As filed with the Securities and Exchange Commission on March 30, 2007






**SECURITIES AND EXCHANGE COMMISSION**


**Washington, D.C. 20549**




**FORM 20-F**


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




For the Fiscal Year Ended December 31, 2006




**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, 2006: **8,817,007 Ordinary Share**




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















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TABLE OF CONTENTS













PagePresentation of Financial and Other Information
      4Forward-looking Information
      4PART IItem 1Identity of Directors, Senior Management and Advisors
      5Item 2Offer Statistics and Expected Timetable
      5Item 3Key Information
      5Item 4Information on the Company
        12


Item 4AUnresolved Staff Comments
        24


Item 5Operating and Financial Review and Prospects
        24


Item 6Directors, Senior Management and Employees
        37


Item 7Major Shareholders and Related Party Transactions
        44


Item 8Financial Information
        45


Item 9The Offer and Listing
        46


Item 10Additional Information
        47


Item 11Quantitative and Qualitative Disclosures about Market Risk
        59


Item 12Description of Securities Other than Equity Securities
        60


PART II

Item 13Defaults, Dividend Arrearages and Delinquencies
        60


Item 14Material Modifications to the Rights of Security Holders and Use of Proceeds
        60


Item 15Controls and Procedures
        60


Item 16AAudit Committee Financial Expert
        60


Item 16BCode of Ethics
        60


Item 16CPrincipal Accounting Fees and Services
        60


Item 16DExemptions from the Listing Standards for Audit Committees
        61


Item 16EPurchases of Equity Securities by the Issuer and Affiliated Purchasers
        61


PART III

Item 17Financial Statements
        62


Item 18Financial Statements
        62


Item 19Exhibits
        62








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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 = 0.7882, 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, 2006. 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 the markets in which we operate;-
      the uncertainty of market acceptance for our HIFU devices;-
      the uncertainty of reimbursement status of procedures performed with our products;-
      the clinical status of 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.











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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, 2004, 2005 and 2006 and the income statement data for the years ended December 31, 2004, 2005 and 2006 set forth below have been derived from our Consolidated Financial Statements included in this annual report. The balance sheet data as of December 31, 2002 and 2003 and the income statement data for the year ended December 31, 2002 and 2003 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 or IFRS, nor have we done so.



Year Ended and at December 31,

In thousands of euro, except
per share data
        2002
        2003
        2004
        2005
        2006INCOME STATEMENT DATATotal revenues
        19,961
        18,473
        22,163
        20,810
        20,265Total net sales
        19,725
        18,030
        21,955
        20,717
        20,174Gross profit
        8,458
        5,379
        8,487
        8,497
        8,319Operating expenses
        (13,234)
        (13,500)
        (9,317)
        (9,820)
        (11,413)Loss from operations
        (4,776)
        (8,121)
        (830)
        (1,323)
        (3,094)Income (loss) before income taxes
        (3,873)
        (9,090)
        (871)
        (961)
        (3,375)Income tax (expense) benefit
        (167)
        114
        (278)
        (104)
        (56)Net income (loss)
        (4,040)
        (8,976)
        (1,149)
        (1,065)
        (3,431)Basic earnings (loss) per share
        (002)
        (1.15)
        (0.15)
        (0.14)
        (0.39)Dividends per share(1)
        
        
        
        
        Weighted average sharesoutstanding used in basic calculation
        7,771,467
        7,781,731
        7,781,731
        7,782,731
        8,817,007Weighted average sharesoutstanding used in diluted calculation
        7,833,514
        7,817,303
        8,074,210
        8,373,574
        9,557,533Diluted earnings (loss) per Share
        (002)
        (1.15)
        (0.15)
        (0.14)
        (0.39)BALANCE SHEET DATATotal current assets
        34,091
        25,870
        22,041
        22,777
        26,393Property and equipment, net
        1,985
        2,903
        2,807
        3,130
        3,211Total current liabilities
        9,880
        11,074
        8,272
        9,874
        10,926Total assets
        39,787
        31,910
        27,901
        28,796
        32,473Long-term debt, less current portion
        95
        7
        -
        55
        58Total shareholders equity
        28,375
        18,961
        17,964
        17,372
        19,300


(1)
        No dividends were paid with respect to fiscal years 2002 through 2005 and subject to approval of the annual shareholders meeting to be held in May 2007, the Company does not anticipate paying any dividend with respect to fiscal year 2006. See Item 8, Financial Information  Dividends and Dividend Policy.








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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
        
        
        2002
        
        
        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
        0.80
        0.842006
        
        
        0.84
        0.75
        0.80
        0.76


(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.





End of Month
        High
        Low
        Average
        
        
        2006October
        
        
        0.78
        0.80
        0.78
        0.79November
        
        
        0.75
        0.79
        0.75
        0.78December
        
        
        0.76
        0.76
        0.75
        0.762007January
        
        
        0.77
        0.77
        0.75
        0.77February
        
        
        0.76
        0.77
        0.75
        0.76March, through March 16, 2007
        
        
        0.75
        0.76
        0.75
        0.76




On March 16, 2007, the Noon Buying Rate was U.S.$1.00 = 0.75





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In addition to the other information contained in this annual report, the following risk factors should be carefully considered in evaluating us and our business. These statements are intended to highlight the material risk factors that may affect our business results.



RISK FACTORS

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

We depend on the success of 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 enrolling patients. In November 2006, HealthTronics informed us that they intended to discontinue Ablatherm FDA trials, at which time the trials were suspended. The parties are in the process of negotiating an agreement terminating the Distribution


 Agreement,
which we expect will be finalized in the coming weeks, whereby HealthTronics will transition the study to EDAP, among other things. This will allow us to resume the trials soon while we look for the necessary resources to fund the study ourselves. We cannot guarantee that we will be able to find the necessary resources to fund the study in the coming weeks, and if we are unable to find funding ourselves we will suspend the trials until we have found a sponsor to provide funding. Also, we cannot guarantee the successful completion of clinical trials nor can we 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. We may not have the necessary resources to pursue the
trials. 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 our 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





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authorities. We  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 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 2006, 2005 and 2004, moreover, our operating 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 2006 and 2005 operating 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 expected  continued expansion of the leasing of our products, or the continued 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 2006, we raised new equity funds via a $7.5 million Private Investment in Public Equity, aimed at financing our new marketing and sales campaign to promote and develop the Revenue-Per-Procedure business. Our future cash flow will be affected by the increased expenses in sales efforts as well as marketing and promotion tools, while there is no assurance that this will result in the
increase in the demand for our products and services.

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). In 2006, however, we had negative operating income in both of our operating divisions (HIFU division and UDS division), reflecting the clinical, marketing and sales efforts in the HIFU
division to develop HIFUs status as a standard of care, and the R&D and regulatory efforts in the UDS division to develop a new, high-range lithotripter. We cannot assure you that we will realize sufficient revenue to become profitable in the future. See Item 5, Operating and Financial Review and Prospects.



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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, 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.

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. In particular, we are currently going through the FDA approval process with our Ablatherm device. 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





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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.

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 and marketing of 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.



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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 the affected 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.

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 face 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 Canada and for the other markets in which we sell our products. Product liability insurance is expensive and there can be





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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 2006, approximately 79% of our selling, marketing and general and administrative expenses and approximately 91% of our research and development expenses were denominated in euro, while approximately 32% 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, 2006, we had no outstanding hedging instrument. 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.

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 (devices which use shockwaves to disintegrate urinary calculi) and produced the first piezo-electric





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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, or the Distribution Agreement, with a subsidiary of HealthTronics Surgical Services, Inc. ("HealthTronics"), whereby 1,000,000 warrants were allocated to HealthTronics. These warrants were to be exercised upon the completion of certain milestones linked to the grant of the Ablatherm PMA pre-market approval and certain minimum sales of lithotripters in the United States. 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.

