exercise of voting rights at ordinary and extraordinary general meetings are subject to certain conditions. Shareholders deciding to exercise their voting rights must have their shares registered in their names in the shareholder registry maintained by or on behalf of the Company before the meeting. Certain procedures to effect such requirements will be required of a holder of ADSs to exercise the voting rights relating to the shares represented by such ADSs.
 All shareholders who have properly registered their shares have the right to participate in general meetings, either in person, by proxy, or by mail, and to vote according to the number of shares they hold. Each share confers on the shareholder the right to one vote. Under French law, an entity controlled directly or indirectly by the Company is prohibited from holding shares in the Company and, in the event it becomes a shareholder, such entity would not be entitled to any voting rights. A proxy may be granted by a shareholder whose name is registered on the Companys share registry to his or her spouse, to another shareholder or to a legal representative, in the case of a legal entity, or by sending a proxy in blank to the Company without nominating any representatives. In the latter case, the Chairman of the shareholders meeting will vote such blank proxy in favor of all resolutions proposed by the Board of Directors and against all others.
 The
      presence in person or by proxy of shareholders having not less than 25% (in
      the
      case of an ordinary general meeting or an extraordinary general meeting deciding
      upon any capital increase by capitalization of reserves) or 33 1/3% (in the
      case
      of an extraordinary general meeting) of the Shares entitled to vote is necessary
      to reach a quorum. If a quorum is not reached at any meeting, the meeting is
      adjourned. Upon recommencement of an adjourned meeting, there is no quorum
      requirement in the case of an ordinary general meeting or an extraordinary
      general meeting deciding upon any capital increase by capitalization of
      reserves. The presence in person or by proxy of shareholders having not less
      than 25% of the Shares is necessary to reach a quorum in the case of any other
      type of extraordinary general meeting.
  At
      an
      ordinary general meeting or an extraordinary general meeting deciding upon
      any
      capital increase by capitalization of reserves, a simple majority of the votes
      of the shareholders present or represented by proxy is required to approve
      a
      resolution. At any other extraordinary general meeting, a two-thirds majority
      of
      the votes cast is required. However, a unanimous vote is required to increase
      liabilities of shareholders. Abstention from voting by those present or
      represented by proxy is viewed as a vote against the resolution submitted to
      a
      vote.
  In
      addition to his/her rights to certain information regarding the Company, any
      shareholder may, during the two-week period preceding a shareholders’ meeting,
      submit to the Board of Directors written questions relating to the agenda for
      the meeting. The Board of Directors is required to respond to such questions
      during the meeting.
  50
 Under
      French law, shareholders can nominate individuals for election to the Board
      of
      Directors at a shareholders’ meeting. When the nomination is part of the agenda
      of the shareholders’ meeting, the nomination must contain the name, age,
      professional references and professional activity of the nominee for the past
      five years, as well as the number of shares owned by such candidate, if any.
      In
      addition, if the agenda for the shareholders’ meeting includes the election of
      members of the Board of Directors, any shareholder may require, during the
      meeting, the nomination of a candidate for election at the Board of Directors
      at
      the shareholders’ meeting, even if such shareholder has not followed the
      nomination procedures. Under French law, shareholders cannot elect a new member
      of the Board of Directors at a general shareholders meeting if the agenda for
      the meeting does not include the election of a member of the Board of Directors,
      unless such nomination is necessary to fill a vacancy due to the previous
      resignation of a member.
  As
      set
      forth in the Company’s articles of association, shareholders’ meetings are held
      at the registered office of the Company or at any other locations specified
      in
      the written notice. The Company has no staggered or cumulative voting
      arrangements for the election of Directors.
  ***Preferential
      Subscription Rights (French Law)***
  Shareholders
      have preferential rights to subscribe for additional shares issued by the
      Company for cash on a pro-rata basis (or any equity securities of the Company
      or
      other securities giving a right, directly or indirectly, to equity securities
      issued by the Company). Shareholders may waive their preferential rights, either
      individually or at an extraordinary general meeting under certain circumstances.
      Preferential subscription rights, if not previously waived, are transferable
      during the subscription period relating to a particular offering of shares.
      U.S.
      holders of ADSs may not be able to exercise preferential rights for Shares
      underlying their ADSs unless a registration statement under the Securities
      Act
      is effective with respect to such rights or an exemption from the registration
      requirement thereunder is available.
  ***Form
      and Holding of Shares (French Law)***
  *Form
      of Shares*
  The
      Company’s articles of association provide that shares can only be held in
      registered form.
  *Holding
      of Shares*
  The
      shares are registered in the name of the respective owners thereof in the
      registry maintained by or on behalf of the Company.
  Stock
      certificates evidencing shares, in a manner comparable to that in the United
      States, are not issued by French companies, but the Company may issue or cause
      to be issued confirmations of shareholdings registered in such registry to
      the
      persons in whose names the shares are registered. Such confirmations do not
      constitute documents of title and are not negotiable instruments.
  ***Ownership
      of ADSs or Shares by Non-French Residents (French Law)***
  Under
      French law, there is no limitation on the right of non-French residents or
      non-French security holders to own, or where applicable, vote securities of
      a
      French company. A non-resident of France must file a *d* *é* *claration
      administrative* ,
      or
      administrative notice, with French authorities in connection with the
      acquisition of a controlling interest in any French company. Under existing
      administrative rulings, ownership, by a non-resident of France or a French
      corporation which is itself controlled by a foreign national, of 33 1/3% or
      more
      of a company’s share capital or voting rights is regarded as a controlling
      interest, but a lower percentage may be held to be a controlling interest in
      certain circumstances (depending upon such factors as the acquiring party’s
      intentions, its ability to elect directors or financial reliance by the French
      company on the acquiring party).
  51
 ***Certain Exemptions (French Law)***
  Under the U.S. securities laws, as a foreign private issuer, EDAP TMS is exempt from certain rules that apply to domestic U.S. issuers with equity securities registered under the U.S. Securities Exchange Act of 1934, including the proxy solicitation rules and the rules requiring disclosure of share ownership by directors, officers and certain shareholders. EDAP TMS is also exempt from certain of the current corporate governance requirements of the Nasdaq Stock Market. For more information on these exemptions, see Item 6, ‘‘Directors, Senior Management and Employees—Exemptions from Certain Nasdaq Corporate Governance Rules.’’
 ***Enforceability
      of Civil Liabilities (French Law)***
  The Company is a société anonyme , or limited liability corporation, organized under the laws of the Republic of France. The majority of our directors and executive officers reside in the Republic of France. All or a substantial portion of our assets and the assets of such persons are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce, either inside or outside the United States, judgments against such persons obtained in U.S. courts or to enforce in U.S. court judgments obtained against such persons in courts in jurisdictions outside the United States, in each case, in any action predicated upon the civil liability provisions of the federal securities laws of the United States. In an original action brought in France predicated solely upon the U.S. federal securities laws, French courts may not have the requisite jurisdiction to grant the remedies sought, and actions for enforcement in France of judgments of U.S. courts rendered against French persons referred to in the second sentence of this paragraph would require such French persons to waive their right under Article 15 of the French Civil Code to be sued in France only. We believe that no such French persons have waived such right with respect to actions predicated solely upon U.S. federal securities laws. In addition, actions in the United States under the U.S. federal securities laws could be affected under certain circumstances by the French law of July 16, 1980, which may preclude or restrict obtaining evidence in France or from French persons in connection with such actions.
  **Material
      Contracts**
  We are a party to a commercial lease agreement for our corporate headquarters and research and development and manufacturing facilities are located in Vaulx-en-Velin, on the outskirts of Lyon. The premises comprise 3,740 square meters. The lease has a term of nine years and is renewable at the lessees option. We believe that the terms of the lease reflect commercial practice and market rates.
  On February 25, 2004, we entered into a distribution agreement with a subsidiary of HealthTronics granting HealthTronics, among other things, (i) the right to begin clinical trials with the Ablatherm (which utilizes HIFU to provide minimally invasive treatment of prostate cancer), (ii) the right to seek Pre-Market Approval (PMA) from the FDA and (iii) exclusive distribution rights in the United States, when and if a PMA is granted. Under the terms of the distribution agreement, we also agreed to grant HealthTronics 1 million warrants ( bons de souscription dactions ) on January 28, 2005, each warrant entitling HealthTronics to purchase a Share of the Company at a price of U.S.$1.50. The warrants are subject to the terms and conditions of an accompanying escrow agreement, which, among other things, include restraints on subsequent resale of the warrant Shares. The distribution agreement allows HealthTronics to exercise specified numbers of warrants as it meets various specified distribution milestones. Under a December 2004 amendment to the distribution agreement, HealthTronicss exclusive use of the Ablatherm trade names was waived until such time as it obtained the PMA from the FDA. On December 29, 2005, we entered into an amendment to the distribution agreement with HealthTronics through its subsidiary. HealthTronics wishes to focus its efforts on obtaining the PMA for Ablatherm and on developing the HIFU market potential on the US territory, and does not want to pursue the distribution of our  lithotripters in the US. The 200,000 warrants that had been issued to HealthTronics were cancelled, as their exercise was directly linked to future purchases of lithotripters manufactured by us.
  **Exchange
      Controls**
  Under current French foreign exchange control regulations, there are no limitations on the amount of cash payments that we may remit to residents of foreign countries. Laws and regulations concerning foreign exchange controls do require, however, that all payments or transfers of funds made by a French resident to a non-resident be handled by an accredited intermediary. All registered banks and credit institutions in France are accredited intermediaries.
  52
 Under
      French law, there is no limitation on the right of non-French residents or
      non-French security holders to own, or where applicable, vote securities of
      a
      French company. A non-resident of France must file a *déclaration
      administrative* ,
      or
      administrative notice, with French authorities in connection with the
      acquisition of a controlling interest in any French company. Under existing
      administrative rulings, ownership by a non-resident of France or a French
      corporation which is itself controlled by a foreign national, of 20% or more
      of
      a listed company’s share capital or voting rights is regarded as a controlling
      interest, but a lower percentage may be held to be a controlling interest in
      certain circumstances (depending upon such factors as the acquiring party’s
      intentions, its ability to elect directors or financial reliance by the French
      company on the acquiring party).
  **French Taxation**
  The following generally summarizes the material French tax consequences of purchasing, owning and disposing of Shares or ADSs. The statements relating to French tax laws set forth below are based on the laws in force as of the date hereof, and are subject to any future changes in applicable laws and tax treaties.
  This discussion is intended only as a descriptive summary and does not purport to be a complete analysis or listing of all potential tax effects of the purchase, ownership or disposition of Shares or ADSs. The following summary does not address the treatment of Shares or ADSs that are held by a resident of France (except for purposes of describing related tax consequences for other holders) or in connection with a permanent establishment or fixed base through which a holder carries on business or performs personal services in France, or by a person that owns, directly or indirectly, 5% or more of the stock of the Company. Moreover, the following discussion of the tax treatment of dividends only deals with distributions made on or after January 1, 2006.
  There
      are
      currently no procedures available for holders that are not U.S. residents to
      claim tax treaty benefits in respect of dividends received on ADSs or Shares
      registered in the name of a nominee. Such holders should consult their own
      tax
      advisor about the consequences of owning and disposing of ADSs.
  Investors
        should consult their own tax advisors regarding the tax consequences of the
        purchase, ownership and disposition of shares in light of their particular
        circumstances.
  ***Taxation
      of Dividends on Shares or ADSs - Withholding Tax***
  In
      France, dividends are paid out of after-tax income. Dividends paid to
      non-residents normally are subject to a 25% French withholding tax. However,
      non-resident holders that are entitled to and comply with the procedures for
      claiming benefits under an applicable tax treaty may be subject to a reduced
      rate (generally 15%) of French withholding tax. If a non-resident holder
      establishes its entitlement to treaty benefits before the payment of a
      dividend, then French tax generally will be withheld at the reduced rate provided
      under the treaty.
  *New
      Tax Credit*
 As
        a
        results of the reforms implemented by the French Finance Law for 2004 and
        the
        French Finance Law for 2006, from January 1, 2006, French resident individuals
        are taxed on only 60% of the dividends they receive and, in addition to a
        fixed
        allowance, are entitled to a tax credit equal to 50% of all dividends received
        within on year (the "Tax Credit"). The Tax Credit is capped at €230 for married
        couples and members of a union agreement subject to joint taxation and €115 for
        single persons, widows or widowers, divorcees or married persons subject to
        separate taxation.
 
 Dividends
        paid to non-residents are not normally eligible for the Tax Credit described
        above. However, qualifying non-resident individuals may, depending on the
        provisions of the tax treaty possibly entered into between France and their
        country of residence, benefit from a refund of the Tax Credit (net of applicable
        withholding tax) under certain conditions, subject to compliance with the
        procedures for claiming benefits under the applicable treaty. The French
        tax
        authorities have not yet issued any guidance with regard to the procedures
        for
        claiming the refund of the Tax Credit to non-resident
        individuals.
  53
 Individual investors are urged to consult their own tax adviers in this
      respect.
  ***Taxation
      on Sale or Disposition of Shares or ADSs***
  Subject
      to the more favorable provisions of a relevant tax treaty, holders that are
      not
      residents of France for tax purposes, do not hold Shares or ADSs in connection
      with the conduct of a business or profession in France, and have not held more
      than 25% of dividend rights ( *droits
      aux bénéfices sociaux* )
      of the
      Company, directly or indirectly, at any time during the preceding five years,
      are not subject to French income tax or capital gains tax on the sale or
      disposition of Shares or ADSs.
  A
      1.1% *ad
      valorem* registration duty (subject to a maximum of €4,000 per transfer) applies to
      certain transfers of shares in French companies. This
      duty
      does not apply to transfers of shares in listed companies that are not evidenced
      by a written agreement, or if any such agreement is executed outside
      France.
  *Estate
      and Gift Tax*
  France
      imposes estate and gift tax on shares or ADSs of a French company that are
      acquired by inheritance or gift. The tax applies without regard to the tax
      residence of the transferor. However, France has entered into estate and gift
      tax treaties with a number of countries pursuant to which, assuming certain
      conditions are met, residents of the treaty country may be exempted from such
      tax or obtain a tax credit.
  *Wealth
      Tax*
  Individuals
      who are not residents of France for purposes of French taxation are not subject
      to a wealth tax ( *impôt
      de solidarité sur la fortune* )
      in
      France as a result of owning an interest in the share capital of a French
      company, provided that such ownership interest is less than 10% of the company’s
      share capital and does not enable the shareholder to exercise influence over
      the
      company. Double taxation treaties may provide for a more favorable tax
      treatment.
  **Taxation
      of U.S. Investors**
  The
      following is a summary of the material French and U.S. federal income tax
      consequences of the purchase, ownership and disposition of Shares or ADSs by
      a
      holder that is a resident of the United States for purposes of the income tax
      convention between the United States and France (the ‘‘Treaty’’) and is fully
      eligible for benefits under the Treaty (a ‘‘U.S. holder’’). A holder generally
      will be entitled to Treaty benefits in respect of Shares or ADSs if he
      is:
  
 ·
            the
                beneficial owner of the shares or ADSs (and the dividends paid with
                respect thereto);
  ·
            an
                individual resident of the United States, a U.S. corporation, or
                a
                partnership, estate or trust to the extent its income is subject
                to
                taxation in the United States in its hands or in the hands of its
                partners
                or beneficiaries;
  ·
            not
                also a resident of France for French tax purposes;
                and
  ·
            not
                subject to an anti-treaty shopping article that applies in limited
                circumstances.
  Special
      rules apply to pension funds and certain other tax-exempt
      investors.
  For
      U.S.
      federal income tax purposes, a U.S. holder’s ownership of the company’s ADSs
      will be treated as ownership of the company’s underlying shares.
  This
      summary does not purport to be a comprehensive description of all of the tax
      considerations that may be relevant to any particular investor, and does not
      discuss tax considerations that arise from rules of general application or
      that
      are generally assumed to be known by investors. In particular, the summary
      does
      not deal with Shares or ADSs that are not held as capital assets, and does
      not
      address the tax treatment of holders that are subject to special rules, such
      as
      banks, insurance companies, dealers in securities or currencies, regulated
      investment companies, persons that elect mark-to-market treatment, persons
      holding Shares or ADSs as a position in a synthetic security, straddle or
      conversion transaction, persons that own, directly or indirectly, 5% or more
      of
      the Company’s voting stock or 10% or more of the Company’s outstanding capital
      and persons whose functional currency is not the U.S. dollar. The summary is
      based on laws, treaties, regulatory interpretations and judicial decisions
      in
      effect on the date hereof, all of which are subject to change.
  54
 This
      summary does not discuss the treatment of Shares or ADSs that are held in
      connection with a permanent establishment or fixed base through which a holder
      carries on business or performs personal services in France. Moreover, the
      following discussion of the tax treatment of dividends only deals with
      distributions made on or after January 1, 2006.
  Holders
      should consult their own tax advisers regarding the tax consequences of the
      purchase, ownership and disposition of Shares or ADSs in the light of their
      particular circumstances, including the effect of any state, local, or other
      laws.
  ***Dividends***
  As discussed in more detail above, the French Finance Law of 2004 implemented a reform of the French tax treatment of distributions and dividends paid by French companies. Generally,
      dividend distributions to non-residents of France are subject to French
      withholding tax at a 25% rate and are not eligible for the benefit of the Tax
      Credit available to French resident individuals, as described above. However,
      under the Treaty, holders can claim the benefit of a reduced dividend
      withholding tax rate of 15%.
 