On August 3, 2006, we closed a private placement of 961,676 ordinary shares in the form of American Depositary Shares, resulting in net proceeds of approximately $7.5 million. These funds are intended to fund additional marketing efforts to accelerate the adoption of Ablatherm-HIFU in key European markets.

On November 10, 2006, HealthTronics informed us that they intended to cease conducting clinical trials and pursuing the Ablatherm PMA approval. The parties are in the process of negotiating an agreement, or the Termination Agreement, which we expect will be finalized in the coming weeks.

To reflect our focus on operations in key European countries, we announced a succession plan on December 19, 2006. Under this plan, the current Chief Operating Officer, Marc Oczachowski, will be appointed Chief Executive Officer, replacing Hugues de Bantel, who will be appointed to the Board of Directors to assist mainly on U.S. market entry. This succession plan will be effective March 31, 2007.

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 aSociété Anonymeorganized 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, MA 01701, is our agent for service of process in the United States.

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





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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.

Our HIFU and UDS divisions operate in Europe, the Americas, and Eastern Asia and Rest of the world.   Total revenues for the HIFU division were  6.3 million,  7.5 million, and 6.8 million in Europe,  0.9 million, 0.3 million and no revenues for 2004 in the Americas, and 0.4 million, 0.1 million and 0.1 in Eastern Asia and the rest of the world, each for 2006, 2005, and 2004, respectively.   Total revenues for the UDS division were 4.8 millions, 4.3 millions, and 3.2 million in Europe, 0.8 million, 0.4 million and 1.2 million in the Americas, and 7.0 million, 8.1 million and 10.8 million in Eastern Asia and the rest of the world, each for 2006, 2005, and 2004, respectively.



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%EDAP GmbH
      
      Germany
      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 three wholly owned and fully consolidated subsidiaries: EDAP S.A. (EDAP), a French corporation, EDAP Technomed Srl, an Italian Corporation and EDAP GmbH, a German Corporation. The HIFU division also has a branch office in 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 7.7 million during the fiscal year ended December 31, 2006.

HIFU Division Business Overview

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, although they have been temporarily suspended as we unwind our relationship with HealthTronics. The HIFU division had a fixed installed base of 55 Ablatherm machines worldwide (with an additional four used for clinical studies) and 132 trained clinical sites were using this technology as of December 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.





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Our HIFU mobile treatment option 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. With the proceeds from the private placement finalized in early August 2006, we are expanding our marketing reach and  accelerating Ablatherm penetration in major European countries.

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. 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 continued to increase spending on research and development (R&D) projects in 2006 to develop HIFU applications beyond prostate
cancer. The division is considering increasing R&D spending in 2007 and future years to strengthen its technological leadership in HIFU and expand its application beyond urology.


HIFU Products

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, although they have been temporarily suspended as we unwind our relationship with HealthTronics.  See Item 4, Information on the CompanyHistory and Development of the Company. 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





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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 December 31, 2006, the HIFU divisions patent portfolio contained 58 patents consisting of 26 in the United States, 24 in the European Union and Japan and 8 in Israel and the rest of the world. They belong to 24 families covering key technologies related to therapeutic ultrasound principles, systems and associated software.

An additional 15 patents covering certain other aspects of our HIFU technology in the European Union, the United States and Japan are still in the examination process. These patents relate to new transducer design for both HIFU and High Intensity Contact Ultrasound (HICU).

During 2006, two new patents have filed.

The HIFU divisions ongoing research and development objectives are to maintain the companys leadership position in the treatment of prostate cancer and to extend the HIFU technology to new applications and minimally invasive systems.

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.

The diagnosis of prostate cancer has two steps. The first one is the evaluation of the Prostate Specific Antigen (PSA), which although not specific to cancer tumors, measures the increase of cells activity inside the prostate. The second is based on biopsies: a sextant biopsy is performed inside the prostate to reveal the presence of a tumor.

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 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





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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  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 the Distribution Agreement with HealthTronics. The terms of the distribution agreement granted HealthTronics the right to pursue market approval from the FDA for the Ablatherm. Under the terms of the distribution agreement, HealthTronics would be granted exclusive distribution rights for the Ablatherm in the United States.

In November 2006, HealthTronics informed us that they intented to discontinue Ablatherm FDA trials.  The parties are in the process of negotiating the Termination Agreement, which we expect will be finalized in the coming weeks, whereby among other things HealthTronics will transfer the study to us. A complete evaluation of the project is currently in process with the support of an external Experts Panel. The company is in the process of obtaining FDA clearance to conduct the trials under EDAPs sponsorship, and we expect clinical trials to resume soon. In order to compete the trials, however, we will need to seek external financing, See Item 3, "Key Information—Risk Factors—Our cash flow is highly dependent on deman for our products" and Item 5,"Operating and Financial Review and Prospects—Liquidity and Capital Resources."

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 should be ready by December 2007. Other clinical trials are currently ongoing to evaluate new treatment monitoring methods, to improve Ablatherm treatment efficacy in higher risk patients and to further extend inclusion criteria.



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 the number of new prostate cancers being diagnosed every year to be approximately 220,000 out of which 70% are diagnosed with localized stage 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.



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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 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 created a fully owned subsidiary in Germany on July 1, 2006 to address the larger market in Europe. We also have 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.

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.

The HIFU divisions marketing efforts include the organization of informative and training programs for urologists "HIFU Tours", mainly in key European countries were HIFU awareness is growing, comprehensive media and web programs to educate patients on the availability of HIFU





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technology to treat localized prostate cancer and strong participation in focused dedicated urological events. Our patients and physicians dedicated web sitewww.hifu-planet.comis well visited.

Urology Devices and Services (UDS) Division

Our UDS 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 15.6 million during the fiscal year ended December 31, 2006.



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 452 ESWL lithotripters worldwide as of December 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.

The UDS division, via its Japanese subsidiary,  recently signed an agreement with a Japanese Company, Medi Trend KK, importer of a new Muscle Trainer Device, manufactured by the U.S. company Neotonus, Inc, to distribute this system in Japan. This device helps users to exercise all of the muscles of the pelvic floor region. The UDS division, via its French subsidiary TMS SA, also recently signed a distribution agreement with LMA, a Swiss corporation, to distribute their StoneBreaker system dedicated to the fragmentation of urinary stones. This device complements our lithotripsy line as it allows the targeting of stones that are not accessible with ESWL generators.



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





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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:


        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 StatusSonolith
      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






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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.

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 December 31, 2006, the UDS divisions patent portfolio contained 15 patents consisting of 5 in the United States, 8 in the European Union and Japan and 2 in Israel and the rest of the world. They belong to 9 families covering key technologies relating to ESWL systems and associated software capabilities.

An additional 4 patents covering certain other aspects of ESWL piezoelectric technologies in the European Union, the United States and Japan are still in the examination process.

During 2006, one patent covering obsolete technology was abandoned in the United States.

The UDS divisions patents cover both piezoelectricity and electroconductivity technologies associated to ESWL treatment head, electrodes and localization systems. The UDS divisions ongoing research and development objectives in ESWL are to further increase the clinical efficacy, the cost-effectiveness and the ease of use of its products to make them accessible to wider patient and user populations.

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.

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.



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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. In February 2004, HealthTronics was appointed distributor in the United States for our Sonolith Praktis lithotripters. We are currently in the process of negotiating a termination agreement with HealthTronics, which we expect to be finalized in the coming weeks.  See Item 4, Information on the CompanyHistory and Development of the Company.

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





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Healthcare Regulation in the United States and Government RegulationHealthcare Regulation in the European Union.

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.



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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, 2006, 2005 and 2004 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.



Revenue Recognition

Sales of goods:

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





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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 are recognized when goods are delivered.



Sales of Revenue-Per-Procedure Treatments and leases:

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. If a contract of RPP includes a minimum number of treatments, as long as this level has not been reached, the revenue is recognized on a linear basis over the contract period. Afterwards, the revenue is recognized when the treatment procedure has been completed. Revenues related to the leasing of devices are recognized on a linear basis.



Sales of spare parts and services:

Revenues related to spare parts are recognized when goods are delivered. Maintenance contracts rarely exceed one year and are recognized on a linear basis. Billings or cash receipts in advance of services due under maintenance contracts are recorded as deferred revenue.



Warrants

In accordance with EITF 96-18, we accounted for the warrants issued to HealthTronics in 2004 and 2005 under the distribution agreement (now terminated) based on their fair value measured at the date of milestone achievement. The related amount, which was a non-cash charge, was then recorded as a reduction of revenue since the warrants vested as a result of HealthTronics purchase of a specified number of lithotripters and Ablatherms.

We used the Black-Scholes options pricing model to determine the fair value of the warrants that vested 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 most 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.



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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 believe 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.

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 valuation method (FIFO), or market. Our inventory valuation policy is based on a review of forecasted demand compared with existing inventory levels. 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. At December 31, 2006, 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. 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, 2006, we had approximately 85 thousand deferred tax assets 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 ("sales of goods"), sales of RPPs and leases, and sales of 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





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Agreement vested as a result of the purchase by Healthtronics of a certain number of lithotripters and one Ablatherm. Following HealthTronicss announcement that it wished to terminate the Distribution Agreement, we are negotiating a termination agreement with them, which we currently expect to be finalized in the coming weeks.  Pursuant to the expected termination agreement, HealthTronics would exercise 200,000 of the warrants that it had been granted under the Distribution Agreement and the remainder would be cancelled. Therefore, following the signature of the Termination Agreement, we will no longer incur any charges linked to the vesting of warrants. 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.

Net sales from revenue-per-procedure (RRP) activity include only the revenues arising from the sale of Ablatherm treatment procedures. RRP involves us 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). 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 we believe 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. This activity has already increased significantly in the past year and now accounts for approximately half of the net sales of the HIFU division.

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 26% of our total revenue in 2006. Net sales of medical devices in Asia represented approximately 20% of such sales in 2006 and consisted primarily of sales of ESWL lithotripters. Net sales of spare parts, supplies and services in Asia represented approximately 31% of such sales in 2006 and related primarily to ESWL lithotripters, reflecting the fact that approximately 40% 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 2006, approximately 79% of our selling, marketing and general and administrative expenses and approximately 91% of our research and development expenses were denominated in euro, while approximately 32% 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.

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 2.4 million, 1.8 million and 1.5 million in 2006, 2005 and 2004, respectively, representing approximately 12%, 9%,





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and 7% of total revenues in 2006, 2005 and 2004, respectively. The increase in research and development in 2006 compared to 2005 was primarily due to an increase in HIFU and ESWL development activities, the development of a newly designed lithotripter and the launch of new clinical studies to maintain our leadership in HIFU for prostate cancer. Beginning 2007, management expects the budget for research and development expenses in Europe (excluding the conduct of FDA clinical trials in the United States) to level off at approximately 11% of total revenues, which allows us to maintain 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. As a result of the termination of our collaboration with HealthTronics, the
warrants granted to Healthtronics and linked to certain milestones in the FDA approval process will be canceled.

Selling and marketing expenses amounted to 4.6 million in 2006, 3.8 million in 2005 and 3.4 million in 2004. The increase of 23% from 2005 to 2006 was primarily due to an increase in marketing expenses, 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. Management expects those marketing and sales efforts to increase in the future to consolidate the Ablatherm-HIFU technologys status as a standard of care for prostate cancer in Europe.

In 2006, we recorded 0.3 million of non-recurring operating expenses, including 0.2 million of employee termination expenses and 0.1 million of capital increase expenses. In 2005, the Company 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 a reduction of headcount initiated in 2003. See Note 18 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. Following the announcement by HealthTronics of its intention not to pursue Ablatherm FDA approval. We are negotiating a termination agreement with HealthTronics, which we expect to finalize in the coming weeks.  See Item 4, Information on the CompanyHistory and Development of the Company. As a consequence, we
will no longer incur any charge in the future linked to the vesting of warrants. In accordance with EITF 96-18, we accounted for the warrants issued to HealthTronics under the distribution agreement, in 2004 and 2005, based on their fair value, measured at the date that the warrants vested (which corresponded to dates that certain milestones in the distribution agreement were achieved). The related amount, which was a non-cash charge, was then recorded as a reduction of revenue since the warrants vested 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.

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. 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, and the funding of Ablatherm trials in the United States in order to continue the FDA process. 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 and treatments.



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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 related supply agreement and distribution agreement, although significantly less than before the sale. Revenues from sales under the supply agreement and the distribution agreement represented  0.2 million or approximately 1% of total revenues in 2004,  46 thousand in 2005. The supply agreement terminated in 2003 and subsequent revenue in 2004 and 2005 was derived from outstanding deliverables under
the agreement; there was no remaining revenue from the Prostatron business in 2006.

Fiscal Year Ended December 31, 2006 Compared to Fiscal Year Ended December 31, 2005

Total revenues.

Our total revenues decreased 2.6% from 20.8 million in 2005 to 20.3 million in 2006, principally due to the transition in the HIFU division to the new RPP model, with the increase in the number of treatments invoiced only partially offsetting the decline in the number of machines sold.

HIFU division. The HIFU divisions total revenues decreased 4% from 7.9 million in 2005 (no significant internal segment revenues) to 7.6 million in 2006 (no significant internal segment revenues), principally due to a decrease 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 decreased 38%, from 4.3 million in 2005 (including internal segment revenues) to 2.6 million in 2006, with 8 Ablatherm units sold in 2006 compared to 10 in 2005. Also, the decrease in the average unit sales price from 426 thousand in 2005 to 329 thousand in 2006 was due to the fact that three of the devices sold in 2006 were used machines compared to 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 treatments on a RPP basis directly related to our HIFU mobile activity increased 60%, from 1.7 million in 2005 to 2.8 million in 2006. This was 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. Primarily, as a result of the increase in the number of total HIFU treatments, net sales of HIFU-related spare parts, supplies, leasing and services increased 19% from 1.9 million in 2005 to 2.2 million in 2006.

Other HIFU-related revenue increased from 13 thousand in 2005 to 66 thousand in 2006.

UDS division. The UDS divisions total revenues decreased 4% from 16.2 million in 2005 to 15.6 million in 2006 (including 0.1 million related to the recognition of the non-cash charge associated with the warrants issued to HealthTronics in 2005, and including  3.0 million and 3.2 million related to internal segment revenues recorded in 2006 and 2005, respectively).

The UDS divisions net sales of medical devices stabilized at 5.9 million in 2006 (same as 2005) with 38 devices sold in 2006 compared to 34 in 2005. The decrease in the average unit price in 2006 resulted principally from the product mix (with a lower portion of high-range, fully equipped lithotripters from Japan), and from a negative Japanese Yen/Euro exchange rate variation.



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Net sales of UDS-related spare parts, supplies and services decreased 6% from 7.0 million in 2005 to 6.6 million in 2006, primarily related to a decrease in rental and service revenues. See Operating ResultsOverview.

Other UDS-related revenue decreased 68% from 80 thousand in 2005 to 26 thousand in 2006, primarily related to a reduction in the royalties received.

Cost of sales.

Cost of sales decreased 3% from 12.3 million in 2005 to 11.9 million in 2006, stable at 59% as a percentage of net sales.

Operating expenses.

Operating expenses increased 16% from 9.8 million in 2005 to 11.4 million in 2006. This increase in operating expenses was mainly due to our strategy to focus on market education on HIFU and to enhance our Ablatherm-HIFU global leadership position, as well as to develop a newly designed lithotripter to be launched in 2007, to sustain our sales in the UDS division. See Note 18 of the Notes to the Consolidated Financial Statements.