 In
      addition, individual U.S. holders, subject to the discussion of the Tax Credit above,  may be entitled to a refund of the Tax Credit,
      less a 15% withholding tax, provided that they are subject to U.S. federal
      income tax on the Tax Credit and the dividend to which it relates. The French
      tax authorities have not yet issued guidance with respect to the  refund of the Tax Credit to non-resident individuals. If it is possible to claim this refund, the claims process may entail compliance with cumbersome formalities.
  U.S.
      holders that are legal entities, pension funds or other tax-exempt holders
      are
      no longer entitled to tax credit payments from the French Treasury.
  French
      withholding tax will be withheld at the 15% Treaty rate for holders that have
      established before the date of payment that they are residents of the United
      States under the Treaty by following the simplified procedure described
      below.
 
 The
      gross
      amount of dividend and Tax Credit that a U.S. holder receives (before the
      deduction of French withholding tax) generally will be subject to U.S. federal
      income taxation as ordinary dividend income to the extent paid or deemed paid
      out of the current or accumulated earnings and profits of the Company (as
      determined under U.S. federal income tax principles). Such
      dividends will not be eligible for the dividends received deduction generally
      allowed to U.S. corporations.
 
 
 Subject to certain exceptions for short-term and hedged positions, the U.S. dollar amount of dividends received by an individual before January 1, 2009 with respect to the Shares or ADSs will be subject to taxation at a maximum rate of 15% if the dividends are qualified dividends. Dividends paid on the Shares or ADSs will be treated as qualified dividends if (i) the issuer is eligible for the benefits of a comprehensive income tax treaty with the United States that the IRS has approved for the purposes of the qualified dividend rules and (ii) the Company was not, in the year prior to the year in which the dividend was paid, and is not, in the year in which the dividend is paid, a passive foreign investment company (PFIC). The Treaty has been approved for the purposes of the qualified dividend rules. Based on the Companys audited financial statements and relevant market and shareholder data, we believe that the Company was not treated as a PFIC for U.S. federal income tax purposes with respect to its 2005 taxable year. In addition, based on the Companys audited financial statements and our current expectations regarding the value and nature of its assets, the sources and nature of its income, and relevant market and shareholder data, we do not anticipate it becoming a PFIC for the 2006 taxable year. Accordingly, dividends paid by us in 2006 to a U.S. holder should constitute qualified dividends unless such holder acquired its Shares or ADSs during a year in which the Company was a PFIC and such holder did not make a mark-to-market election (as described under Passive Foreign Investment Company Rules below).
 55
 The
      U.S.
      Treasury has announced its intention to promulgate rules pursuant to which
      holders of ADSs or common stock and intermediaries though whom such securities
      are held will be permitted to rely on certifications from issuers to establish
      that dividends are treated as qualified dividends. Because such procedures
      have
      not yet been issued, it is not clear whether we will be able to comply
      with them.
  *Holders
      of ADSs and Shares should consult their own tax advisers regarding the
      availability of the reduced dividend tax rate in the light of their own
      particular circumstances.*
  Distributions
      out of earnings and profits with respect to the Shares or ADSs generally will
      be
      treated as dividend income from sources outside of the United States and
      generally will be treated separately along with other items of “passive” (or, in
      the case of certain U.S. holders, “financial services”) income for purposes of
      determining the credit for foreign income taxes allowed under the Code. Subject
      to certain limitations, French income tax withheld in connection with any
      distribution with respect to the Shares or ADSs may be claimed as a credit
      against the U.S. federal income tax liability of a U.S. holder if such U.S.
      holder elects for that year to credit all foreign income taxes. Alternatively
      such French withholding tax may be taken as a deduction against taxable income.
      Foreign tax credits will not be allowed for withholding taxes imposed in respect
      of certain short-term or hedged positions in securities and may not be allowed
      in respect of certain arrangements in which a U.S. holder’s expected economic
      profit is insubstantial. U.S. holders should consult their own tax advisors
      concerning the implications of these rules in light of their particular
      circumstances.
 
 To
      the
      extent that an amount received by a U.S. holder exceeds the allocable share
      of
      current and accumulated earnings and profits of the Company, such excess will
      be
      applied first to reduce such U.S. holder’s tax basis in its Shares or ADSs and
      then, to the extent it exceeds the U.S. holder’s tax basis, it will constitute
      capital gain from a deemed sale or exchange of such Shares or ADSs.
  Dividends
      paid in euro will be included in the income of a U.S. Holder in a U.S. dollar
      amount calculated by reference to the exchange rate in effect on the date of
      receipt by the holder (or, in the case of the ADSs, by the Depositary),
      regardless of whether the payment is in fact converted into U.S. dollars. If
      such a dividend is converted into U.S. dollars on the date of receipt, a U.S.
      holder generally should not be required to recognize foreign currency gain
      or
      loss in respect of the dividend income.
  ***Procedures
      for Claiming Treaty Benefits***
  The French tax authorities issued new guidelines in the instruction no 4-J-1-05, dated February 25, 2005 that significantly changed the formalities to be complied with by non-resident shareholders, including U.S. holders, to obtain the reduced withholding tax rate on distributions made on or after January 1, 2005.
 
 
 Pursuant to the new guidelines, U.S. holders can either claim Treaty benefits under a simplified procedure or under the normal procedure. The procedure to be followed depends on whether the application for Treaty benefits is filed before or after the dividend payment.
 To benefit from the lower rate of withholding tax applicable under the Treaty before the payment of the dividend, you must use the simplified procedure and are no longer allowed to file a Form RF 1 A EU-No. 5052 or a Form RF 1 B EU-No. 5053. The simplified procedure entails completing and delivering to the French tax authorities a certificate stating that:
 ·
            you
                are a U.S. resident within the meaning of the
                Treaty;
 ·
            the
                dividend is not derived from a permanent establishment or a fixed
                base
                that you own in France;
 ·
            the
                dividend received is subject to tax in the United
                States.
  For
        partnerships and trusts, claim for Treaty benefits and related attestations
        are
        made by the partners, beneficiaries or grantors who also have to supply certain
        additional documentation.
  To be eligible for Treaty benefits, pension funds and certain other tax-exempt
      U.S. holders must comply with the simplified procedure described above, though
      they may be required to supply additional documentation evidencing their
      entitlement to those benefits.
  If
      the
      certificate is not filed before the dividend payment, a withholding tax will
      be levied at the 25% rate, and a holder would have to claim a refund for the
      excess under the normal procedure by filing a
      specific treaty form (n° 5052 RF1-EU or n° 5053 RF1-EU) no
      later
      than December 31 of the second year following the year in which the dividend
      is
      paid.
 56
 Copies
      of
      the simplified certificate and of the specific treaty forms are available from
      the U.S. Internal Revenue Service and from the *Centre
      des Impôts des Non-Résidents* (9 rue
      d’Uzès, 75094 Paris Cedex 2).
 
 Finally,
      as mentioned above, the French tax authorities have not yet issued any guidance
      with respect to the procedure for claiming the refund of the Tax Credit to
      non-resident individuals.
  ***Capital
      Gains***
  Under
      the
      Treaty, a U.S. holder will not be subject to French tax on any gain derived
      from
      the sale or exchange of Shares or ADSs, unless the gain is effectively connected
      with a permanent establishment or fixed base maintained by the holder in
      France.
  For
      U.S.
      federal income tax purposes, gain or loss realized by a U.S. holder on the
      sale
      or other disposition of Shares or ADSs will be capital gain or loss, and will
      be
      long-term capital gain or loss if the Shares or ADSs were held for more than
      one
      year. The net amount of long-term capital gain recognized by an individual
      U.S.
      holder generally is subject to taxation at a maximum rate of 20%; however,
      net
      long-term capital gain recognized by an individual U.S. holder after May 5,
      2003
      and before January 1, 2009 generally is subject to taxation at a maximum rate
      of
      15%. U.S. Holders’ ability to offset capital losses against ordinary income is
      limited.
  ***Passive
      Foreign Investment Company Rules***
  The
      Company will be classified as a PFIC in a particular taxable year if
      either:
  ·
            75%
                or more of the Company’s gross income is treated as passive income for
                purposes of the PFIC rules; or
  ·
            the
                average percentage of the value of the Company’s assets that produce or
                are held for the production of passive income is at least
                50%.
  
 As
      discussed above (see “—Dividends”), the Company believes that it was not a PFIC
      in 2005 and does not anticipate being a PFIC in 2006. However, as discussed
      in
      Forms 20-F filed by the Company with respect to prior years, the Company
      believes that it was a PFIC during certain periods.
  If
      a U.S.
      holder held Shares or ADSs during a year in which the Company was a PFIC and
      does not make the mark-to-market election, described in the next paragraph,
      such
      holder will be subject to a special additional tax, determined as described
      below, on certain dividends received and gains realized (‘‘excess
      distributions’’) in subsequent years, without regard to whether the Company was
      a PFIC in the year the excess distribution was received. The amount of this
      tax
      is equal to the sum of (i) tax at ordinary rates on the amount of the excess
      distribution, plus (ii) an interest charge to compensate for tax deferral,
      calculated as if the excess distribution had been earned ratably over the period
      the U.S. holder held its Shares or ADSs. Classification as a PFIC may also
      have
      other adverse tax consequences, including the denial of a step-up in the basis
      of Shares and ADSs at death.
  U.S.
      holders can avoid the unfavorable treatment described above by electing to
      mark
      their Shares or ADSs to market. For any year in which the Company is a PFIC,
      a
      U.S. holder who makes a mark-to-market election would include as ordinary income
      the excess of the fair market value of the Shares or ADSs at year-end over
      the
      holder’s basis in those Shares or ADSs. In addition, any gain recognized upon a
      sale of Shares or ADSs in such year would be taxed as ordinary
      income.
  The
      Company does not intend to furnish holders with the information necessary to
      make a qualified electing fund (‘‘QEF’’) election.
  ***French
      Estate and Gift Tax***
  Under
      the
      estate and gift tax convention between the United States and France, a transfer
      of Shares or ADSs by gift or by reason of the death of a U.S. holder entitled
      to
      benefits under that convention will not be subject to French gift or inheritance
      tax, so long as the donor or decedent was not domiciled in France at the time
      of
      the transfer, and Shares or ADSs were not used or held for use in the conduct
      of
      a business or profession through a permanent establishment or fixed base in
      France.
 57
 ***French
      Wealth Tax***
  The
      French wealth tax does not generally apply to shares or ADSs of a U.S. Holder
      if
      the holder is a resident of the United States for purposes of the
      Treaty.
  **U.S.
      Information Reporting and Backup Withholding Rules**
  Payments
      of dividends and sales proceeds that are made within the United States or
      through certain U.S.-related financial intermediaries are subject to information
      reporting and may be subject to backup withholding unless the holder (i) is
      a
      corporation or other exempt recipient or (ii) provides a taxpayer identification
      number and certifies that no loss of exemption from backup withholding has
      occurred. Holders that are not U.S. persons generally are not subject to
      information reporting or backup withholding. However, such a holder may be
      required to provide a certification of its non- U.S. status in connection with
      payments received within the United States or through a U.S.-related financial
      intermediary.
  **Documents
      on Display**
  We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, we file reports and other information with the Securities and Exchange Commission. These materials, including this annual report and the exhibits hereto, may be inspected and copied at the Commissions public reference room at 100F Street, N.E., Washington, D.C. 20549 and at the Commissions regional offices at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 233 Broadway, New York, New York 10279. Copies of the materials may be obtained from the public reference room of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribe rates. The public may obtain information on the operation of the Commissions Public Reference Room by calling the Commission in the United States at +1 800 SEC 0330.
  
 **Item
      11. Quantitative and Qualitative Disclosures about Market
      Risk**
  We are exposed to market risk from changes in both foreign currency exchange rates and interest rates. We do not hold or issue derivative or other financial instruments for trading purposes. As of December 31, 2005, we had five foreign exchange sale contracts, three for the Japanese yen that expire in March, June and September 2006 and two for the U.S. dollar that expire in February and April 2006. As of March 31, 2006, we had three new foreign exchange sale contracts, one for the Japanese yen and two for U.S. dollars.
  **Exchange
      Rate Risk**
  ***Revenues
      and Expenses in Foreign Currencies***
  We are exposed to foreign currency exchange rate risk because a significant portion of our costs are denominated in currencies other than those in which we earn revenues. In 2005, approximately 76% of our selling and general and administrative expenses and approximately 93% of our research and development expenses were denominated in euro. During the same period, only 58% of our sales were denominated in euro, the rest being denominated primarily in U.S. dollars and Japanese yen.
  A uniform 10% strengthening in the value of the euro as of December 31, 2005 relative to the U.S. dollar and the Japanese yen would have resulted in an increase in income before taxes and minority interests of approximately 28,000 for the year ended December 31, 2005, compared to an increase of approximately 43,000 for the year ended December 31, 2004. This calculation assumes that the U.S. dollar and Japanese yen exchange rates would have changed in the same direction relative to the euro. In addition to the direct effects of changes in exchange rates quantified above, changes in exchange rates also affect the volume of sales. The foreign exchange sale contracts in place as of December 31, 2005 will be effective as from January 2006. We regularly assess the exposure of our receivables to fluctuations in the exchange rates of the principal foreign currencies in which our sales are denominated (in particular, the U.S. dollar and the Japanese yen) and, from time to time, hedge such exposure by entering into forward sale contracts for the amounts denominated in such currencies that we expect to receive from our local subsidiaries. As of December 31, 2005, we had three options to hedge against Japanese yen for a total nominal amount of JPY45 million (i.e., 331 thousand), an amount of JPY15 million each, expiring on March, June and September 2006, respectively, and two options to hedge against US$ for a total nominal amount of US$200 thousand (i.e., 160 thousand), an amount of US$100 thousand each, expiring on February and April 2006. As of March 31, 2006, we had three new foreign exchange sale contracts, one for the Japanese yen and two for U.S. dollars.
 58
 ***Financial
      Instruments and Indebtedness***
  Over the past three years, we also had exchange rate exposures with respect to indebtedness and assets denominated in Japanese yen. Approximately 0.2 million, 0.5 million and 0.3 million of our outstanding indebtedness at December 31, 2005, 2004 and 2003, respectively, was denominated in Japanese yen. None of the our outstanding indebtedness over the past three years was denominated in U.S. dollars. In addition, we had approximately 0.5 million, 1.2 million and 0.4 million of cash denominated in U.S. dollars at December 31, 2005, 2004 and 2003, respectively, and 0.9 million, 1.3 million and 0.7 million of cash denominated in Japanese yen at December 31, 2005, 2004 and 2003, respectively.
  **Item 12. Description of Securities Other than Equity Securities**
  Not Applicable.
 