HIFU division R&D expenses increased 18% from 1.0 million in 2005 to 1.2 million in 2006. HIFU division R&D expenses specifically related to the development of new technologies and products and enhancement of existing products, remained stable at 0.6 million in 2006, while clinical trial expenses increased 56% from 0.4 million in 2005 to 0.6 million in 2006, as a result of the development 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 increased 63% from 0.7 million in 2005 to 1.2 million in 2006, as a result of design development on lithotripters. UDS division R&D expenses specifically related to the development of new technologies and product enhancement increased 72% from  0.4 million in 2005 to 0.6 million in 2006. See  Operating ResultsOverview.

HIFU division marketing expenses increased 86% from 0.6 million in 2005 to 1.1 million in 2006, 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 remained stable at 1.4 million in 2006 (18% of net sales).We anticipate these expenses will increase in the future, as we execute the HIFU dedicated marketing and sales strategy to increase penetration of Ablatherm-HIFU on the European market.

UDS division selling expenses increased 15% from 1.4 million in 2005 to 1.7 million in 2006. We anticipate that these expenses will remain stable in the future. As a percentage of net sales, selling expenses increased from 9% in 2005 to 10% in 2006.

General and administrative expenses, at the consolidated level, remained stable at 4.3 million in 2006. As a percentage of net sales, general and administrative expenses increased from 20% in 2005 to 22% in 2006. 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 recorded a consolidated operating loss of 3.1 million in 2006, including the holding company expenses, as compared to a consolidated operating loss of 1.3 million in 2005.

We realized an operating loss in the HIFU division of 0.3 million in 2006, compared to an operating profit of 0.1 million in 2005 and an operating loss in the UDS division of 0.5 million in 2006, as compared to operating profit of 0.2 million in 2005.

Interest income, net. Interest income, net remained stable at 0.1 million in 2005 and 2006.



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Foreign currency exchange gains (loss), net. In 2006, we recorded a net foreign currency exchange loss of 430 thousand compared to a loss of 38 thousand in 2005 mainly due to the weakening of the Japanese Yen against the Euro.

Other income (expense), net. Other income (expense), net decreased from a gain of 9,000 in 2005 to a loss of 5,000 in 2006.

Income taxes. We recorded a corporate income tax expense of 56 thousand in 2006 compared to 0.1 million in 2005, 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).

Net loss.

We realized a consolidated net loss of 3.4 million in 2006 compared with consolidated net loss of 1.1 million in 2005, as a result of the factors mentioned above.

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.

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.



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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.

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 U.S. 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.



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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.

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, 2006.

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 believe 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, 2006, 2005 and 2004, was 10.9 million (including 1 million of short term treasury investments), 8.3 million and 9.4 million, respectively. We experienced positive cash flows of 1.5 million in 2006, and negative cash flows of 1.1 million and 1.0 million in 2005 and 2004, respectively.  In 2006, our positive cash flow situation was primarily due to the net capital increase of 5.2 million realized during the summer through a $7.5 million Private Offering in Public Equity.  To finance the FDA approval process for the Ablatherm to completion, we are contemplating seeking a dedicated financing, preferably through a debt and/or convertible debt financing.

In 2006, net cash used in operating activities was 1.9 million compared with net cash used in operating activities of 0.3 million and 1.1 million in 2005 and 2004, respectively. In 2006, net cash used in operating activities reflected principally:

-
        a net loss of 3.4 million,


-
        elimination of 1.9 million of net expenses without effects on cash,


-
        an increase in trade accounts receivable of 1.2 million,


-
        a decrease in inventories of 0.4 million, reflecting dedicated actions to reduce the level of both the inventory of finished goods and spare parts,


-
        an increase in accrued expenses and other current liabilities of 0.3 million.


In 2005, net cash used in operating activities reflected principally a net loss of 1.1 million, an increase in trade accounts of 1.5 million, an increase in inventories of 0.7 million, an increase in trade accounts payable of 0.7 million and an increase in accrued expenses and other current liabilities of 0.4 million.

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





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million, primarily related to severance packages linked to the restructuring that took place at the end of 2003.

In 2006, net cash used in investing activities was 1.6 million compared with net cash used of 1.1 million in investing activities in 2005 and no net cash used in investing activities in 2004. In 2006, net cash used in investing activities reflected principally an increased investment of 1.3 million in capitalized assets produced by the company (mainly Ablatherm devices as a support of the Revenue-Per-Procedure business model in HIFU), an investment of 0.2 million in property and equipment, net proceeds from sales of lease-back assets of 0.7 million and net proceeds from sales of assets of  0.2 million. Cash flows from investing activities also include short term treasury investments of 1.0 million, as part of the cash management investment support.

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 2006, net cash provided by financing activities was 5.2 million compared with net cash provided in financing activities of 0.2 million in 2005, and net cash used of 0.1 million in 2004. In 2006 net cash provided by financing activities reflected principally a share capital increase of 5.2 million, a short-term debt increase of 0.4 million, an increase in long term borrowing for 0.2 million reimbursed of 0.2 million and repayment of capital lease obligations totaling 0.5 million.

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.

We anticipate that cash flows from operations, together with our current cash balances, will provide us with sufficient resources to sustain our European strategy and bring our European operations to a cash positive situation.  As discussed above, we are contemplating raising additional funding to finance our U.S. strategy and the FDA approval process requirements over the next four years.

Our future cash flow may also be affected by the expansion of 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, this business model initially generates smaller, but more predictable cash flows. The RPP model is now established in Europe as a growth and profitability model, and we will continue expand this business model in the near future.

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: Euribor+0.5 and 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 may use certain financial instruments for hedging purposes. As of December 31, 2006 and as of March 16, 2007, there were no outstanding
hedging instruments.





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Contractual Obligations and Commercial Commitments as of December 31, 2006 (in thousands of euro)



Payments Due by PeriodTotal
        Less than 1 year
        1-3 years
        4-5 years
        More than 
      5 yearsShort-Term Debt..............................
        
        1 308
        1 308
        
        
        Long-Term Debt..............................
        
        181
        123
        58
        
        Capital Lease Obligations................
        
        1 132
        436
        696
        
        Operating Leases..............................
        836
        452
        384
        
        




New Accounting Pronouncements



(i) Accounting for Certain Hybrid Financial Instruments



FAS No. 155 "Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and No. 140" was issued in February 2006 and is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity's first fiscal year that begins after September 15, 2006. FAS No.155 provides entity with relief from having to separately determine the fair value of an embedded derivative that would otherwise be required to be bifurcated from its host contract in accordance with FAS No. 133. FAS No. 155 allows an entity to make an irrevocable election to measure such hybrid financial instrument at fair value in its entirety with changes in fair value recognized in earnings.

The adoption of FAS No. 155 will have no material effect on the Group's earnings and shareholder's equity, as determined under U.S. GAAP.



(ii) Accounting for Servicing of Financial Assets



FAS No. 156 "Accounting for Servicing of Financial Assets, an amendment of FASB Statements No. 140" was issued in March 2006 and is effective prospectively to all transactions occurring after the beginning of an entity's first fiscal year that begins after September 15, 2006. FAS No. 156 requires that an entity separately recognize a servicing asset or a servicing liability when it undertakes an obligation to service a financial asset under a servicing contract in certain situations.

The adoption of FAS No. 156 will have no material effect on the Group's earnings and shareholder's equity, as determined under U.S. GAAP.



(iii) Fair Value Measurements



FAS No. 157 Fair Value Measurements was issued in September 2006 and is effective prospectively for fiscal years beginning after November 15, 2007. FAS No. 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. The statement also sets out a fair value hierarchy.

The adoption of FAS No. 157 is not expected to have significant effect on the Group's earnings and shareholder's equity, as determined under U.S. GAAP.



(iv) Accounting for Defined Benefit Pension and Other Postretirement Plans



FAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No.87, 88, 106, 132(R), was issued in September 2006 and is effective for fiscal years ending after December 15,2006. FAS No. 158 requires a full recognition of the plan overfunded or underfunded status of its benefit plans in the balance sheet. Therefore, unrecognized actuarial gain and loss and prior service costs and credits need to be recognized in Other Comprehensive Income and are recycled to the income statement based on current amortization and recognition criteria.



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In addition, the statement also required a company to measure its plan assets and benefit obligations as of its year-end balance sheet date.



(v) FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" - an interpretation of FASB Statement No. 109



On July 2006, the FASB issued FIN No. 48 which is effective for fiscal years beginning after December 15, 2006, and should be applied to all tax positions upon initial adoption. FIN No. 48 clarifies the accounting for income taxes by prescribing a "more-likely-than-not" recognition threshold a tax position is required to meet before being recognised in the financial statements. Once the recognition threshold has been met, FIN No. 48 requires to recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.

The Interpretation also requires making explicit disclosures about uncertainties in Company's income tax positions.

The adoption of FIN No. 48 is not expected to have significant effect on the Group's earnings and shareholder's equity, as determined under U.S. GAAP.



(vi) Planned Major Maintenance Activities



On September 2006, the FASB issued FSP No. AUG AIR-1 Accounting for Planned Major Maintenance Activities which is effective for the fiscal year beginning after December 15, 2006 and should be applied retrospectively. The FSP prohibits the use of the accrue-in advance method of accounting for planned major maintenance activities. It continues to permit the application of the other three alternative methods of accounting for planned major maintenance activities: direct expense, built-in overhaul, and deferral.

The adoption of the FSP No. AUG AIR-1 will have no material effect on the Group's earnings and shareholder's equity, as determined under U.S. GAAP

.

(vii) Fair Value Option for Financial Assets and Financial Liabilities



FAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" was issued in February 2007 and is effective as of the beginning of the first fiscal year that begins after November 15, 2007. FAS No. 159 offers an irrevocable option to carry the vast majority of financial assets and liabilities at fair value, with changes in fair value recorded in earnings. The adoption of FAS No. 159 is not expected to have significant effect on the Group's earnings and shareholder's equity, as adjusted to accord with U.S. GAAP.



(viii) Quantification of financial statement misstatements



In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108) regarding the quantification of financial statement misstatements. SAB 108 requires a dual approach for quantifications of errors consisting of "the roll-over method" and the "iron curtain method". The roll-over method focuses primarily on the impact of a misstatement on the income statementincluding the reversing effect of prior year misstatements and the iron-curtain method, on the other hand, focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement. EDAP adopted the provisions of SAB 108 for the year ended December 31, 2006. The adoption of this standard did not have a material impact on EDAP.

Research and Development, Patents and Licenses

See -Operating Results-Overview and 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.



36






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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 as of March 16, 2007. The Chief Executive Officer, the Chief Operating Officer and the Chief Financial Officer  listed below have entered into employment contracts with the Company or its subsidiaries (which permits the employee to resign subject to varying notice periods). On March 31, 2007, a transition will occur whereby the current Chief Executive Officer will be stepping down to join the Board of Directors, and the current Chief Operating Officer will officially be appointed Chief Executive Officer. This transition plan was publicly announced in December 2006. 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 totaling
approximately  0.4 million.

|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                               
|----------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------
|Name              | Age                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     | Position                                                                                      
|Philippe Chauveau | 71                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Chairman of the Board of Directors                                                            
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                               
|Hugues de Bantel  | 37                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Chief Executive Officer of EDAP TMS S.A.                                                      
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                               
|Marc Oczachowski  | 35                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Chief Operating Officer of EDAP TMS SA and President of the HIFU Division and the UDS Division
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                               
|Eric Soyer        | 40                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | Chief Financial Officer of EDAP TMS SA                                                        
|                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                               
|Philippe 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 2000, Philippe Chauveau was also 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. He is also personal executive coach to senior research leaders at Hoffmann LaRoche. Additionally, he is involved in management development programs at Solvay Business School, in Brussels, Belgium. 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 & G


amble. He has an Honours Degree from Trinity College Dublin with a B.A. 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     





37






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|Marc Oczachowski       | Marc Oczachowski joined the company in May 1997 as Area Sales Manager, based in Lyon, France. From March 2001 to January 2004, he held management positions as General Manager of EDAP Technomed Malaysia. Previously he worked for Sodem Systems - power tools for orthopedie - as Area Sales Manager. He is a graduate of Institut Commercial de Lyon, France                                                                                                                                                                                                                                                      
|---------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|Eric Soyer             | Eric Soyer joined the Company in December 2006. He was previously CFO of Medica, a  270 million French company operating 108 nursing home and post-care clinics throughout France and Italy. Previously he was CFO and a Managing Director of April Group, an insurance services business with 22 subsidiaries in France, the UK, Spain, Germany and Italy. He has international experience as a controller and cost accountant for Michelin Group in France, the United States and Africa. Eric Soyer has degrees from Clermont Management School, the University of Kansas and the HEC Paris School of Management.
|**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. There is no contract providing for benefits upon termination of Directors mandates.



Philippe Chauveau
        See biography under Senior Executive Officers.Pierre Beysson
Age: 65
        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: 41
        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 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.Guy Vallancien Age: 60
        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 was a member of the Executive Committee of the French Urological Association (AFU) from 1986 to 1992 and is a member of the European and International Urological Association.






38






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Jean-Philippe 
            Deschamps
Age: 65
        Pr. Jean-Philippe Deschamps was appointed as a member of the Company's Board of Directors in March 2007. He is Professor of Technology and Innovation Management at IMD, in Lausanne, Switzerland. Prior to joining IMD in November 1996, he was based in Brussels as a corporate Vice-President with Arthur D. Little and Chairman of the firm's technology and innovation management practice, which he created in 1981. Before that, he was Arthur D. Little's first European practice leader for strategy and organisation. He has thirty years of international management consulting experience throughout Europe, North America, Asia and the Middle East. He Graduated from Ecole des Hautes Etudes Commerciales in Paris and received his MBA from INSEAD and from the Harvard Business School.


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. On December 15, 2006, following the resignation of Olivier Missoffe as member of the Board for personal reasons, it was decided that the whole Board would act temporarily as a
"Compensation Committee" provided that the majority of independent members would participate in the votes for Management compensations.  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 2006 was approximately 0.5 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 2006.

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 the current President of each division 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 3.6% and 2.6% 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, 2006, Senior Executive Officers held an aggregate of 167,425 options to purchase or to subscribe to shares of our common stock, with a weighted average exercise price of 1.78. Of these options, 12,000 expire on December 31, 2008, 19,000 expire on September 25, 2011, 6,425 expire on June 18, 2012 and 130,000 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.  Following Mr. Olivier Missoffes resignation from the Board in November 2006, and the appointment of Mr. Jean-Philippe Deschamps on March 8, 2007, the Audit Committee accounts for four fully independent Members as of today. The purpose of the Committee is to:



39






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-
        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.


Employees



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
        2Total =
        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
        2Total =
        30
        22
        40
        8
        5
        2
        27
        134




As of December 31, 2006, we employed 142 individuals on a full-time basis, employed as follows:



Sales & Marketing
        Manufac-turing
        Service
        Research & Dvpt
        Regula-tory
        Clinical Affairs
        Adminis-trative
        TotalFrance
        15
        22
        24
        9
        3
        3
        17
        93Italy
        3
        0
        0
        0
        0
        0
        2
        5Germany
        2
        0
        2
        0
        0
        0
        2
        6Japan
        9
        0
        14
        0
        2
        0
        4
        29Malaysia
        2
        0
        3
        0
        0
        0
        2
        7South Korea
        1
        0
        0
        0
        0
        0
        1
        2


|Total = | 32 | 22 | 43 | 9 | 5 | 3 | 28 | 142
|------- | -- | -- | -- | - | - | - | -- | ---





40






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Management considers labor relations to be good. Employee benefits are in line with those specified by applicable government regulations.