 **PART
      II**
  **Item
      13. Defaults, Dividend Arrearages and Delinquencies**
  Not
      Applicable.
  **Item
      14. Material Modifications to the Rights of Security Holders and Use of
      Proceeds**
  Not
      Applicable.
  
 **Item
      15. Controls and Procedures**
  Within the 90 days before the date of this annual report, we carried out an evaluation under the supervision and with the participation of the Companys management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon and as of the date of our evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in all material respects to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required.
  There has been no change in our internal control over financial reporting during our 2005 fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
  **Item
      16A. Audit Committee Financial Expert**
  Our Board of Directors has determined that the chair of the Boards audit committee, Mr. Pierre Beysson, an independent Director, qualifies as an audit committee financial expert.
  **Item
      16B. Code of Ethics**
 59
 We have adopted a code of ethics applicable to our Chief Executive Officer, Chief Financial Officer, principal accounting officers and to any persons performing similar functions. The code of ethics is reviewed every year by the Board of Directors. In 2005, there were no waivers of its applicability. We have attached the code of ethics as an exhibit to this report and have made it available on our website at www.edap-tms.com.
  **Item 16C. Principal Accountant Fees and Services**
  The Audit and Non-Audit Services Pre-Approval Policy was approved by our Audit Committee on December 22, 2003 and reviewed on July 22, 2005. This requires all services which are to be performed by our external auditors to be pre-approved. This may be in the form of a general pre-approval or as pre-approval on a case-by-case basis. All services to be performed by the external auditors were subjected to the above policy and approved in advance. The Audit Committee has been regularly informed of the services and the fees to be paid. No services which are classified as prohibited services by the U.S. Securities and Exchange Commission under the 2003 Rules were commissioned after May 6, 2003. Our external auditors Ernst & Young Audit (E&Y) billed the following services related to our 2005 financial year:
 
 **Nature
                of the Fees**
            
            
            **2004**
              **(in
                €)**
            **2005**
              **(in
                €)**Audit
                fees
            
            
            143,265
            136,020Audit-related
                fees
            
            
            8,010
            97,305Tax
                fees
            
            
            -
            -All
                other fees
            
            
            -
            -**Total**
            
            
            **151,275**
            **233,325**
 
 ***Audit
      Fees***
  The
      following services were billed under the category ‘‘audit services’’: audit of
      financial statements and services performed in relation to legal obligations,
      including the formulation of audit opinions and reports, domestic and
      international legal audits and support in the preparation and auditing of the
      documents to be filed. Audit services also included the auditing of information
      systems and processes and tests, which serve to promote understanding and
      reliability of the systems and internal corporate controls, as well as advice
      on
      issues of billing, accounting and reporting.
  
 ***Audit-Related
      Fees***
  Audit-related
      services mainly consisted of services, which are normally performed by the
      external auditor in connection with the auditing of the annual financial
      statements. Audit-related services also included advice on issues of accounting
      and reporting which were not classified as audit services, support with the
      interpretation and implementation of new accounting and reporting standards,
      auditing of employee benefit plans and support with the implementation of
      corporate control requirements for reporting.
  ***Tax
      Fees***
  Tax services consisted of services relating to issues of domestic and international taxation (adherence to tax law, tax planning and tax consulting). Furthermore, services were commissioned for the review of tax returns, assistance with tax audits, as well as assistance relating to tax law. No tax services were rendered during the 2005 fiscal year.
  ***All
      Other Fees***
  Other
      services mainly consisted of routine and administrative follow-up of patents
      and
      brand names. All these services were unrelated to the audits of our financial
      statements.
 60
 **Item
      16D. Exemptions from the Listing Standards for Audit
      Committees**
 
 Not
      applicable.
 
 **Item
      16E. Purchases of Equity Securities by the Issuer and Affiliated
      Purchasers**
 
 In
      2005,
      neither the Company nor affiliated purchasers made purchases of equity
      securities of the Company registered pursuant to Section 12 of the Exchange
      Act.
  
 61
 **PART
      III**
  **Item
      17. Financial Statements.**
  See
      Item
      18, "Financial Statements."
  **Item
      18. Financial Statements**
  The
      financial statements listed in the Index to Financial Statements are filed
      as a
      part of this Annual Report.
  **Item
      19. Exhibits**
  The
      exhibits listed in the Index to Exhibits are filed or incorporated by reference
      as a part of this Annual Report.
  
  62
 **INDEX
      TO EXHIBITS**
 
 Pursuant
      to the rules and regulations of the Securities and Exchange Commission, the
      Company has filed certain agreements as exhibits to this annual report on Form
      20-F. These agreements may contain representations and warranties by the
      parties. These representations and warranties have been made solely for the
      benefit of the other party or parties to such agreements and (i) may be intended
      not as statements of fact, but rather as a way of allocating the risk to one
      of
      the parties to such agreements if those statements turn out to be inaccurate;
      (ii) may have been qualified by disclosures that were made to such other party
      or parties and that either have been reflected in the Company’s filings or are
      not required to be disclosed in those filings; (iii) may apply materiality
      standards different from what may be viewed as material to investors; and (iv)
      were made only as of the date of such agreements or such other
      date(s) as may be specified in such agreements and are subject to more recent
      developments. Accordingly, these representations and warranties may not describe
      the Company’s actual state of affairs at the date hereof.
  **Exhibit
      Description**
  **Number:**
  1.1
            By-laws
                (*statuts*)
                of EDAP TMS S.A. as amended as of June 21, 2005 (together with an
                English
            translation thereof).(1)
 4.1
            (a)
            Distribution
                Agreement, dated as of February 25, 2004, among the Company, HT Prostate
                Therapy
                Management Company, LLC, EDAP S.A. and Technomed Medical Systems,
                S.A.(2)
 (b)
            Amendment
                No. 1 to the Distribution Agreement dated December 23, 2004.(1)
 (c)
            Amendment
                No. 2 to the Distribution Agreement dated December 29,
                2005.(1)
 4.2
            (a)
            Commercial
                Leases dated October 1, 2002 and Amendment No. 1 dated October 15,
                2002,
                between
                Maison Antoine Baud and EDAP TMS S.A., EDAP S.A. and Technomed MedicalSystems
                S.A. (together with an English translation thereof).(1)
 (b)
            Appendix
                No. 2 to commercial leases between TMS S.A. and Maison Antoine Baud,
                signed on June 28, 2004.(1)
 8.1
            List
                of subsidiaries of EDAP TMS S.A. as of March 31,
                2006.(1)
 11.1
            Code
                of Ethics of the Company, approved by the Board of Directors on July
                22,
                2005.(1)
 12.1
            Certification
                of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.
 12.2
            Certification
                of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
                Act of 2002.
 13.1
            Certification
                of Chief Executive Officer and Chief Financial Officer pursuant to
                Section
                906 of the Sarbanes Oxley Act of
                2002.
 
 *(1)*
            *Previously
                filed**.*
 *(2)***
            *Previously
                filed with certain confidential portions omitted under Rule 24b-2
                under
                the Securities Exchange Act of
                1934.*
 
 
 63
  **SIGNATURES**
  The
      registrant hereby certifies that it meets all of the requirements for filing
      on
      Form 20-F and that it has duly caused and authorized the undersigned to sign
      this annual report on its behalf.
   EDAP
      TMS
      S.A.
  
 Dated:
      August 22, 2006
 *Hugues
      de Bantel*
 *Chief
      Executive Officer*
   
 Dated:
      August 22, 2006
 *Thierry
      Turbant*
 *Chief
      Financial Officer*
  
 64
 **INDEX
      TO FINANCIAL STATEMENTS**
 **Audited
                    Consolidated Financial Statements for EDAP TMS S.A. and Subsidiaries
                    for
                    the Years Ended December 31, 2005, 2004 and
                    2003**Report
                    of Independent Auditors
                F-1Consolidated
                    Balance Sheets as of December 31, 2005 and 2004
                F-3Consolidated
                    Statements of Income for the years ended December 31, 2005, 2004
                    and 2003
                F-4Consolidated
                    Statements of Comprehensive Income for the years ended December
                    31, 2005,
                    2004 and 2003
                F-5Consolidated
                    Statements of Shareholders’ Equity for the years ended December 31, 2005,
                    2004 and 2003
                F-6Consolidated
                    Statements of Cash Flows for the years ended December 31, 2005,
                    2004 and
                    2003
                F-7Notes
                    to Consolidated Financial Statements
                F-8
  65
 
 **Report
        of Independent Auditors**
 
  To
        the
        Board of Directors
 and
        Shareholders of EDAP TMS S.A.
  We
        have
        audited the accompanying consolidated balance sheets of EDAP TMS S.A. (the
        ‘‘Company’’) and its subsidiaries as of December 31, 2005 and 2004, and the
        related consolidated statements of income, comprehensive income, shareholders’
equity and cash flows for each of the three years in the period ended December
        31, 2005. These financial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these financial
        statements based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. We were not engaged to perform
        an
        audit of the Company’s internal control over financial reporting. An
        audit
        includes consideration of internal control over financial reporting as a
        basis
        for designing audit procedures that are appropriate in the circumstances,
        but
        not for the purpose of expressing an opinion on the effectiveness of the
        Company’s internal control over financial reporting. Accordingly, we express no
        such opinion. An audit also includes examining, on a test basis, evidence
        supporting the amounts and disclosures in the financial statements, assessing
        the accounting principles used and significant estimates made by management,
        as
        well as evaluating the overall financial statement presentation. We believe
        that
        our audits provide a reasonable basis for our opinion.
  In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the consolidated financial position of EDAP TMS S.A. and
        its
        subsidiaries at December 31, 2005 and 2004, and the consolidated results
        of
        their operations and their cash flows for each of the three years in the
        period
        ended December 31, 2005 in conformity with U.S. generally accepted accounting
        principles.
  ERNST
        & YOUNG Audit
  
 Represented
        by
 *Jean-Luc
        Desplat*
 June
        6,
        2006
 Lyon,
        France
 
 
 F-1
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **CONSOLIDATED
        BALANCE SHEETS**
 **As
        of December 31, 2005 and 2004**
 **(in
        thousands of euros unless otherwise noted)**
 
 **ASSETS**
              **Notes**
              **2005**
              **2004****Current
                  assets**Cash
                  and cash equivalents
              2
              8,317
              9,398Trade
                  accounts and notes receivable, net of allowance of €663 in 2005 and €705
                  in 2004
              3
              8,769
              7,722Other
                  receivables
              4
              850
              473Inventories
              5
              4,450
              3,939Deferred
                  tax assets
              21-3
              0
              77Prepaid
                  expenses
              
              391
              432Total
                  current assets
              
              22,777
              22,041Property
                  and equipment, net
              6
              3,130
              2,807Intangible
                  assets, net
              7
              86
              119Goodwill
              7
              2,412
              2,412Deposits
                  and other non-current assets
              
              391
              522Total
                  assets
              
              28,796
              27,901**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY****Current
                  liabilities**Trade
                  accounts and notes payable
              8
              4,305
              3,675Deferred
                  revenues, current portion
              9
              771
              843Social
                  security and other payroll withholdings taxes
              
              605
              513Employee
                  absences compensation
              
              438
              424Income
                  taxes payable
              
              19Accruals
                  for restructuring
              18
              
              136Other
                  accrued liabilities
              10
              2,305
              1,816Short-term
                  borrowings
              12
              899
              525Current
                  portion of capital lease obligations
              11
              385
              334Current
                  portion of long-term debt
              13
              147
              6Total
                  current liabilities
              
              9,874
              8,
                  272Deferred
                  revenues, long term portion
              9
              439
              442Capital
                  lease obligations, less current portion
              11
              474
              663Long-term
                  debt, less current portion
              13
              55
              —Deferred
                  income taxes
              21-3
              7
              0Other
                  long-term liabilities
              14
              575
              560Total
                  liabilities
              
              11,424
              9,937**Shareholders’
                  equity**Common
              stock, €0.13 par value, 9,318,875 shares authorized;8,362,821
                  shares issued; 7,782,731 and 7,781,731 shares outstanding at December
                  31,2005
              and 2004, respectively
              
              1,087
              1,087Additional
                  paid-in capital
              
              20,359
              19,999Retained
                  earnings
              
              597
              1,662Cumulative
                  other comprehensive loss
              
              (2,877)
              (2,987)Treasury
                  stock, at cost; 580,090 and 581,090 shares at December 31, 2005
                  and 2004,
                  respectively
              
              (1,794)
              (1,797)Total
                  shareholders’ equity
              15
              17,372
              17,964Total
                  liabilities and shareholders’ equity
              
              28,796
              27,901
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
 F-2
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **CONSOLIDATED
        STATEMENTS OF INCOME**
 **For
        the years ended December 31, 2005, 2004 and 2003**
 **(in
        thousands of euros unless otherwise noted)**
 
 **Notes**
              **2005**
              **2004**
              **2003**Sales
                  of medical devices
              
              10,242
              11,922
              8,512Sales
                  of disposables, RPPs, leases, spare parts and services
              
              10,710
              10,207
              9,518Total
                  sales
              16
              20,952
              22,129
              18,030Warrants
                  granted
              
              (235)
              (174)
              -Total
                  net sales
              16
              20,717
              21,955
              18,030Other
                  revenues
              17
              93
              208
              443Total
                  revenues
              
              20,810
              22,163
              18,473Cost
                  of sales
              
              (12,313)
              (13,676)
              (13,094)Gross
                  profit
              
              8,497
              8,487
              5,379Research
                  and development expenses
              
              (1,784)
              (1,523)
              (3,069)Selling
                  and marketing expenses
              
              (3,758)
              (3,402)
              (4,228)General
                  and administrative expenses
              
              (4,278)
              (4,074)
              (4,106)Non
                  recurring operating expenses
              18
              -
              (318)
              (2,097)Loss
                  from operations
              
              (1,323)
              (830)
              (8,121)Interest
                  income, net
              19
              135
              71
              177Foreign
                  currency exchange gain (loss), net
              
              218
              (38)
              (928)Other
                  income (expense), net
              20
              9
              (74)
              (218)Loss
                  before taxes
              
              (961)
              (871)
              (9,090)Income
                  tax (expense) benefit
              21
              (104)
              (278)
              114Net
                  loss
              
              (1,065)
              (1,149)
              (8,976)Basic
                  loss per share
              1-18
              (0.14)
              (0.15)
              (1.15)Weighted
                  average shares outstanding used in basiccalculation
              1-18
              7,782,731
              7,781,731
              7,781,731Diluted
                  loss per share
              1-18
              (0.14)
              (0.15)
              (1.15)Weighted
                  average shares outstanding used indiluted
                  calculation
              1-18
              8,373,574
              8,074,210
              7,817,303
  
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
 
 F-3
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME**
 **For
        the years ended December 31, 2005, 2004 and 2003**
 **(in
        thousands of euros unless otherwise noted)**
 
 
 
 **2005**
              **2004**
              **2003**Net
                  loss
              (1,065)
              (1,149)
              (8,976)Other
                  comprehensive loss:Foreign
                  currency translation adjustments
              110
              (36)
              (547)Comprehensive
                  loss, net of tax
              (955)
              (1,185)
              (9,523)
 
 
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
 
 F-4
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY**
 **For
        the years ended December 31, 2005, 2004 and 2003**
 **(in
        thousands of euros unless otherwise noted)**
  