Share Ownership

On March 5, 2007, the CEO exercised 100,000 options to subscribed to 100,000 new shares, thus bringing the total number of issued shares to 9,424,497 and to 8,942,007 the total of voting rights.

On February 28, 2007, Siemens France Holding resigned from the Board of Directors. As of March  16, 2007, Siemens France Holding owned 1,003,250 Shares representing 10.65% of the total share capital and (after subtracting treasury stock which under French law carries no voting rights) 11.22% of the voting rights of the Company.

As of March 16, 2007, the Board of Directors and the Senior Executive Officers of the Company hold a total of 111,125 Shares representing 1.18% of the total share capital and (after subtracting treasury stock which under French law carries no voting rights) 1.24% of the voting rights of the Company.

Options to Purchase or Subscribe for Securities

As of March 16, 2007, 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. Pursuant to an amendment to the agreement between HealthTronics and us, 200,000 warrants were cancelled on December 29, 2005. Pursuant to the termination agreement currently being negotiated between  HealthTronics and us, which we expect to finalize in the coming weeks, 200,000 warrants would be exercised in 2007 and the remaining warrants would be cancelled.

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





41






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Performance Stock Plan authorized by the shareholders, 564,100 rights to subscribe to new shares were distributed, including new entrants. On July 3, 2006, an additional 13,800 rights to subscribe to new shares were distributed to new entrants. On March 8, 2007, 47,100 rights to subscribe to new shares were granted to new entrants by the Board of Directors, based on certain performance criteria to be met for years 2007 and 2008. On that same date, upon reviewing and approving the consolidated 2006 results, the Board confirmed that 2006 performance criteria fixed by the Board on January 6, 2006 were not met. 313,680 rights to susbscribe to new shares, based on these fixed performance criteria were then cancelled and these shares will then never be subscribed and issued. As of March 16, 2007, only 256,220 rights out of the 625,000 initially distributed were still in force due to employees departures.



On December 31, 2006, the duration of our stock option contracts was as follows:

months until expiration
        
        
        
        
        
        Number of Shares12
        
        
        
        
        
        33,62524
        
        
        
        
        
        46,90036
        
        
        
        
        
        1,21260
        
        
        
        
        
        93,00066
        
        
        
        
        
        12,42586
        
        
        
        
        
        300,00097
        
        
        
        
        
        15,000






42






---



As of December 31, 2006, a summary of stock option activity to purchase or to subscribe to Shares under these plans is as follows:



2006
        2005
        2004Options
        Weighted 
            average 
            exercise
            price
()
        Options
        Weighted 
            average 
            exercise
            price
()
        Options
        Weighted
            average 
            exercise
            price
()Outstanding on January 1,
        593,262
        2.50
        580,262
        2.49
        391,262
        2.68Granted
        
        
        15,000
        2.78
        325,000
        2.19Exercised
        (72,600)
        3,20
        (1,000)
        1.62
        0Forfeited
        (18,500)
        2,60
        (1,000)
        3.81
        (136,000)
        2.34Expired
        -
        -
        -
        -
        -
        -Outstanding on December 31,
        502,162
        2.38
        593,262
        2.50
        580,262
        2.49Exercisable on December 31,
        405,162
        2,73
        409,652
        2.45
        219,547
        2.99Shares 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, 2006:



Outstanding options
        Exercisable optionsExercise price ()
        
        Options
        Weighted 
      average 
      remaining contractual
      life
        Weighted 
            average 
            exercise
            price
()
        Options
        Weighted 
            average 
            exercise
            price
()3.81
        
        71,525
        1.5
        3.81
        71,525
        3.812.78
        
        15,000
        8.1
        2.78
        15,000
        2.782.60
        
        200,000
        7.2
        2.60
        103,000
        2.602.08(1)
        
        93,000
        5.0
        2.08
        93,000
        2.082.02(2)
        
        12,425
        5.5
        2.02
        12,425
        2.021.83
        
        10,212
        2.5
        1.83
        10,212
        1.831.28
        
        100,000
        7.2
        1.28
        100,000
        1.281.28 to 3.81
        
        502,162
        5.9
        2.39
        405,162
        2.34


(1)
        All the 93,000 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 12,425 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).




As of March 16, 2007, 25,000 options to purchase 25,000 shares of the company were exercised, bringing to 482,490 the number of treasury stocks held by the company.



Exemptions from Certain Nasdaq Corporate Governance Rules



43






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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:



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 16, 2007, to our knowledge, the following persons had beneficial ownership of more than 5% of the Shares: Siemens France Holding owned 1,003,250 Shares representing 10.65% of the total share capital of the Company and (after subtracting treasury stock, which under French law carries no voting rights) 11.22% of voting rights, Wells Capital Management, Inc., formerly Benson Associates LLC, owned 1,260,425 Shares representing 13.37% of the total share capital of the Company and (after subtracting treasury stock, which under French law carries no voting rights) 14.09% of voting rights and Bruce & Co., Inc, owned 550,050 shares representing 5.84% of the total share capital of the
Company and (after subtracting treasury stock, which under French law carries no voting rights) 6.15% 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 16, 2007, 9,424,497 Shares were issued, including 8,942,007 outstanding and 482,490 treasury Shares. At the same date, there were 8,258,639 ADSs, each representing one Share, all of which were held of record by 17 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 2006, EDAP TMS Korea paid Dae You a total of 74,100 for its services under service maintenance contracts, and Dae You purchased 588,000 of medical devices and services from us.



44






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We purchase certain technological elements from Siemens AG. Total purchases amounted 444,000 in 2006, 547,000 in 2005 and 405,000 in 2004. Payables due to Siemens AG amounted to 17,700, 46,000 and  3,000 as of December 31, 2006, 2005 and 2004 respectively.



Item 8. Financial Information

Consolidated Financial Statements

See Item 18, Financial Statements.

Export Sales

As of December 31, 2006, total consolidated export sales, which we define as sales made outside of France, were 14.4 million, which represented 71% 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 to Urologix Inc. 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 2002 through 2005. Subject to the approval of the shareholders meeting to be held on or before June 30, 2007, we do not anticipate paying any dividends with respect to fiscal year 2006.

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, 2006.







45






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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 2002 through 2006, the reported high and low sales prices of the ADSs on Nasdaq.

NasdaqHigh
        Low$2006
        
        
        
        
        21.64
        5.122005
        
        
        
        
        5.68
        3.102004
        
        
        
        
        3.92
        1.552003
        
        
        
        
        1.99
        1.002002
        
        
        
        
        2.49
        1.15


The following tables set forth, for the years 2005 and 2006, the reported high and low sales prices of the ADSs on Nasdaq for each full financial quarter:

NasdaqHigh
        Low$2006:First Quarter
        
        
        
        
        21.64
        5.30Second Quarter
        
        
        
        
        19.46
        7.02Third Quarter
        
        
        
        
        12.20
        6.50Fourth Quarter
        
        
        
        
        8.60
        5.122005:First Quarter
        
        
        
        
        5.50
        3.41Second Quarter
        
        
        
        
        5.00
        3.65Third Quarter
        
        
        
        
        4.27
        3.18Fourth Quarter
        
        
        
        
        5.68
        3.10






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The following table sets forth, for the most recent six months (from October 2006 through March 16, 2007), the reported high and low sale prices of the ADSs on Nasdaq for each month:



NasdaqHigh
        Low$2006:October
        
        
        
        
        8.60
        7.00November
        
        
        
        
        7.55
        5.12December
        
        
        
        
        6.89
        5.332007:January
        
        
        
        
        9.40
        5.62February
        
        
        
        
        8.19
        7.06March (through March 16, 2007)
        
        
        
        
        7.48
        6.18


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 ourstatuts. 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 five members who were appointed by the shareholders for a period of six years expiring upon the date of the general shareholders meeting approving the financial results for fiscal year 2007. (See Item 6, Directors, Senior Management and Employees)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





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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.