 **Number
                  of**
                **Shares**
              **Common**
                **Stock**
              **Additional**
                **paid-in**
                **Capital**
              **Retained**
                **Earnings**
              **Cumulative**
                **Other**
                **Comprehensive**
                **Income**
                **(loss)**
              **Treasury**
                **Stock**
              **Total**Balance
                  as of January 1, 2003
              7,781,731
              1,087
              19,811
              11,787
              (2,513)
              (1,797)
              28,375Net
                  loss
              
              
              
              (8,976)
              
              
              (8,976)Translation
                  adjustment
              
              
              
              
              (547)
              
              (547)Change
                  in unrealized gain/loss oninvestments
                  available for sale
              
              
              
              
              109
              
              109Balance
                  as of December 31, 2003
              7,781,731
              1,087
              19,811
              2,811
              (2,951)
              (1,797)
              18,961
 Net
                  loss
              
              
              
              (1,149)
              
              
              (1,149)Translation
                  adjustment
              
              
              
              
              (36)
              
              (36)Warrants
                  and stock options granted
              
              
              188
              
              
              
              188Balance
                  as of December 31, 2004
              7,781,731
              1,087
              19,999
              1,662
              (2,987)
              (1,797)
              17,964Net
                  loss
              
              
              
              (1,065)
              
              
              (1,065)Translation
                  adjustment
              
              
              
              
              110
              
              110Warrants
                  and stock options granted
              1,000
              
              360
              
              
              3
              363Balance
                  as of December 31, 2005
              7,782,731
              1,087
              20,359
              597
              (2,877)
              (1,794)
              17,372
 
 
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
 
 F-5
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **For
        the years ended December 31, 2005, 2004 and 2003**
 **(in
        thousands of euros unless otherwise noted)**
  **2005**
              **2004**
              **2003****Cash
                  flows from operating activities**Net
                  loss
              (1,065)
              (1,149)
              (8,976)Adjustments
                  to reconcile net loss to net cash provided by (used in) operating
                  activities:Depreciation
                  and amortization
              1,202
              1,049
              983Non-cash
                compensation (1)
              360
              188
              —Change
                  in allowances for doubtful accounts & slow-moving
                  inventories
              128
              (834)
              (147)Change
                  in long-term provisions
              67
              (94)
              46Deferred
                  tax expense/(benefit)
              84
              255
              (226)Net
                  loss (gain) on sale of assets
              (21)
              (389)
              (9)Net
                  loss (gain) on sale of investments available for sale
              —
              —
              123Increase/Decrease
                  in operating assets and liabilities:Decrease/(Increase)
                  in trade accounts and notes and other receivables
              (1,473)
              20
              3,076Decrease/(Increase)
                  in inventories
              (681)
              2,341
              1,110Decrease/(Increase)
                  in prepaid expenses
              41
              (9)
              (36)(Decrease)/Increase
                  in trade accounts and notes payable
              632
              (439)
              (1,025)(Decrease)/Increase
                  in accrued expenses, other current liabilities
              441
              (1,884)
              1,432**Net
                  cash (used in) provided by operating activities**
              (285)
              (945)
              (3,649)**Cash
                  flows from investing activities**Acquisitions
                  of property and equipment
              (372)
              (247)
              (400)Acquisitions
                  of intangible assets
              (24)
              (18)
              (27)Capitalized
                  assets produced by the Company
              (1,042)
              (750)
              (780)Net
                  proceeds from sale of assets
              113
              722
              10Net
                  proceeds from sale of leased back assets
              239
              342
              250Proceeds
                  from sale of investments available for sale
              —
              —
              55Increase
                  in deposits and guarantees
              (21)
              (108)
              —Reimbursement
                  of deposits and guarantees
              48
              75
              350**Net
                  cash (used in) provided by investing activities**
              (1,059)
              16
              (542)**Cash
                  flow from financing activities**Proceeds
                  from long term borrowings
              288
              —
              —Repayment
                  of long term borrowings
              (93)
              (77)
              (370)Repayment
                  of obligations under capital leases
              (378)
              (316)
              (77)Increase/(decrease)
                  in bank overdrafts and short-term borrowings
              371
              310
              (222)**Net
                  cash used in financing activities**
              188
              (83)
              (669)Net
                  effect of exchange rate changes on cash and cash equivalents
              75
              (19)
              (466)**Net
                  increase/(decrease) in cash and cash equivalents**
              (1,081)
              (1,031)
              (5,326)Cash
                  and cash equivalents at beginning of year
              9,398
              10,429
              15,755**Cash
                  and cash equivalents at end of year**
              8,317
              9,398
              10,429
  (1)
        Certain prior years amounts have been reclassified to conform the current
        year's
        presentation.
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
 F-6
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **1—SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES**
  ***1-1
        Nature of operations***
  EDAP
        TMS
        S.A. and its subsidiaries (‘‘the Company’’) are engaged in the development,
        production, marketing and distribution of a portfolio of minimally-invasive
        medical devices for the treatment of urological diseases. The Company currently
        produces devices for treating stones of the urinary tract, benign prostatic
        hyperplasia and localized prostate cancer. Net sales consist primarily of
        direct
        sales to hospitals and clinics in France and Europe, export sales to third-party
        distributors and agents, and export sales through subsidiaries based in Italy
        and Asia.
  The
        Company purchases the majority of the components used in its products from
        a
        number of suppliers but for some components, relies on a single source. Delay
        would be caused if the supply of these components or other components was
        interrupted and these delays could be extended in certain situations where a
        component substitution may require regulatory approval. Failure to obtain
        adequate supplies of these components in a timely manner could have a material
        adverse effect on the Company’s business, financial position and results of
        operation.
  ***1-2
        Management estimates***
  The
        preparation of financial statements in conformity with U.S. generally accepted
        accounting principles ( ‘‘ US
        GAAP ’’ )
        requires management to make estimates and assumptions that affect the reported
        amounts of assets and liabilities and disclosure of contingent assets and
        liabilities at the date of the financial statements and the reported amounts
        of
        revenues and expenses during the reporting period. Actual results could differ
        from those estimates.
  ***1-3
        Consolidation***
  The
        accompanying consolidated financial statements include the accounts of EDAP
        TMS
        S.A. and all its domestic and foreign owned subsidiaries, which include
        Technomed Medical Systems S.A. (‘‘TMS S.A.’’), EDAP Technomed Inc., Edap
        Technomed Sdn Bhd, Edap Technomed Italia S.R.L, EDAP Technomed Co. Ltd.
        (formerly Nippon Euro Edap Technomed KK) and EDAP S.A. Edap Technomed Sdn
        Bhd
        was incorporated in early 1997. Edap Technomed Co. Ltd. was created in late
        1996. EDAP S.A. was incorporated in May 2000. All intercompany transactions
        and
        balances are eliminated in consolidation.
  ***1-4
        Revenue recognition***
  For
        medical device sales with no significant remaining vendor obligation, payments
        contingent upon customer financing, acceptance criteria that can be subjectively
        interpreted by the customer, or tied to the use of the device, revenue is
        recognized when evidence of an arrangement exists, title to the device passes
        (depending on terms, either upon shipment or delivery), and the customer
        has the
        intent and ability to pay in accordance with contract payment terms that
        are
        fixed or determinable. For sales in which payment is contingent upon customer
        financing, acceptance criteria can be subjectively interpreted by the customer,
        or payment depends on use of the device, revenue is recognized when the
        contingency is resolved. The Company provides training and usually provides
        a
        one-year warranty upon installation. The Company accrues for the estimated
        training and warranty costs at the time of sale.
  Revenues
        related to disposables and spare parts are recognized when goods are delivered.
        Maintenance contracts rarely exceed one year and are recognized on a linear
        basis. Revenues related to the leasing of devices are recognized on a linear
        basis. Billings or cash receipts in advance of services due under maintenance
        contracts and leases are recorded as deferred revenue.
  Revenues
        related to the sale of Ablatherm treatments invoiced on a
‘‘Revenue-Per-Procedure’’ (‘‘RPP’’) basis are recognized when the treatment
        procedure has been completed.
  F-7
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  ***1-5
        Shipping and handling costs***
  The
        Company recognizes revenue from the shipping and handling of its products
        as a
        component of revenue. Shipping and handling costs are recorded as a component
        of
        cost of sales.
  ***1-6
        Cash equivalents***
  Cash
        equivalents are cash investments which are highly liquid and have initial
        maturities of 90 days or less.
  ***1-7
        Accounts Receivables***
  Accounts
        receivables are stated at cost net of allowances for doubtful accounts. The
        Company makes judgements as to its ability to collect outstanding receivables
        and provides allowances for the portion of receivables when collection becomes
        doubtful. Provision is made based upon a specific review of all significant
        outstanding invoices. These estimates are based on our bad debt write-off
        experience, analysis of credit information, specific identification of probable
        bad debt based on our collection efforts, aging of accounts receivables and
        other known factors.
  ***1-8
        Inventories***
  Inventories
        are valued at the lower of manufacturing cost, which is principally comprised
        of
        components and labor costs, or market (net realizable value). Cost is determined
        on a first-in, first-out basis for components and spare parts and by specific
        identification for finished goods (medical devices). The Company establishes
        reserves for inventory estimated to be obsolete, unmarketable or slow moving,
        first based on a detailed comparison between quantity in inventory and
        historical consumption and then based on case-by-case analysis of the difference
        between the cost of inventory and the related estimated market
        value.
  ***1-9
        Property and equipment***
  Property
        and equipment is stated at historical cost. Depreciation and amortization
        of
        property and equipment are calculated using the straight-line method over
        the
        estimated useful life of the related assets, as follows:
  Leasehold
                  improvements
              10
                years or lease term if shorterEquipment
              3-10
                yearsFurniture,
                  fixtures, fittings and other
              2-10
                years
  Equipment
        includes industrial equipment and research equipment that has alternative
        future
        uses. Equipment
        also includes devices that are manufactured by the Company and leased to
        customers through operating leases related to Revenue-Per-Procedure transactions
        and devices subject to sale and lease-back transactions. This equipment is
        depreciated over a period of five years.
  ***1-10
        Long-lived assets***
  The
        Company reviews the carrying value of its long-lived assets, including fixed
        assets and intangible assets, for impairment whenever events or changes in
        circumstances indicate that the carrying amount of such assets may not be
        fully
        recoverable. Recoverability of long-lived assets is assessed by a comparison
        of
        the carrying amount of the assets (or the Group of assets, including the
        asset
        in question, that represents the lowest level of separately-identifiable
        cash
        flows) to the total estimated undiscounted cash flows expected to be generated
        by the asset or group of assets. If the future net undiscounted cash flows
        is
        less than the carrying amount of the asset or group of assets, the asset
        or
        group of assets is considered impaired and an expense is recognized equal
        to the
        amount required to reduce the carrying amount of the asset or group of assets
        to
        its then fair value. Fair value is determined by discounting the cash flows
        expected to be generated by the assets, when the quoted market prices are
        not
        available for the long-lived assets. Estimated future cash flows are based
        on
        assumptions and are subject to risk and uncertainty.
  F-8
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  ***1-11
        Goodwill and intangible assets***
  Goodwill
        represents the excess of purchase price over the fair value of identifiable
        net
        assets of businesses acquired. Goodwill is not amortized but instead tested
        annually for impairment or more frequently when events or change in
        circumstances indicate that the assets might be impaired by comparing the
        carrying value to the fair value of the reporting units to which it is assigned.
  Intangible
        assets consist primarily of purchased patents relating to lithotripters,
        purchased licenses, a purchased tradename and a purchased trademark. The
        basis
        for valuation of these assets is their historical acquisition cost. Amortization
        of intangible assets is calculated by the straight-line method over the shorter
        of the contractual or estimated useful life of the assets, as
        follows:
  Patents
              5
                yearsLicenses
              5
                  yearsTradename
                and trademark
              7
                  years
  ***1-12*** ***Treasury
            Stocks***
  Treasury
        Stocks purchases are accounted for at cost. The sale of treasury stocks is
        accounted for using the first in first out method. Gains on the sale or
        retirement of treasury stocks are accounted for as additional paid-in capital
        whereas losses on the sale or retirement of treasury stock are recorded as
        additional paid-in capital to the extent that previous net gains from sale
        or
        retirement of treasury stocks are included therein, otherwise the losses
        shall
        be recorded to accumulated benefit (deficit) account. Gains or losses from
        the
        sale or retirement of treasury stock do not affect reported results of
        operations.
  ***1-13
        Warranty expenses***
  The
        Company generally provides customers with a warranty for each product sold
        and
        accrues warranty expense at time of sale based upon historical claims
        experience. Actual warranty costs incurred are charged against the accrual
        when
        paid and are classified in cost of sales in the statement of income. Warranty
        expense amounted to €517 thousand, €558 thousand and €690 thousand for the years
        ended December 31, 2005, 2004 and 2003, respectively.
  ***1-14
        Income taxes***
  The
        Company accounts for income taxes in accordance with SFAS No. 109, ‘‘Accounting
        for Income Taxes’’ Under SFAS No. 109, deferred tax assets and liabilities are
        determined based on differences between the financial reporting and tax basis
        of
        assets and liabilities and are measured by applying enacted tax rates and
        laws
        to taxable years in which such differences are expected to reverse. A valuation
        allowance is established if, based on the weight of available evidence, it
        is
        more likely than not that some portion, or all of the deferred tax assets,
        will
        not be realized. In accordance with SFAS No. 109, no provision has been made
        for
        income or withholding taxes on undistributed earnings of foreign subsidiaries,
        such undistributed earnings being permanently reinvested.
  ***1-15
        Research and development costs***
  Research
        and development costs are recorded as an expense in the period in which they
        are
        incurred.
  The
        French government provides tax credits to companies for annual increased
        spending for innovative research and development. Income tax benefits correspond
        to these French research tax credits, which are credited against income taxes
        payable in each of the four years after being incurred or, if not utilized,
        are
        recoverable in cash. As of December 31, 2005, Edap had total research tax
        credits receivable of €64 thousand.
  F-9
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  ***1-16
        Advertising costs***
  Advertising
        costs are recorded as an expense in the period in which they are incurred.
        Advertising costs for the years ended December 31, 2005, 2004 and 2003 were
        not
        material to the consolidated financial statements.
  ***1-17
        Foreign currency translation and transactions***
  *Translation
        of the financial statements of consolidated companies*
  The
        translation rules applicable to the financial statements of foreign subsidiaries
        (EDAP Technomed Inc., Edap Technomed Sdn Bhd and Edap Technomed Co. Ltd.)
        are as
        follows:
  ·
              assets
                  and liabilities are translated at year-end exchange
                  rates;
  ·
              shareholders’
                  equity is translated at historical exchange rates (as of the date
                  of
                  contribution);
  ·
              statement
                  of income items are translated at average exchange rates for the
                  year;
                  and
  ·
              translation
                  gains and losses are recorded in a separate component of shareholders’
                  equity.
  *Foreign
        currencies transactions*
  Transactions
        involving foreign currencies are translated into the functional currency
        using
        the exchange rate prevailing at the time of the transactions. Receivables
        and
        payables denominated in foreign currencies are translated at year-end exchange
        rates. The resulting unrealized exchange gains and losses are carried to
        the
        statement of income.
  ***1-18
        Earnings per share***
 
 Basic
        earnings per share is computed by dividing income available to common
        shareholders by the weighted average number of shares of common stock
        outstanding for the period. Diluted earnings per share reflects potential
        dilution that could occur if securities or other contracts to issue common
        stock
        were exercised or converted into common stock or resulted in the issuance
        of
        common stock that then shared in the earnings of the Company. The dilutive
        effects of the Company’s common stock options and warrants is determined using
        the treasury stock method to measure the number of shares that are assumed
        to
        have been repurchased using the average market price during the period, which
        is
        converted from U.S. dollars at the average exchange rate for the
        period.
  ***1-19
        Derivative instruments***
  Financial
        Accounting Standards Board Statement No. 133 ‘‘Accounting for Derivative
        Instruments and Hedging Activities’’ (‘‘SFAS 133’’) requires the Company to
        recognize all of its derivative instruments as either assets or liabilities
        in
        the statement of financial position at fair value. The accounting for changes
        in
        the fair value (i.e., gains or losses) of a derivative instruments depends
        on
        whether it has been designated and qualifies as part of a hedging relationship
        and further, on the type of hedging relationship. For those derivative
        instruments that are designated and qualify as hedging instruments, the Company
        must classify the hedging instrument, based upon the exposure being hedged,
        as
        fair value hedge, cash flow hedge or a hedge of a net investment in a foreign
        operation.
  Given
        the
        Company’s minimal use of derivative Instruments, this standard does not have any
        significant effect on the Company’s financial position, results of operations or
        cash flows.
  F-10
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  ***1-20
        Employee stock option plans***
  At
        December 31, 2005, the Company had six stock-based employee compensation
        plans.
        The Company accounts for those plans under the recognition and measurement
        principles of APB Opinion No. 25, *Accounting
        for Stock Issued to Employees* (APB
        25), and related Interpretations. In accordance with APB 25, the Company
        recognizes stock-based employee compensation costs over the vesting period
        when
        the options granted under those plans have an exercise price lower than the
        market value of the underlying common stock on the date of grant. The following
        table illustrates the effect on net income and earnings per share if the
        Company
        had applied the fair value recognition provisions of FASB Statement No. 123, *Accounting
        for Stock-Based Compensation* ,
        to
        stock-based employee compensation.
  **Year
                  Ended December 31,****2005**
              **2004**
              **2003**Net
                  loss, as reported
              (1,065)
              (1,149)
              (8,976)Add:  
                  Stock-based employee compensation expense included inReported
                  net loss, net of related tax effects
              125
              14
              —Deduct:
                  Total stock-based employee compensation expenseDetermined
                  under fair value-based method for all awards, netof
                  related tax effects
              (231)
              (44)
              (56)Pro
                  forma net loss
              (1,171)
              (1,179)
              (9,032)Loss
                  per share:Basic,
                  as reported
              (0.14)
              (0.15)
              (1.15)Basic,
                  pro forma
              (0.15)
              (0.15)
              (1.16)Diluted,
                  as reported
              (0.14)
              (0.15)
              (1.15)Diluted,
                  pro forma
              (0.15)
              (0.15)
              (1.16)
  The
        fair
        value of each stock option granted during the year is estimated on the date
        of
        grant using the Black-Scholes option pricing model with the following
        assumptions:
  **Year
                  Ended December 31,****2005**
              
              **2004**Weighted-average
                  expected life (years)
              
              
              2
              
              
              3.08Expected
                  volatility rates
              
              
              75%
              
              
              85%Expected
                  dividend yield
              
              
              —
              
              
              —Risk-free
                  interest rate
              
              
              4.3%
              
              
              3.3%Weighted-average
                  exercise price (€)
              
              
              2.78
              
              
              2.19Weighted-average
                  fair value of options granted during the year (€)
              
              
              1.82
              
              
              0.51
  ***1-21
        New accounting pronouncements***
 
 In
        December 2004, the FASB issued Statement 153, Exchanges of Non-monetary Assets,
        an Amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions
        (FAS 153). This Statement eliminates the exception from fair value measurement
        for non-monetary exchanges of similar productive assets and replaces it with
        an
        exception for exchanges that do not have commercial substance. FAS 153, is
        effective for non-monetary asset exchanges occurring in fiscal periods beginning
        after June 15, 2005 and is not expected to have a material impact on the
        Company’s results of operations, cash flows or financial position.
  F-11
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  On
        June
        7, 2005, the FASB issued Statement No. 154, “Accounting Changes and Error
        Corrections”, a replacement of APB Opinion No. 20, “Accounting Changes”, and
        Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”.
        Statement 154 changes the requirements for the accounting for and reporting
        of a
        change in accounting principle. Previously, most voluntary changes in accounting
        principles were required recognition via a cumulative effect adjustment within
        net income of the period of the change. Statement 154 requires retrospective
        application to prior periods' financial statements, unless it is impracticable
        to determine either the period-specific effects or the cumulative effect
        of the
        change. Statement 154 is effective for accounting changes made in fiscal
        years
        beginning after December 15, 2005; however, the Statement does not change
        the
        transition provisions of any existing accounting pronouncements. We do not
        believe adoption of Statement 154 will have a material effect on our
        consolidated financial position, results of operations or cash
        flows.
 
 On
        December 16, 2004, the Financial Accounting Standards Board (FASB) issued
        FASB
        Statement No. 123 (revised 2004), *Share-Based
        Payment* ,
        which
        is a revision of FASB Statement No. 123, *Accounting
        for Stock-Based Compensation* .
        Statement 123(R) supersedes APB Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        and
        amends FASB Statement No. 95, *Statement
        of Cash Flows* .
        Generally, the approach in Statement 123(R) is similar to the approach described
        in Statement 123. However, Statement 123(R) *requires* all
        share-based payments to employees of the Company, including grants of employee
        stock options, to be recognized in the income statement based on their fair
        values. Pro forma disclosure is no longer an alternative.
  Statement
        123(R) must be adopted no later than the first fiscal year beginning after
        June
        15, 2005. Early adoption will be permitted in periods in which financial
        statements have not yet been issued. The Company will adopt Statement 123(R)
        as
        of January 1, 2006.
 
 Statement
        123(R) permits public companies to adopt its requirements using one of two
        methods:
 
 1.
              A
                  “modified prospective” method, in which compensation cost is recognized
                  beginning with the effective date (a) based on the requirements
                  of
                  Statement 123(R) for all share-based payments granted after the
                  effective
                  date and (b) based on the requirements of Statement 123 for all
                  awards
                  granted to employees prior to the effective date of Statement 123(R)
                  that
                  remain unvested on the effective
                  date.
 2.
              A
                  “modified retrospective” method, which includes the requirements of the
                  modified prospective method described above, but also permits entities
                  to
                  restate based on the amounts previously recognized under Statement
                  123 for
                  purposes of pro forma disclosures either (a) all prior periods
                  presented
                  or (b) prior interim periods of the year of
                  adoption.
 
 The
        Company plans to adopt Statement 123 using the modified prospective
        method.
  As
        permitted by Statement 123, the Company currently accounts for share-based
        payments to employees using Opinion 25’s intrinsic value method and, as such,
        generally recognizes no compensation cost for employee stock options.
        Accordingly, the adoption of Statement 123(R)’s fair value method will have a
        significant impact on the Company's result of operations, although it will
        have
        no impact on its overall financial position. The impact of the adoption of
        Statement 123(R) cannot be predicted at this time because it will depend
        on
        levels of share-based payments granted in the future. However, had the Company
        adopted Statement 123(R) in prior periods, the impact of that standard would
        have approximated the impact of Statement 123.
 
 F-12
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **2—CASH
        AND CASH EQUIVALENTS**
  Cash
        and
        cash equivalents are comprised of the following:
  **December
                  31,****2005**
              **2004**Cash
                  held at bank
              
              
              
              8,317
              5,659Money
                  market funds
              
              
              
              -
              3,739Total
              
              
              
              8,317
              9,398
 
 Gross
        realized gains on sales of these money market funds amounted to €101 thousand,
€117 thousand and €214 thousand, for the years ended December 31, 2005, 2004 and
        2003, respectively.
  **3—TRADE
        ACCOUNTS AND NOTES RECEIVABLE, NET**
  Trade
        accounts and notes receivable consist of the following:
  **December
                  31,****2005**
              **2004**Trade
                  accounts receivable
              
              
              
              9,281
              8,335Notes
                  receivable
              
              
              
              151
              92Less:
                  allowance for doubtful accounts
              
              
              
              (663)
              (705)Total
              
              
              
              8,769
              7,722
  Notes
        receivable usually represent commercial bills of exchange (drafts) with initial
        maturities of 90 days or less.
  **4—OTHER
        RECEIVABLES**
  Other
        receivables consist of the following:
  **December
                  31,****2005**
              **2004**Tax
                  loss carryback receivable from the French State
              
              
              
              -
              109Value-added
                  taxes receivable from the French State
              
              
              
              521
              210Research
                  and development tax credit receivable from the French State
              
              64
              -Other
                  receivables from the French State
              
              
              
              31
              16Others
              
              
              
              234
              138Total
              
              
              
              850
              473
  Research
        and development tax credits can be used to offset income taxes due during
        the
        three years following the year in which the credits were recorded. Any balance
        of receivable at the end of this three-year period will be reimbursed by
        the
        French State.
  F-13
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **5—INVENTORIES**
 
 Inventories
        consist of the following:
  **December
                  31,****2005**
              **2004**Components,
                  spare parts
              
              
              
              3,759
              3,491Work-in-progress
              
              
              
              369
              326Finished
                  goods
              
              
              
              1,196
              826Total
                  gross inventories
              
              
              
              5,324
              4,643Less:
                  provision for slow-moving inventory
              
              
              
              (874)
              (704)Total
              
              
              
              4,450
              3,939
  The
        provision for slow moving inventory essentially concerns the components and
        spare parts. The allowance for slow moving inventory, which is classified
        as a
        cost of sales, amounted to €386 thousand, €252 thousand and €569 thousand for
        the years ended December 31, 2005, 2004 and 2003, respectively.
  **6—PROPERTY
        AND EQUIPMENT, NET**
 
 Property
        and equipment consist of the following:
  **December
                  31,****2005**
              **2004**Equipment
              
              
              
              5,852
              4,647Furniture,
                  fixture, and fittings and other
              
              
              
              2,280
              2,180Total
                  gross value
              
              
              
              8,132
              6,827Less:
                  accumulated depreciation and amortization
              
              
              
              (5,002)
              (4,020)Total
              
              
              
              3,130
              2,807
 
 Depreciation
        and amortization expense related to property and equipment amounted to €1,145
        thousand, €934 thousand and €867 thousand for the years ended December 31, 2005,
        2004 and 2003, respectively.
  Capitalized
        costs on assets held under capital leases of €1,297 thousand and €1,058 thousand
        are included in property and equipment at December 31, 2005 and 2004,
        respectively. Accumulated amortization of these assets leased to third parties
        was €550 thousand and €283 thousand, at December 31, 2005 and 2004,
        respectively. Amortization expense on assets held under capital leases is
        included in total amortization expense and amounted to €267 thousand, €217
        thousand and €66 thousand for the years ended December 31, 2005, 2004 and 2003,
        respectively.
 
 F-14
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **7—GOODWILL
        AND INTANGIBLE ASSETS**
  As
        discussed in Note 1-11, the Company adopted SFAS 142, ‘‘Goodwill and Other
        Intangible Assets’’, on January 1, 2002. SFAS 142 requires that goodwill and
        other intangible assets that have indefinite lives not be amortized but instead
        be tested at least annually for impairment, or more frequently when events
        or
        change in circumstances indicate that the asset might be impaired, by comparing
        the carrying value to the fair value of the reporting unit to which they
        are
        assigned. The Company considers its SFAS 131 operating segment — High Intensity
        Focused Ultrasound (HIFU) and Urology Devices and Services (UDS) — to be its
        reporting units for purposes of testing for impairment, as the components
        within
        each operating segment have similar economic characteristics and thus do
        not
        represent separate reporting units. Goodwill amounts to €1,767 thousand for the
        UDS division and to €645 thousand for the HIFU division, at December 31,
        2005.
  The
        Company completed the required annual impairment test in the fourth quarter
        of
        2005. To determine the fair value of the Company’s reporting units, the Company
        used the discounted cash flow approach for each of the two reportable units.
        The
        main assumptions used are the following: (i) a five-year business plan approved
        by management, (ii) a discount rate of 15%, (iii) a residual value based
        on a
        multiple of Profit Before Tax (PBT) specific to each segment. In both cases,
        the
        fair value of the reporting unit was in excess of the reporting unit's book
        value, which resulted in no goodwill impairment.
  Intangible
        assets consist of the following:
  **December
                  31,****2005**
              **2004**Licenses
              
              
              
              443
              419Tradename
                  and trademark
              
              
              
              585
              583Patents
              
              
              
              412
              412Organization
                  costs
              
              
              
              363
              363Total
                  gross value
              
              
              
              1,803
              1,777Less:
                  accumulated amortization
              
              
              
              (1,717)
              (1,658)Total
              
              
              
              86
              119
  Amortization
        expenses related to intangible assets amounted to €57 thousand, €71 thousand and
€77 thousand, for the years ended December 31, 2005, 2004 and 2003,
        respectively.
  For
        the
        two coming years, the annual estimated amortization expense for intangible
        assets will be approximately €60 thousand.
  **8—TRADE
        ACCOUNTS AND NOTES PAYABLE**
  Trade
        accounts and notes payable consist of the following:
  **December
                  31,****2005**
              **2004**Trade
                  accounts payable
              
              
              
              3,532
              2,913Notes
                  payable
              
              
              
              773
              762Total
              
              
              
              4,305
              3,675
 
 Trade
        accounts payable usually represent invoices with a due date of 90 days or
        less.
  Notes
        payable represent commercial bills of exchange (drafts) with initial maturities
        of 90 days or less.
 F-15
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **9—DEFERRED
        REVENUES**
  Deferred
        revenues consist of the following:
  **December
                  31,****2005**
              **2004**Deferred
                  revenues on maintenance contracts
              
              
              
              375
              370Deferred
                  revenue on sale of devices
              
              
              
              645
              676Deferral
                  of the gain on sale-lease-back
                Transactions
              
              
              
              189
              239Total
              
              
              
              1,210
              1,285Less
                  long term portion
              
              
              
              439
              442Current
                  portion
              
              
              
              771
              843
  **10—OTHER
        ACCRUED LIABILITIES**
 
 Other
        accrued liabilities consist of the following:
  **December
                  31,****2005**
              **2004**Provision
                  for warranty costs
              
              
              
              
              700
              660Value
                  added tax payable
              
              
              
              
              543
              273Accruals
                  for social expenses
              
              
              
              
              348
              301Conditional
                  government subsidies
              
              
              
              
              398
              318Advance
                  to debtors
              
              
              
              
              29
              28Others
              
              
              
              
              287
              236Total
              
              
              
              
              2,305
              1,816
  Changes
        in the provision for warranty costs are as follows:
  **December
                  31,****2005**
              **2004**Beginning
                  of year
              
              
              
              660
              694Amount
                  used during the year (payments)
              
              
              
              (477)
              (592)New
                  warranty expenses
              
              
              
              517
              558End
                  of year
              
              
              
              700
              660
  F-16
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **11—LEASE
        OBLIGATIONS**
  ***11-1
        Capital leases***
  The
        Company leases certain of its equipment under capital leases. At December
        31,
        2005, this equipment consists of medical devices for an amount of €699 thousand
        and vehicles for an amount of €160 thousand. Future minimum lease payments under
        capital leases for the years ending December 31, are as follows:
  **December
                  31, 2005**2006
              
              
              
              4172007
              
              
              
              3022008
              
              
              
              1512009
              
              
              
              61Total
                  minimum lease payments
              
              
              
              931Less:
                  amount representing interest
              
              
              
              (72)Present
                  value of minimum lease payments
              
              
              859Less:
                  current portion
              
              
              
              (385)Long-term
                  portion
              
              
              
              474
  Interest
        paid under capital lease obligations was €28 thousand, €19 thousand, and €4
        thousand for the years ended December 31, 2005, 2004, and 2003, respectively.
  ***11-2
        Operating leases***
 
 On
        June
        30, 2004, following the reduction in headcount implemented early in 2004,
        the
        Company reduced its rented office space and cancelled two lease contracts.
        As of
        December 31, 2005, operating leases having initial or remaining non-cancelable
        lease terms greater than one year consists of one lease for the facilities
        of
        TMS S.A. in Vaulx-en-Velin, France and several leases for facilities in Japan.
        The French lease contract has a lease term of nine years expiring at the
        option
        of the lessee at the end of a first four-year period, then a two-year and
        finally a three-year period, through 2011 (i.e., in 2006, 2008 or 2011).
 