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 lose 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-five 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.

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.



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As with any other Director, the Chairman cannot be over seventy-five 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.

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. Following a Management succession plan announced in December 2006, Hugues de Bantel will be replaced by Marc Oczachowski, current Chief Operating Officer. Hugues de Bantel will be appointed Member of the Board of Directors.

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 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





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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.

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)

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





50






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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 (Comité 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





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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.

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 adéclaration 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).



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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 asociété 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.

To assist in the successful completion of clinical trials to obtain FDA approval for the Ablatherm, we partnered with 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 enrolling patients. In November 2006, HealthTronics informed us that they intended to discontinue Ablatherm FDA trials, at which time the trials were suspended. The parties are in the process of negotiating a termination agreement, which we expect to finalize in the coming weeks, whereby HealthTronics will transition the study to EDAP, upon payment of agreed compensation by HealthTronics. This will allow us to resume the trials soon while we look for the necessary resources to fund the study ourselves.  See Item 3, Risk FactorsOur future revenue growth a


nd income depends, among other things, on the success of our HIFU technology, and Item 4, Information on the CompanyHistory and
Development of the Company.



On August 3, 2006, we closed a private placement of 961,676 ordinary shares in the form of American Depositary Shares, resulting in net proceeds of approximately $7.5 million.  The Securities Purchase Agreement among EDAP TMS S.A. and each purchaser set forth the purchase price for the ordinary shares.  The terms for registering the American Depositary Shares with the SEC are covered by the Registration Rights Agreement.

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





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resident to a non-resident be handled by an accredited intermediary. All registered banks and credit institutions in France are accredited intermediaries.

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 adéclaration 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 result 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 one 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 income tax treaty (if any) 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





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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.

Individual investors are urged to consult their own tax advisors 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 valoremregistration 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





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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.

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 light of their particular circumstances, including the effect of any state, local, or other laws.

Dividends

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 may be entitled to a refund of the Tax Credit, less a 15% withholding tax (subject to the discussion of the Tax Credit above), 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.

U.S. holders that are not individuals 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 dividends 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, 2011 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 2006 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 2007 taxable year.  Accordingly, dividends paid by us in 2007 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).

Holders of ADSs and Shares should consult their own tax advisers regarding the availability of the reduced dividend tax rate in 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 as passive category (or, in the case of certain U.S. holders, general category) income for U.S. foreign tax credit purposes with respect to taxable years starting after December 31, 2006, or as passive (or, in the





56






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case of certain U.S. holders, financial services) income with respect to taxable years starting before January 1, 2007.  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.

Under the simplified procedure, in order to benefit from the lower rate of withholding tax applicable under the Treaty before the payment of the dividend, a U.S. holder must complete and deliver to the paying agent (through its account holder) a treaty form (Form 5000), to certify in particular that:


        the U.S. holder is beneficially entitled to the dividend;



        the U.S. holder is a U.S. resident within the meaning of the Treaty;



        the dividend is not derived from a permanent establishment or a fixed base that the U.S. holder has in France; and



        the dividend received is or will be reported to the tax authorities in the United States.


For partnerships and trusts, claims 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 Form 5000 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 both Form 5000 and Form 5001 no later than December 31 of the second year following the year in which the dividend is paid.

Copies of Form 5000 and Form 5001 may be downloaded from the French tax authorities website (www.impots.gouv.fr) and are also available from the U.S. Internal Revenue Service and from theCentre des Impôts des Non-Résidentsin France(10 rue du Centre 93160 Noisy-Le-Grand).

Finally, as mentioned above, the French tax authorities have not yet issued any guidance with respect to the procedures for claiming the refund of the Tax Credit to non-resident individuals.





57






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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 before January 1, 2011 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 2006 and does not anticipate being a PFIC in 2007.  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 may be enable to 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.

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





58






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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 prescribed 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, 2006, we had no outstanding foreign exchange sale contracts.

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 2006, approximately 79% of our selling and general and administrative expenses and approximately 91% of our research and development expenses were denominated in euro. During the same period, only 68% 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, 2006 relative to the U.S. dollar and the Japanese yen would have resulted in a decrease in income before taxes and minority interests of approximately 65,000 for the year ended December 31, 2006, compared to an increase of approximately 28,000 for the year ended December 31, 2005. 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 effect of changes in exchange rates quantified above, changes in exchange rates also affect the volume of sales.

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, 2006 and as of March 16, 2007, we had no outstanding hedging instruments.

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 0.05 million, 0.2 million and 0.5 million of our outstanding indebtedness at December 31, 2006, 2005 and 2004, respectively, was denominated in Japanese yen. None of our outstanding indebtedness over the past three years was denominated in U.S. dollars. In addition, we had approximately 0.4 million, 0.5 million and 1.2 million of cash denominated in U.S. dollars at December 31, 2006, 2005 and 2004, respectively, and 1.2 million, 0.9 million and 1.3 million of cash denominated in Japanese yen at December 31, 2006, 2005 and 2004, respectively.



59






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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

We carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2006. 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 our evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported.

There has been no change in our internal control over financial reporting during our 2006 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

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 2006, 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 atwww.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 2006 financial year:







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Nature of the Fees
      
      
      2005 (in )
      2006 (in )


Audit fees
        
        
        136,020
        175,780Audit-related fees
        
        
        97,305
        96,850Tax fees
        
        
        -
        -All other fees
        
        
        -
        -Total
        
        
        233,325
        272,630




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 that 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 2006 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.



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 2006, neither the Company nor affiliated purchasers made purchases of equity securities of the Company registered pursuant to Section 12 of the Exchange Act.





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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.











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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 July 27, 2006 (together with an English translation thereof).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 (incorporated herein by reference to Exhibit 4.1 to the Annual Report on Form 20-F filed on June 4, 2004 (File No. 000-29374)).(b) Amendment No. 1 to the Distribution Agreement dated December 23, 2004 (incorporated herein by reference to Exhibit 4.1(b) to the Annual Report on Form 20-F filed on May 20, 2005 (File No. 000-29374)).(c) Amendment No. 2 to the Distribution Agreement dated December 29, 2005 (incorporated herein by reference to Exhibit 4.1(c) to the Annual Report on Form 20-F filed on June 6, 2006 (File No. 000-29374)).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 Medical Systems S.A. (together with an English translation thereof) (incorporated herein by reference to Exhibit 4.4 to the Annual Report on Form 20-F filed on May 8, 2003 (File No. 000-29374)).(b) Amendment No. 2 to commercial leases between TMS S.A. and Maison Antoine Baud, signed on June 28, 2004(incorporated herein by reference to Exhibit 4.2(b) to the Annual Report on Form 20-F filed on May 20, 2005 (File No. 000-29374)).4.3
      Form of Securities Purchase Agreement dated as of July 27, 2006 among EDAP TMS S.A. and each purchaser identified on the signature pages thereto (incorporated herein by reference to Exhibit 1 to the Report of Foreign Private Issuer on Form 6-K/A filed on August 18, 2006 (File No. 000-29374))4.4
      Form of Registration Rights Agreement dated as of July 27, 2006, among EDAP TMS S.A. and the investors signatory thereto (incorporated herein by reference to Exhibit 2 to the Report of Foreign Private Issuer on Form 6-K/A filed on August 18, 2006 (File No. 000-29374)).8.1
      List of subsidiaries of EDAP TMS S.A. as of March 1, 2007.11.1
      Code of Ethics of the Company, approved by the Board of Directors on July 22, 2005(incorporated herein by reference to Exhibit 11.1 to the Annual Report on Form 20-F filed on June 6, 2006 (File No. 000-29374)).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.








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15.1
        Consent of Ernst & Young.


.





