 Future
        minimum lease payments for these operating leases consist of the following
        amounts, unless leases are otherwise cancelled by the lessees:
  **TMS**
              **Japan**2006
              
              
              241
              1872007
              
              
              -
              472008
              
              
              
              -
              6Total
              
              
              
              241
              241
  Total
        rent expense under operating leases amounted to €703 thousand, €899 thousand and
€918 thousand for the years ended December 31, 2005, 2004 and 2003,
        respectively. These total rent expenses include the above mentioned operating
        leases, but also lease expenses related to subsidiaries office rentals, office
        equipment and car rentals.
 
 F-17
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **12—SHORT-TERM
        BORROWINGS**
  As
        of
        December 31, 2005, short-term borrowings consist of a loan in euros amounting
        to
€155 thousand due to mature on December 20, 2006 at an annual variable rate
        based on Eonia +0.5% and €744 thousand of account receivables factored and for
        which the Company is supporting the risk of uncollectibility. As of December
        31,
        2004, short-term borrowings consist of loans in Japanese yen amounting to
        JPY 20
        million (€143 thousand), JPY 30 million (€215 thousand) and JPY 23 million (€167
        thousand) due to mature on March 30, May 30 and June 28, 2005, respectively,
        at
        an annual rate of 2.2%.
  **13—LONG-TERM
        DEBT**
 
 Long-term
        debt consists of the following:
  **December
                  31,****2005**
              **2004**Japanese
                  yen term loan
              
              
              
              202
              -Other
                  financial debts
              
              
              
              -
              6Total
              
              
              
              202
              6Less
                  current portion
              
              
              
              (147)
              (6)Total
                  long-term portion
              
              
              
              55
              0
 
 Long-term
        debt at December 31, 2005 matures as follows:
  2006
              
              
              
              
              1472007
              
              
              
              
              55Total
              
              
              
              
              202
  As
        of
        December 31, 2005, long-term debt consist of loan in Japanese yen amounting
        to
        JPY 28.1 million (€202 thousand) with a 2.4% interest rate, due to mature on May
        11, 2007.
  **14—OTHER
        LONG-TERM LIABILITIES**
 
 Other
        long-term liabilities consist of the following:
  **December
                  31,****2005**
              **2004**Provision
                  for retirement indemnities
              
              
              
              469
              379Other
              
              
              
              106
              181Total
              
              
              
              575
              560
  F-18
 **EDAP
          TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  Pension,
        post-retirement, and post-employment benefits for most of the Company’s
        employees are sponsored by European governments. The Company’s liability with
        respect to these plans is mostly limited to specific payroll deductions.
        In
        addition to government-sponsored plans, certain subsidiaries within the Company
        have defined benefit retirement indemnity plans in place. The provision for
        retirement indemnities at December 31, 2005 represents an accrual for lump-sum
        retirement indemnity payments to be paid at the time an employee retires.
        The
        largest part of this liability relates to employees in France. This provision
        has been calculated taking into account the estimated payment at retirement
        (discounted to the current date), turnover and salary increases. Calculations
        have been performed by an actuary consultant.
  The
        actuarial assumptions as of year-end are as follows:
  **Pension
                  Benefits - France****2005**
              **2004**
              **2003**Weighted
                  average assumptions:Discount
                  rate
              
              
              4.00%
              4.50%
              4.50%Salary
                  increase
              
              
              2.00%
              2.00%
              2.50%Retirement
                  age
              
              
              65
              65
              63Average
                  retirement remaining service period
              
              
              27
              26
              25
  **Pension
                  Benefits - Japan****2005**
              **2004**
              **2003**Weighted
                  average assumptions:Discount
                  rate
              
              
              1.50%
              1.50%
              1.50%Salary
                  increase
              
              
              1.80%
              1.80%
              1.80%
  The
        reconciliation between projected benefit obligations and the accumulated
        benefit
        obligations is as follows as of December 31, 2005 (in Keuros):
  **France**
              **Japan**Projected
                  benefit obligation
              
              229
              262Normal
                  cost
              
              23
              36Accumulated
                  benefit obligation
              
              163
              225Accrued
                  pension cost
              
              202
              132
  F-19
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  Detailed
        reconciliation of pension cost components (in Keuros) during fiscal year
        ending
        December 31, 2005:
 
 **France**
              **2005**
              **2004****Change
                  in benefit obligations**Benefit
                  obligations at beginning of year
              132
              155Service
                  cost
              17
              19Interest
                  cost
              6
              7Plan
                  amendments
              -
              -(gain)
                  / loss
              74
              (49)Benefits
                  paids
              -
              -**Benefit
                  obligations at end of year**
              **229**
              **132****Change
                  in plan assets**Fair
                  value of plan assets at beginning of year
              -
              -Employer
                  contribution
              -
              -Return
                  on plan assets
              -
              -Benefits
                  paid
              -
              -**Fair
                  value of plan assets at end of year**Unrecognized
                  actuarial (gain) loss
              27
              (49)Unrecognized
                  prior service cost
              -
              -**Accrued
                  pension cost**
              **202**
              **181**
  
 **JAPAN**
              **2005**
              **2004****Change
                  in benefit obligations**Benefit
                  obligations at beginning of year
              217
              140Service
                  cost
              35
              -Interest
                  cost
              3
              -Plan
                  amendments
              -
              -Termination
                  benefits
              -
              25(gain)
                  / loss
              7
              136Benefits
                  paids
              -
              (84)**Benefit
                  obligations at end of year**
              **262**
              **217****Change
                  in plan assets**Fair
                  value of plan assets at beginning of year
              -
              -Employer
                  contribution
              -
              -Return
                  on plan assets
              -
              -Benefits
                  paid
              -
              -**Fair
                  value of plan assets at end of year**Unrecognized
                  actuarial (gain) loss
              130
              136Unrecognized
                  prior service cost
              0
              0**Accrued
                  pension cost**
              **132**
              **81**
 
 F-20
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **15—SHAREHOLDERS’
        EQUITY**
  ***15-1
        Common stock***
  As
        of
        December 31, 2005, EDAP TMS S.A.’s common stock consisted of 9,318,875
        authorized shares with a par value of €0.13 each, of which 8,362,821 were issued
        and fully paid and 7,782,731 were outstanding.
  ***15-2
        Preemptive subscription rights***
  Shareholders
        have preemptive rights to subscribe on a *pro
        rata* basis
        for additional shares issued by the Company for cash. Shareholders may waive
        such preemptive subscription rights at an extraordinary general meeting of
        shareholders under certain circumstances. Preemptive subscription rights,
        if not
        previously waived, are transferable during the subscription period relating
        to a
        particular offer of shares.
  ***15-3
        Dividend rights***
  Dividends
        may be distributed from the statutory retained earnings, subject to the
        requirements of French law and the Company’s by-laws. The Company has not
        distributed any dividends since its inception. Distributable statutory retained
        earnings amounted to €22,906 thousand and €23,967 thousand at December 31, 2005
        and 2004, respectively. Dividend distributions, if any, will be made in euros.
        The Company has no plans to distribute dividends in the foreseeable
        future.
  ***15-4
        Treasury stock***
  As
        of
        December 31, 2005, the 580,090 shares of treasury stock consisted of (i)
        177,750
        shares acquired on December 2, 1996 for €707 thousand, (ii) 352,800 shares
        acquired between August and December 1998 for €1,016 thousand, and (iii) 49,540
        shares acquired in June and July 2001 for €150 thousand. All 580,090 shares of
        treasury stock have been acquired to cover outstanding stock options (see
        Note
        15-5).
  ***15-5
        Stock-option plans***
  As
        of
        December 31, 2005, EDAP TMS S.A. sponsored six stock purchase and subscription
        option plans:
  On
        December 2, 1996, the shareholders of EDAP TMS S.A. authorized the Board
        of
        Directors to grant up to 177,750 options to purchase pre-existing Shares
        and
        156,625 options to subscribe for newly issued Shares at a fixed exercise
        price
        of €6.97 per share. The authorization to grant the options expired at the end
        of
        the five-year period beginning December 2, 1996. On February 7 and March
        3,
        1997, the Board of Directors granted the 177,750 options to buy pre-existing
        Shares and 134,750 of the options to subscribe for newly issued Shares to
        10
        employees. 25% of the options were exercisable as of the date of grant and
        the
        right to exercise the remaining 75% of the options vested at the rate of
        25%
        each January 1 following the date of grant. The options expired five years
        after
        the date of grant. On October 29, 1998, the Board of Directors amended the
        terms
        of 124,125 of the options to conform to the terms of the 1998 option plan
        discussed below.
  On
        May
        14, 1998, the shareholders of EDAP TMS S.A. authorized the Board of Directors
        to
        grant up to 713,425 options to purchase pre-existing Shares at a fixed exercise
        price to be set by the Board of Directors at the time of grant provided that
        the
        exercise price may not be less than the average stock market price of the
        Shares
        over the 20 business days preceding the date of grant. The shareholders also
        authorized the Board of Directors to cause EDAP TMS S.A. to repurchase up
        to
        535,675 of its own Shares (treasury stock) to cover the options granted under
        the new plan. The authorization to grant the options expired one year after
        the
        completion of the share repurchase program, which was completed in December
        1998. Up to 279,000 of the 713,425 options were reserved for modifications
        to
        the terms of pre-existing options.
  F-21
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  On
        October 29, 1998, the Board of Directors granted 327,000 options to French
        employees meeting certain tenure criteria. The exercise price was fixed at
€3.81
        per Share for 152,000 options and €1.83 per Share for 175,000 options; both
        exercise prices were not less than the average stock market price of the
        Shares
        over the 20 business days preceding the date of grant and also exceeded the
        market price of the Shares on the date of grant. The options were to begin
        vesting two years after the date of grant and were fully vested as of January
        1,
        2002 (i.e., four years and two months after the date of grant). Shares acquired
        pursuant to the options cannot be sold prior to five years from the date
        of
        grant. The options expire on December 31, 2008 (i.e., ten years and two months
        after the date of grant) or when employment with the Company ceases, whichever
        occurs earlier. As noted above, on October 29, 1998, the Board of Directors
        amended the terms of 124,125 of the options granted in 1997 to conform to
        the
        terms of the 1998 stock option plan.
  Conforming
        to the 1998 stock option plan, on January 4, 1999, the Board of Directors
        granted 24,000 options to French employees meeting certain tenure criteria.
        The
        exercise price was fixed at €3.81 per Share for 11,000 options and €1.83 per
        Share for 13,000 options. The options were to begin vesting two years after
        the
        date of grant and were fully vested as of January 1, 2002 (i.e., three years
        after the date of grant). Shares acquired pursuant to the options cannot
        be sold
        prior to five years from the date of grant. The options expire on December
        31,
        2008 (i.e., ten years after the date of grant) or when employment with the
        Company ceases, whichever occurs earlier. On March 15, 1999, the Board of
        Directors granted 60,000 options to certain employees of the Company; 40,000
        options were granted with an exercise price of €3.81 and 20,000 options at an
        exercise price of €2.74. Exercise prices corresponding to options granted on
        these two dates were not less than the average stock market price of the
        Shares
        over the 20 business days preceding the date of grant. Among these options
        granted on March 15, 1999: 50,000 were to begin vesting two years after the
        date
        of grant and were fully vested as of June 1, 2002 (i.e. three years and two
        and
        half months after the date of grant); Shares acquired pursuant to the options
        cannot be sold prior to five years from the date of grant; 40,000 options
        expire
        on March 31, 2009 (i.e. ten years after the date of grant) and 10,000 options
        expire on December 31, 2009 (i.e. ten years and nine months after the date
        of
        grant) or when employment with the Company ceases, whichever occurs earlier.
        For
        the remaining 10,000 options, granted on March 15, 1999, 50% of the options
        are
        exercisable as of the date of grant and the right to exercise the remaining
        50%
        of the options vested at the rate of 25% each January 1 following the date
        of
        grant. The options expired on December 31, 2003 (i.e., four years and nine
        months after the date of grant).
 
 On
        September 27, 1999, the Board of Directors decided to grant 2,425 options
        to
        certain employees of the Company at an exercise price of €1.83, which is not
        less than the average stock market price of the Shares over the 20 business
        days
        preceding the date of grant. The options were to begin vesting two years
        after
        the date of grant and were fully vested as of January 1, 2003 (i.e., three
        years
        and three months after the date of grant). Shares acquired pursuant to the
        options cannot be sold prior to five years from the date of grant. The options
        expire on December 31, 2009 (i.e., ten years and three months after the date
        of
        grant) or when employment with the Company ceases, whichever occurs
        earlier.
  On
        June
        12, 2001, the shareholders of EDAP TMS S.A. authorized the Board of Directors
        to
        grant up to 300,000 options to purchase pre-existing Shares and 80,000 options
        to subscribe to new Shares, at a fixed exercise price to be set by the
        Supervisory Board. Conforming this plan, on September 25, 2001, the Board
        of
        Directors granted 307,115 options to purchase Shares (among which 33,540
        options
        were related to the plan authorized by the shareholders on June 24, 1999)
        and
        granted 80,000 options to subscribe to new Shares to employees of the Company
        meeting certain tenure criteria. The exercise price was fixed at U.S.$1.92
        (€2.08) per share. Options were to begin vesting one year after the date of
        grant and will be fully vested as of September 25, 2005. Shares acquired
        pursuant to the options cannot be sold prior to four years from the date
        of
        grant. The options expire on September 25, 2011 (i.e., ten years after the
        date
        of grant) or when employment with the Company ceases, whichever occurs
        earlier.
 
 F-22
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  On
        March
        21, 2002, a Member of the Management Board exercised his option to subscribe
        to
        47,421 new Shares (out of the 86,885 options to subscribe to new Shares
        authorized on June 24, 1999) at an exercise price of U.S.$1.561 (€1.76). The
        capital of the Company was thus increased from €1,081 thousand to €1,087
        thousand and the number of Shares issued increased from 8,315,400 to
        8,362,821.
  On
        June
        18, 2002, conforming the June 12, 2001 stock option plan, the Board of Directors
        granted the remaining 26,425 options to French employees meeting certain
        tenure
        criteria. The exercise price was fixed at U.S.$1.92 (€2.02) per share. Options
        were to begin vesting one year after the date of grant and will be fully
        vested
        as of June 18, 2006 (i.e., four years after the date of grant). Shares acquired
        pursuant to the options cannot be sold prior to four years from the date
        of
        grant. The options expire on June 18, 2012 (i.e., ten years after the date
        of
        grant) or when employment with the Company ceases, whichever occurs earlier.
        All
        Shares that may purchased through the exercise of stock options are currently
        held as treasury stock.
  On
        January 29, 2004, the shareholders of EDAP TMS S.A. authorized the Board
        of
        Directors to grant up to 240,000 options to purchase pre-existing Shares
        and
        100,000 options to subscribe to new Shares, to employees of the Company meeting
        certain tenure criteria, at a fixed exercise price to be set by the Board
        of
        Directors.
  Conforming
        this stock option plan, on February 24, 2004, the Board of Directors granted
        225,000 options to purchase pre-existing Shares to certain employees of EDAP
        TMS. The exercise price was fixed at €2.60 per share. Options were to begin
        vesting one year after the date of grant and will be fully vested as of February
        24, 2008 (i.e., four years after the date of grant). Shares acquired pursuant
        to
        the options cannot be sold prior to four years from the date of grant. The
        options expire on February 24, 2014 (i.e., ten years after the date of grant)
        or
        when employment with the Company ceases, whichever occurs earlier. All Shares
        that may be purchased through the exercise of stock options are currently
        held
        as treasury stock.
  On
        February 24, 2004, the Board of Directors granted 100,000 options to subscribe
        to new Shares to the Chief Executive Officer of EDAP S.A. and TMS S.A. The
        exercise price was fixed at €1.28 per share. All options were to begin vesting
        one year after the date of grant. Shares acquired pursuant to the options
        cannot
        be sold prior to four years from the date of grant. The options expire on
        February 24, 2014 (i.e., ten years after the date of grant) or when employment
        with the Company ceases, whichever occurs earlier.
  On
        January 28, 2005, the Board of Directors granted 15,000 options to purchase
        pre-existing Shares to certain employees of EDAP TMS. The exercise price
        was
        fixed at €2.78 per share. 3,750 options were to begin vesting on December 31,
        2005 and 11,250 on December 31, 2006. The options expire on January 28, 2015
        (i.e., ten years after the date of grant) or when employment with the Company
        ceases, whichever occurs earlier. All Shares that may be purchased through
        the
        exercise of stock options are currently held as treasury stock.
  On
        February 17, 2005, the shareholders of EDAP TMS S.A. authorized the Board
        of
        Directors to grant up to 625,000 free shares to be issued to certain employees
        of the Company, subject to compliance with the conditions and performance
        criteria fixed by the Board of Directors. On March 30, 2005, 500,900 rights
        to
        subscribe to free shares were granted to by the Board of Directors, based
        on
        certain performances and criteria to be met for years 2005 and 2006. However,
        given the shift of business model, during 2005, from the sales of Ablatherm
        equipment towards the sales of treatment procedures (RPPs), the Board of
        Directors decided to modify the conditions and performance criteria to be
        met by
        employees, to reflect the new business model. Therefore, on January 6, 2006,
        the
        Board of Directors cancelled the Free Performance Share Plan approved on
        March
        30, 2005 and set up a new Plan with performance criteria based on the new
        RPP
        business model for years 2006 and 2007, in accordance with the Performance
        Stock
        plan approved by the shareholders. On January 6, 2006, 564.100 rights to
        subscribe to new shares were distributed, including new entrants. This plan
        will
        be accounted for in compliance with FASB 123-(R). See
        Item
        5, “Operating and Financial Review and Prospects—New Accounting
        Pronouncements.”
 
 F-23
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
 
 As
        of
        December 31, 2005, a summary of stock option activity to purchase or to
        subscribe to Shares under these plans is as follows:
  2005
              2004
              2003Options
              Weighted
                average
                exercise
                price
                (€)
              Options
              Weighted
                average
                exercise
                price
                (€)
              Options
              Weighted
                average
                exercise
                price
                (€)Outstanding
                  on January 1,
              580,262
              2.49
              391,262
              2.68
              654,341
              2.58Granted
              15,000
              2.78
              325,000
              2.19
              0Exercised
              (1,000)
              1.62
              0
              
              0Forfeited
              (1,000)
              3.81
              (136,000)
              2.34
              (263,079)
              2.43Expired
              -
              -
              -
              -
              -
              -Outstanding
                  on December 31,
              593,262
              2.50
              580,262
              2.49
              391,262
              2.68Exercisable
                  on December 31,
              409,652
              2.45
              219,547
              2.99
              272,442
              2.94Shares
                  purchase options available for grant on December 31
              0
              -
              0
              -
              0
              -
  The
        following table summarizes information about options to purchase Shares already
        held by the Company as treasury Shares, or to subscribe to new Shares, at
        December 31, 2005:
  Outstanding
                  options
              Exercisable
                  optionsExercise
                  price (€)
              
              Options
              Weighted
                average
                remaining
                contractual
                life
              Weighted
                average
                exercise
                price
                (€)
              Options
              Weighted
                average
                exercise
                price
                (€)3.81
              
              116,625
              2.5
              3.81
              116,625
              3.812.78
              
              15,000
              9.1
              2.78
              3,750
              2.782.60
              
              225,000
              8.2
              2.60
              56,250
              2.602.08(1)
              
              112,000
              6.0
              2.08
              112,000
              2.082.02(2)
              
              14,425
              6.5
              2.02
              10,815
              2.021.83
              
              10,212
              3.5
              1.83
              10,212
              1.831.28
              
              100,000
              8.2
              1.28
              100,000
              1.281.28
                  to 3.81
              
              593,262
              6.3
              2.50
              409,652
              2.11
  (1)
              All
                  the 112,000 options were granted on September 25, 2001 with an
                  exercise
                  price expressed in U.S. dollars ($1.92) and converted here to euros
                  based
                  on the noon buying rate on September 25, 2001 ($1 = €
                  1.085).
 (2)
              All
                  the 14,425 options were granted on June 18, 2002 with an exercise
                  price
                  expressed in U.S. dollars ($1.92) and converted here to euros based
                  on the
                  noon buying rate on June 18, 2002 ($1 = €
                  1.0545).
  F-24
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  The
        Company applies Accounting Principles Board Opinion No. 25, ‘‘ *Accounting
        for Stock- Based Compensation* ’’
(APB
        25), and its related interpretations in accounting for its employee stock
        options. Under APB 25 and its related interpretations, the options granted
        or
        modified in 2002 and 2001 did not result in recording any compensation expense,
        additional compensation expense or reversal of compensation expense. Options
        granted in 2005 and 2004 generated a compensation expense amounting to €10
        thousand in 2005 and €14 thousand in 2004.
 ***15-6
          Warrants granted to certain employees***
  As
          of
          December 18, 2002, the shareholders of two of the Company’s wholly owned and
          fully consolidated subsidiaries, TMS S.A. and EDAP S.A., authorized the
          respective Boards of Directors to grant certain Senior Executive Officers
          warrants to subscribe to an aggregate of 604,538 new shares of TMS S.A.’s and
          EDAP S.A.’s common stock. The average exercise price of such warrants is
          equivalent to the higher of either (a) the share value of the capital of
          each
          company or (b) the net book value, each such amount to be calculated on
          the date
          of exercise. Following the resignation of the President of EDAP S.A. in
          November
          2003, outstanding warrants allow today's President of both divisions, to
          subscribe to an aggregate of 252,111 new shares of each of TMS S.A.’s and EDAP
          S.A.’s common stock. The total number of warrants granted, if exercised, would
          represent 3.5% and 2.5% of the respective share capital of TMS S.A. and
          EDAP
          S.A. after subscription. These warrants begin vesting three years after
          their
          date of grant.  These warrants to subscribe to shares expire on the earlier
          of December 18, 2007 or when employment with the Company ceases. According
          to
          APB25, a compensation charge has been booked for an amount of  €115
          thousand as at December 31, 2005, €0 as at December 31, 2004 and €0 as at
          December 31, 2003.
  **16—NET
        SALES**
 
 Net
        sales
        consist of the following:
 
 **2005**
              **2004**
              **2003**Medical
                  devices
              10,242
              11,922
              8,557Disposables
              1,956
              1,901
              1,850RPPs
              1,747
              1,422
              562Leases
              1,399
              1,564
              1,462Spare
                  parts & services
              5,608
              5,320
              5,599Total
                  sales
              20,952
              22,129
              18,030Warrants
                  granted
              (235)
              (174)Total
                  net sales
              20,717
              21,955
              18,030
  ***Warrants***
  On
        February 25, 2004, the Company entered into a distribution agreement with
        HealthTronics granting it, among other things, (i) the right to begin clinical
        trials in the U.S. with the Ablatherm, (ii) the right to seek PMA for the
        Ablatherm from the FDA and (iii) exclusive Ablatherm distribution rights
        in the
        United States, when and if a PMA is granted. Under the terms of the distribution
        agreement, the Company also agreed to grant HealthTronics 1 million warrants
        on
        January 28, 2005, each entitling HealthTronics to purchase a share of the
        Company at a price of U.S.$1.50 upon their vesting. The distribution agreement
        allows HealthTronics to exercise specified numbers of warrants as it meets
        various specified milestones set out in the distribution agreement, some
        of
        which relate to HealthTronics’s commitment to purchase a specified number of
        lithotripter units and others which relate to completion of various stages
        of
        the clinical trials and the regulatory process leading to the PMA for the
        Ablatherm.
 
 F-25
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  In
        accordance with EITF 96-18, the company accounts for the warrants issued
        to
        HealthTronics under the distribution agreement based upon the fair value
        of the
        warrants, measured at the date of milestone achievement, as there is no
        performance obligation from HealthTronics. The related amount, which is a
        non-cash charge, is then recorded as a reduction of revenue. On December
        29,
        2005, HealthTronics, through its subsidiary, and EDAP TMS entered into an
        amendment to the distribution agreement. HealthTronics wishes to focus its
        efforts on obtaining the PMA for Ablatherm and on developing the HIFU market
        potential on the US territory, and does not want to pursue the distribution
        of
        EDAP's ** lithotripters
        in the US, therefore the parties decided to amend the terms and conditions
        of
        the contract. No more warrants are directly linked to the purchase of additional
        lithotripters and future revenues from the sales of lithotripters will not
        be
        impacted by warrants.
  As
        of
        December 31, 2005, the non-cash charge, amounting to €235 thousand, was
        calculated at the fair value of the warrants using the Black & Scholes
        pricing model based on the following assumptions:
  Risk-Free
        Interest Rate (%): 4.30,
 Strike
        (U.S.$): 1.50,
 Volatility
        (%): 75,
 Share
        price (U.S.$): 3.53,
 Dividend
        (%): 0.
  The
        Back
& Scholes valuation was made at the date the performance target was
        achieved, e.g. November 11, 2005.
  This
        non-cash charge of €235 thousand recorded for 2005 related to a series of
        warrants is linked to HealthTronics's purchase of two lithotripters and one
        Ablatherm in 2005, in accordance with the terms of the Amendment to the
        distribution agreement dated December 29, 2005.
  **17—OTHER
        REVENUES**
  Other
        revenues consists of the following:
  **2005**
              **2004**
              **2003**Royalties
              47
              163
              124Grants
                  and others
              46
              45
              319Total
              93
              208
              443
  TMS
        S.A.
        and EDAP S.A. received grants of €6 thousand in 2005, €25 thousand in 2004 and
€75 thousand in 2003, from the French Ministry of Research and Development.
  **18—OPERATING
        EXPENSES**
  Operating
        expenses include bad debt expenses amounting to €274 thousand, €204 thousand,
€41 thousand for the years ended December 31, 2005, 2004, and 2003. These
        operating expenses also include allowance for slow moving inventory which
        is
        classified as cost of goods sold and amounts to €386
        thousand, €252 thousand and €569 thousand for the years ended December 31, 2005,
        2004 and 2003 respectively.
  In
        2004,
        following the Company’s decision in 2003 to reduce headcount in both divisions
        (discussed below), the Company recorded non-recurring expenses of €0.3 million,
        including €0.2 million of employee termination expenses. In 2003, after an
        extensive review of the businesses, with consideration of the current economic
        situation and  to maintain the competitiveness of the Company, EDAP
        TMS
        S.A. implemented a reduction in headcount in its two French operational
        divisions.
  F-26
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  The
        reductions represented a decrease of 22% of the French-based workforce. The
        Company recorded nonrecurring expenses of €2.1 million, including €1.8 million
        of employee termination expenses and €0.2 million of legal and various expenses
        linked to this reorganization. The balance of the provision as of December
        31,
        2003 amounted to €2.0 million. This provision was used over year 2004, for an
        amount of €1.7 million of employee termination expenses and €0.2 million of
        legal and various expenses linked to this reorganization. The balance of
        the
        provision as of December 31, 2004 amounted to €0.1 million and was used in 2005.
  **19—INTEREST
        INCOME, NET**
 
 Interest
        (expense) income, net consists of the following:
  **2005**
              **2004**
              **2003**Interest
                  income
              187
              146
              284Interest
                  expense
              (52)
              (75)
              (107)Total
              135
              71
              177
  **20—OTHER
        INCOME (EXPENSE), NET**
  Other
        income (expense), consists of the following:
  **2005**
              **2004**
              **2003**Net
                  loss on sale of Urologix common stock
              --
              --
              (123)Other
                  income (expense), net
              9
              (74)
              (95)Total
              9
              (74)
              (218)
  **21—INCOME
        TAXES**
  ***21-1
        Loss before income taxes***
  Loss
        before income taxes is comprised of the following:
  **2005**
              **2004**
              **2003**France
              (755)
              (361)
              (8,509)Other
                  countries
              (206)
              (510)
              (581)Total
              (961)
              (871)
              (9,090)
  
 F-27
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  ***21-2
        Income tax (expense)/ benefit***
  Income
        tax (expense)/benefit consists of the following:
  **2005**
              **2004**
              **2003***Current
                  income tax expense:*France
              38
              6
              (22)Other
                  countries
              (57)
              (29)
              (78)Sub-total
                  current income tax expense
              (19)
              (23)
              (100)*Deferred
                  income tax (expense) benefit:*France
              (90)
              (255)
              149Other
                  countries
              5
              -
              65*Sub-total
                  deferred income tax (expense) benefit*
              *(85)*
              *(255)*
              *(214)*Total
              (104)
              (278)
              114
  ***21-3
        Deferred income taxes:***
  Deferred
        income taxes reflect the impact of temporary differences between the amounts
        of
        assets and liabilities reported for financial reporting purposes and such
        amounts as measured in accordance with tax laws. The tax effect of temporary
        differences which give rise to significant deferred tax assets (liabilities)
        are
        as follows:
  **December
                  31,****2005**
              **2004**Elimination
                  of intercompany profit in inventory
              
              212
              199Other
                  items
              
              431
              413Net
                  operating loss carryforwards
              
              5,941
              5,707Total
                  deferred tax assets
              
              6,584
              6,319Capital
                  leases treated as operating leases for tax
              
              (9)
              (4)Exit
                  tax
              
              (161)
              (161)Other
                  items
              
              (198)
              (88)Total
                  deferred tax liabilities
              
              (368)
              (253)Net
                  deferred tax assets
              
              6,216
              6,066Valuation
                  allowance for deferred tax assets
              
              (6,223)
              (5,989)Deferred
                  tax assets (liabilities), net of allowance
              
              (7)
              77
 
 Net
        operating loss carryforwards of €2,109 thousand, €1,801 thousand, €1,910
        thousand, €263 thousand, €325 thousand and €10,987 thousand as of December 31,
        2005 are available at EDAP Technomed Inc., TMS S.A., EDAP S.A., Edap Technomed
        Italia S.R.L.,Edap Technomed Co Ltd Japan and EDAP TMS S.A., respectively.
        These
        net operating losses generate deferred tax assets of €5,941 thousand.
        Realization of these assets is contingent on future taxable earnings in the
        applicable tax jurisdictions. As of December 31, 2005, €5,711 thousand out of
        these €5,941 thousand net operating loss carry-forwards have no expiration date.
        The remaining tax loss carry-forwards expire in years 2006 through 2012.
        In
        accordance with SFAS No. 109, a valuation allowance is recorded as realization
        of those amounts are not considered probable.
  Deferred
        taxes have not been provided on the undistributed earnings of domestic
        subsidiaries as these earnings, with the exception of the earnings of TMS
        S.A.,
        which benefited from the tax exemption, can be distributed tax-free to EDAP
        TMS
        S.A. The tax exempted earnings of TMS S.A. would normally be taxable if
        distributed to EDAP TMS S.A. via dividends. However, no taxes will be due
        if the
        Company first incorporates these earnings into statutory capital and then
        makes
        a distribution via a statutory capital reduction (redemption). As the Company
        intends on implementing this tax planning opportunity in the event a
        distribution were to be made, no deferred taxes have been provided on these
        earnings.
  F-28
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
 
 In
        2005,
        the Company recorded a corporate income tax benefit of €0.1 million, principally
        reflecting income tax with respect to the results of various subsidiaries.
        In
        2004, the Company recorded a corporate income tax benefit of €0.3 million in
        2004, principally reflecting income tax with respect to the results of various
        subsidiaries and an exceptional exit tax in France of 2.5% (which was enacted
        in
        compensation for the phase-out of capital gains tax on participation shares).
        In
        2004, the
        Company has booked a deferred tax liability amounting to €161 thousand related
        to this exit tax, which will be paid in two equal installments in 2006 and
        2007,
        pursuant to the Amended Finance Law of 2004, dated December 30, 2004.
  ***21-4
        Effective tax rate***
  A
        reconciliation of differences between the statutory French income tax rate
        and
        the Company’s effective tax rate is as follows:
  **2005**
              **2004**
              **2003**French
                  statutory rate
              33.8%
              34.3%
              34.3%Research
                  and development tax credit
              7.6%Income
                  of foreign subsidiaries taxed at different tax rates
              1.5%
              1.9%
              0.1%Effect
                  of net operating loss carryforwards and valuationAllowances
              (22.5%)
              (31.4%)
              (23.5%)Non
                  deductible entertainment expenses
              (4.9%)
              (2.6%)
              (0.3%)Other
              (27.7%)
              (34.1%)
              (9.3%)Effective
                  tax rate
              (12.2%)
              (31.9%)
              (1.3%)
  **22—EARNINGS
        (LOSS) PER SHARE**
 
 A
        reconciliation of the numerators and denominators of the basic and diluted
        EPS
        calculations for the years ended December 31, 2005, 2004 and 2003 is as
        follows:
 
 **For
                  the year ended Dec. 31, 2005**
              **For
                  the year ended Dec. 31, 2004**
              **For
                  the year ended Dec. 31, 2003****Loss
                  in euro (Numerator)**
              **Shares
                  (Denominator)**
              **Per-Share
                  Amount)**
              **Loss
                  in euro (Numerator)**
              **Shares
                  (Denominator)**
              **Per-Share
                  Amount**
              **Loss
                  in euro (Numerator)**
              **Shares
                  (Denominator)**
              **Per-Share
                  Amount****Basic
                  EPS**Loss
                  available tocommon
                  Shareholders
              (1,065,375)
              7,782,731
              (0.14)
              (1,148,792)
              7,781,731
              (0.15)
              (8,975,846)
              7,781,731
              (1.15)Effect
                  of dilutive securities:Stock
                  options
              
              590,843
              
              
              292,479
              
              
              35,572**Diluted
                  EPS**Loss
                  available tocommon
                  shareholders,Including
                  assumedConversions
              (1,065,375)
              8,373,574
              (0.14)
              (1,148,792)
              8,074,210
              (0.15)
              (8,975,846)
              7,817,303
              (1.15)
  
 F-29
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **23—COMMITMENTS
        AND CONTINGENCIES**
  ***23-1
        Commitments***
  The
        Company currently has commitments regarding its operating leases as described
        in
        Note 11- 2.
  ***23-2
        Litigation***
  To
        date,
        the Company is a party to two product liability actions in the United States
        by
        patients claiming to have been injured in the course of a Prostatron procedure.
        The Company has agreed to retain liability for these two cases following
        the
        sale of the Prostatron business in October 2000. However, in one of the two
        cases, the Company believes that it may be able to claim indemnification
        from
        Urologix. The Company believes that the patients’ claims against the Company are
        without merit. While it is not possible to predict the outcome of legal actions
        brought against the Company, the Company believes that the liability resulting
        from the pending claims and suits would not have a material adverse effect
        on
        the results of its operations, cash flows, or financial position as of December
        31, 2005, and for the year then ended.
  **24—FAIR
        VALUE OF FINANCIAL INSTRUMENTS**
  The
        following disclosure of the estimated fair value of financial instruments
        was
        made in accordance with the requirements of SFAS No. 107 ‘‘Disclosure about fair
        value of financial instruments.’’ The estimated fair value amounts have been
        determined by the Company using available market information and appropriate
        valuation methodologies. The estimates of fair values of the Company’s financial
        instruments are compared below to the recorded amounts at December 31, 2005
        and
        2004.
  **December
                  31,**
              **December
                  31,****2005**
                **Recorded**
                **Value**
              **2005**
                **Estimated**
                **Fair
                  Value**
              **2004**
                **Recorded**
                **Value**
              **2004**
                **Estimated**
                **Fair
                  Value**Assets:Cash
                  and cash equivalents
              8,317
              8,317
              9,398
              9,398Trade
                  accounts and notes receivable, net
              8,025
              8,025
              7,722
              7,722Liabilities:Short-term
                  borrowings
              155
              155
              525
              525Trade
                  accounts payable
              3.532
              3,532
              2,913
              2,913Notes
                  payable
              773
              773
              762
              762Long-term
                  debt
              55
              53
              6
              6
  The
        recorded amount of cash and cash equivalents, investments available for sale,
        trade accounts and notes receivable (drafts), short-term borrowings, and
        trade
        accounts and notes payable (drafts) are a reasonable estimate of their fair
        value due to the short-term maturities of these instruments.
  Fair
        value of long-term debt is estimated based on borrowing rates currently
        available to the Company for loans with similar terms and
        maturities.
 
 F-30
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **25—CONCENTRATION
        OF CREDIT RISK**
  Financial
        instruments, which potentially subject the Company to concentrations of credit
        risk, consist principally of cash and cash equivalents and trade accounts
        and
        notes receivable from customers, primarily located in France, Japan and the
        United States. The Company maintains cash deposits with major banks. Management
        periodically assesses the financial condition of these institutions and believes
        that any possible credit risk is limited.
  The
        Company has procedures in effect to monitor the creditworthiness of its
        customers. The Company obtains bank guarantees for first-time or infrequent
        customers, and in certain cases obtains insurance against the risk of a payment
        default by the customer. The Company reviewed individual customer balances
        considering current and historical loss experience and general economic
        conditions in determining the allowance for doubtful accounts receivable
        of €0.7
        million as of December 31, 2005 and 2004. Ultimate losses may vary from the
        current estimates, and any adjustments are reported in earnings in the periods
        in which they become known.
  In
        2005
        and 2004, the Company did not generate significant revenue with a single
        customer.
 
 **26—FOREIGN
        CURRENCY TRANSACTIONS**
 
 The
        Company generates a significant percentage of its revenues, and of its operating
        expenses, in currencies other than euro. The Company’s operating profitability
        could be materially adversely affected by large fluctuations in the rate
        of
        exchange between the euro and such other currencies. The Company engages
        in
        foreign exchange hedging activities when it deems necessary, but there can
        be no
        assurance that hedging activities will be offset by the impact of movements
        in
        exchange rates on the Company’s results of operations. As of December 31, 2005,
        the Company had three options to hedge against Japanese yen for a total nominal
        amount of JPY45 million (i.e. €331 thousand), an amount of JPY15 million each,
        expiring on March, June and September 2006 respectively and two options to
        hedge
        against US$ for a total nominal amount of US$200 thousand (i.e. €160 thousand),
        an amount of US$100 thousand each, expiring on February and April 2006. The
        fair
        value of these derivatives was not material as of December 31,
        2005.
 
 **27—SEGMENT
        INFORMATION**
 
 In
        July
        of fiscal year 2002, the Company announced an organizational realignment
        that
        created two operating divisions within the Company. For reporting purposes,
        this
        organizational realignment created three reporting segments: the holding
        company, EDAP TMS S.A., the High Intensity Focused Ultrasound division and
        the
        Urological Devices and Services division. The following tables set forth
        the key
        income statement figures, by segment for fiscal years 2005, 2004 and 2003
        and
        the key balance sheet figures, by segment, for fiscal years 2005 and
        2004.
  The
        business in which the Company operates is the development and production
        of
        minimally invasive medical devices, primarily for the treatment of urological
        diseases. Substantially all revenues result from the sale of medical devices
        and
        their related license and royalty payments from third parties. The segments
        derive their revenues from this activity.
 
 F-31
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
 
 Segment
        operating profit or loss and segment assets are determined in accordance
        with
        the same policies as those described in the summary of significant accounting
        policies except that interest income and expense, current and deferred income
        taxes, and goodwill are not allocated to individual segments. A reconciliation
        of segment operating profit or loss to consolidated net loss is as
        follows:
  **2005**
              **2004**
              **2003**Segment
                  operating loss
              (1,323)
              (830)
              (8,121)Interest
                  income, net
              135
              71
              177Foreign
                  Currency exchange (losses) gains, net
              218
              (38)
              (928)Other
                  income, net
              9
              (74)
              (218)Income
                  tax (expense) credit
              (104)
              (278)
              114Consolidated
                  net loss
              (1,065)
              (1,149)
              (8,976)
  A
        summary
        of the Company’s operations by business unit is presented below for years ending
        December 31, 2005, 2004 and 2003:
 
 **HIFU
                  Division**
              **UDS
                  Division**
              **EDAP
                  TMS**
                **(Corporate)**
              **Consolidation**
              **Total**
                **consolidated****2005**External
                  sales of medical devices
              4,260
              5,982
              
              
              10,242External
                  sales of spares parts,Supplies
                  & services
              3,685
              7,025
              
              
              10,710Internal
                  segment revenues
              3
              3,185
              
              (3,188)Total
                  sales
              7,948
              16,192
              
              (3,188)
              20,952Warrants
                  granted
              (118)
              (117)
              
              
              (235)Total
                  net sales
              7,830
              16,075
              
              (3,188)
              20,717External
                  other revenues
              14
              79
              
              
              93Internal
                  other revenues
              105
              -
              
              (105)
              -Total
                  revenues
              7,949
              16,154
              
              (3,293)
              20,810Total
                  COS
              (3,998)
              (11,457)
              
              3,142
              (12,313)Gross
                  margin
              3,951
              4,697
              
              (151)
              8,497R&D
              (1,042)
              (742)
              
              
              (1,784)Selling
                  expenses
              (1,983)
              (1,775)
              
              
              (3,758)G&A
              (791)
              (1,937)
              (1,550)
              
              (4,278)Total
                  expenses
              (3,816)
              (4,454)
              (1,550)
              
              (9,820)Operating
                  income (loss)
              135
              243
              (1,550)
              (151)
              (1,323)Total
                  Assets
              9,177
              22,163
              5,620
              (8,164)
              28,796Capital
                  expenditures
              696
              645
              
              
              1,341Long-lived
                  assets
              2,172
              3,787
              59
              
              6,018Goodwill
              645
              1,767
              
              
              2,412
 
 F-32
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  
 **HIFU
                  Division**
              **UDS
                  Division**
              **EDAP
                  TMS**
                **(Corporate)**
              **Consolidation**
              **Total**
                **consolidated****2004**External
                  sales of medical devices
              3,733
              8,189
              
              
              11,922External
                  sales of spares parts,Supplies
                  & services
              2,915
              7,291
              
              
              10,206Internal
                  segment revenues
              287
              1,905
              
              (2,192)Total
                  sales
              6,935
              17,385
              
              (2,192)
              22,128Warrants
                  granted
              
              (174)
              
              
              (174)Total
                  net sales
              6,935
              17,211
              
              (2,192)
              21,954Other
                  revenues
              34
              174
              
              
              208Total
                  revenues
              6,969
              17,385
              
              (2,192)
              22,162Total
                  COS
              (3,749)
              (12,119)
              
              2,192
              (13,676)Gross
                  margin
              3,220
              5,266
              
              
              8,486R&D
              (817)
              (706)
              
              
              (1,523)Selling
                  expenses
              (1,275)
              (2,128)
              
              
              (3,403)G&A
              (659)
              (2,221)
              (1,193)
              
              (4,073)Non
                  recurring
              (82)
              (27)
              (208)
              
              (317)Total
                  expenses
              (2,833)
              (5,082)
              (1,401)
              
              (9,316)Operating
                  income (loss)
              387
              184
              (1,401)
              
              (830)Total
                  Assets
              7,162
              20,334
              6,645
              (6,256)
              27,885Capital
                  expenditures
              287
              844
              2
              
              1,133Long-lived
                  assets
              1,781
              4,048
              31
              
              5,860Goodwill
              645
              1,767
              
              
              2,412
 
 F-33
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
 
 
 **HIFU
                  Division**
              **UDS
                  Division**
              **EDAP
                  TMS**
                **(Corporate)**
              **Consolidation**
              **Total**
                **consolidated****2003**External
                  sales of medical devices
              1,148
              7,364
              
              
              8,512External
                  sales of spares parts,supplies
                  & services
              1,709
              7,809
              
              
              9,518Internal
                  segment revenues
              3
              1,967
              
              (1,970)
              —Other
                  revenues
              99
              342
              2
              
              443Total
                  revenues
              2,959
              17,482
              2
              (1,970)
              18,473Total
                  COS
              (2,056)
              (12,771)
              —
              1,733
              (13,094)Gross
                  margin
              903
              4,711
              —
              (237)
              5,379R&D
              (2,345)
              (725)
              
              
              (3,070)Selling
                  expenses
              (2,023)
              (2,205)
              
              
              (4,228)G&A
              (747)
              (2,005)
              (1,353)
              
              (4,105)Non
                  recurring
              (1,590)
              (463)
              (44)
              
              (2,097)Total
                  expenses
              (6,705)
              (5,398)
              (1,397)
              —
              13,500Operating
                  income (loss)
              (5,802)
              (687)
              (1,395)
              (237)
              (8,121)Total
                  Assets
              9,432
              21,050
              5,238
              (3,810)
              31,910Capital
                  expenditures
              635
              1,138
              25
              
              1,798Long-lived
                  assets
              1,951
              4,054
              35
              
              6,040Goodwill
              645
              1,767
              
              
              2,412
 
 F-34
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
 
  **28—VALUATION
        ACCOUNTS**
  **Allowance
                  for doubtful accounts**
              **Slow-moving
                  inventory**Restated
                  balance as of January 1, 2003
              862
              1,528Charges
                  to costs and expenses
              41
              569Deductions:
                  write-off provided in prior periods
              (377)
              (380)Restated
                  balance as of December 31, 2003
              526
              1,717Charges
                  to costs and expenses
              204
              252Deductions:
                  write-off provided in prior periods
              (25)
              (1,265)Restated
                  balance as of December 31, 2004
              705
              704Charges
                  to costs and expenses
              274
              386Deductions:
                  write-off provided in prior periods
              (316)
              (216)Restated
                  balance as of December 31, 2005
              663
              874
  **29—SUPPLEMENTAL
        DISCLOSURES OF CASH FLOW INFORMATION**
  Interest
        and income taxes paid are as follows:
  **2005**
              **2004**
              **2003**Income
                  taxes paid (refunds received)
              (66)
              (82)
              (560)Interest
                  paid
              7
              19
              21Interest
                  received
              119
              120
              223Non-cash
                  transactions:
              **2005**
              **2004**
              **2003**Capital
                  lease obligations incurred
              859
              998
              792
  **30—RELATED
        PARTY TRANSACTIONS**
 
 The
        General Manager of the Company's Korean branch "EDAP-TMS Korea" is also Chairman
        of a Korean company named Dae You.
 
 EDAP-TMS
        Korea subcontracts to Dae You the service contract maintenance of the Company
        medical devices installed in Korea for an amount of €136 thousand, €63 thousand
        and €33 thousand, for 2005, 2004 and 2003 respectively.
 
 Dae
        You
        is also acting as an agent to promote the Company's medical devices in South
        Korea, and receives commissions on sales.
 
 F-35
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
 
 
 Dae
        You
        also purchased medical devices from the Company and operates them in partnership
        with hospitals or clinics for an amount of €396 thousand, €401 thousand and €309
        thousand in 2005, 2004 and 2003 respectively.
 
 As
        of
        December, 31 2005, receivables amounted to €148 thousand and payables to €83
        thousand. As of December 31, 2004, there were no receivables nor payables,
        related to DAE YOU.
 
 The
        Company purchases certain technological elements to Siemens AG. Total purchases
        amounted to €547 thousand in 2005, €405 thousand in 2004 and €360 thousand in
        2003. As of December 31, 2005, payables due to Siemens AG amounted to €46
        thousand and as of December 31, 2004, payables due to Siemens AG amounted
        to €3
        thousand.
     F-36