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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: March 30, 2007

/s/ HUGUES DE BANTEL

Hugues de Bantel

Chief Executive Officer





Dated: March 30, 2007

/s/ ERIC SOYER

Eric Soyer

Chief Financial Officer

















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INDEX TO FINANCIAL STATEMENTS



|Audited Consolidated Financial Statements for EDAP TMS S.A. and Subsidiaries for the Years Ended December 31, 2006, 2005 and 2004
|---------------------------------------------------------------------------------------------------------------------------------
|Report of Independent Auditors                                                                                                   
|Consolidated Balance Sheets as of December 31, 2006 and 2005                                                                     
|Consolidated Statements of Income for the years ended December 31, 2006, 2005 and 2004                                           
|Consolidated Statements of Comprehensive Income for the years ended December 31, 2006, 2005 and 2004                             
|Consolidated Statements of Shareholders Equity for the years ended December 31, 2006, 2005 and 2004                             
|Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004                                       
|Notes to Consolidated Financial Statements                                                                                       















1






---



Report of Independent Registered Public Accounting Firm



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. as of December 31, 2004, 2005 and 2006, and the related consolidated statements of operations, changes in shareholders' equity and cash flows for the years then ended. These consolidated financial statements are the responsibility of EDAP TMS's management. Our responsibility is to express an opinion on these consolidated 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. Our audits included 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, and evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of EDAP TMS, S.A. at December 31, 2004, 2005 and 2006, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.



As discussed in Note 1 of the Consolidated Financial Statements, the Company adopted, as of January 1, 2006 the provisions of Statement of Financial Accounting Standards No. 123(R), "Share-Based Payment".



ERNST & YOUNG Audit





/s/ LAURENT CHAPOULAUD

Represented by

Laurent Chapoulaud



March 30, 2007

Lyon, France













F-1






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EDAP TMS S.A. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

As of December 31, 2006 and 2005

(in thousands of euros unless otherwise noted)

ASSETS
        Notes
        2006
        2005Current assetsCash and cash equivalents
        2
        9,894
        8,317Net Trade accounts and notes receivable
        3
        10,142
        8,769Other receivables
        4
        732
        850Inventories
        5
        3,766
        4,450Deferred tax assets
        21-3
        85
        0Prepaid expenses
        
        744
        391Short-term investment
        2
        1,031Total current assets
        
        26,393
        22,777Property and equipment, net
        6
        3,211
        3,130Intangible assets, net
        7
        71
        86Goodwill
        7
        2,412
        2,412Deposits and other non-current assets
        
        386
        391Total assets
        
        32,473
        28,796LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilitiesTrade accounts and notes payable
        8
        4,718
        4,305Deferred revenues, current portion
        9
        669
        771Social security and other payroll withholdings taxes
        
        715
        605Employee absences compensation
        
        467
        438Income taxes payable
        
        31
        19Other accrued liabilities
        10
        2458
        2,305Short-term borrowings
        12
        1308
        899Current portion of capital lease obligations
        11
        436
        385Current portion of long-term debt
        13
        123
        147Total current liabilities
        
        10,926
        9,874Deferred revenues, non current
        9
        613
        439Capital lease obligations, non current
        11
        696
        474Long-term debt, non current
        13
        58
        55Deferred income taxes
        21-3
        0
        7Other long-term liabilities
        14
        880
        575Total liabilities
        
        13,172
        11,424Shareholders equityCommon stock, 0.13 par value;9,324,497 shares issued and   8,817,007 shares outstanding; 8,362,821 shares issued and 7,782,731 shares outstanding at December 31,2006 and  2005, respectively
        
        1,212
        1,087Additional paid-in capital
        
        25,476
        20,359Retained earnings
        
        (2,835)
        597Cumulative other comprehensive loss
        
        (3,016)
        (2,877)Treasury stock, at cost; 507,490 and 580,090 shares at December 31, 2006 and 2005, respectively
        
        (1,538)
        (1,794)Total shareholders equity
        15
        19,300
        17,372Total liabilities and shareholders equity
        
        32,473
        28,796




The accompanying notes are an integral part of the consolidated financial statements.



F-2







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EDAP TMS S.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

For the years ended December 31, 2006, 2005 and 2004

(in thousands of euros unless otherwise noted)



Notes
        2006
        2005
        2004Sales of goods
        
        10,849
        12,198
        13,823Sales of RPPs & leases
        
        3,805
        3,146
        2,986Sales of spare parts and services
        
        5,520
        5,606
        5,320Total sales
        
        20,174
        20,952
        22,129Warrants granted
        
        
        (235)
        (174)Total net sales
        16
        20,174
        20,717
        21,955Other revenues
        17
        91
        93
        208Total revenues
        
        20,265
        20,810
        22,163Cost of goods
        
        (5,582)
        (6,453)
        (7,837)Cost of RPPs & leases
        
        (1,576)
        (1,115)
        (862)Cost of spare parts and services
        
        (4,789)
        (4,744)
        (4,977)Total cost of sales
        
        (11,946)
        (12,313)
        (13,676)Gross profit
        
        8,319
        8,497
        8,487Research and development expenses
        
        (2,442)
        (1,784)
        (1,523)Selling and marketing expenses
        
        (4,621)
        (3,758)
        (3,402)General and administrative expenses
        
        (4,082)
        (4,278)
        (4,074)Non recurring operating expenses
        18
        (267)
        -
        (318)Loss from operations
        
        (3,094)
        (1,323)
        (830)Interest income, net
        19
        153
        135
        71Foreign currency exchange gain (loss), net
        
        (430)
        218
        (38)Other income (expense), net
        20
        (5)
        9
        (74)Loss before taxes
        
        (3,375)
        (961)
        (871)Income tax (expense) benefit
        21
        (56)
        (104)
        (278)Net loss
        
        (3,431)
        (1,065)
        (1,149)Basic loss per share
        1-18
        (0.39)
        (0.14)
        (0.15)Diluted loss per share
        1-18
        (0.39)
        (0.14)
        (0.15)Basic Weighted average shares outstanding
        1-18
        8,817,007
        7,782,731
        7,781,731Diluted Weighted average shares outstanding
        1-18
        9,557,533
        8,373,574
        8,074,210








The accompanying notes are an integral part of the consolidated financial statements.



F-3









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EDAP TMS S.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the years ended December 31, 2006, 2005 and 2004

(in thousands of euros unless otherwise noted)





2006
        2005
        2004Net loss
        (3,431)
        (1,065)
        (1,149)Other comprehensive loss:Foreign currency translation adjustments
        (55)
        110
        (36)Provision for retirement indemnities
        (84)Comprehensive loss, net of tax
        (3,570)
        (955)
        (1,185)










































The accompanying notes are an integral part of the consolidated financial statements.



F-4









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EDAP TMS S.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY

For the years ended December 31, 2006, 2005 and 2004

(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
    TotalBalance as of January 1, 2004
    7,781,731
    1,087
    19,811
    2,811
    (2,951)
    (1,797)
    18,961Net 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)
        17,372Net loss
        
        
        
        (3,431)
        
        
        (3,431)Translation adjustment
        
        
        
        
        (55)
        
        (55)Warrants and stock options granted
        72,600
        
        4
        
        
        256
        260Capital increase
        961,676
        125
        5,114
        
        
        
        5,239Provision for retirement indemnities
        
        
        
        
        (84)
        
        (84)Balance as of December 31, 2006
        8,817,007
        1,212
        25,476
        (2,835)
        (3,016)
        (1,538)
        19,300




















The accompanying notes are an integral part of the consolidated financial statements.



F-5









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EDAP TMS S.A. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the years ended December 31, 2006, 2005 and 2004

(in thousands of euros unless otherwise noted).

2006
        2005
        2004Cash flows from operating activitiesNet loss
        (3,431)
        (1,065)
        (1,149)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
        1,257
        1,202
        1,049Non-cash compensation
        32
        360
        188Change in allowances for doubtful accounts & slow-moving inventories
        273
        128
        (834)Change in long-term provisions
        229
        67
        (94)Net capital loss on disposals of assets
        245
        
        Deferred tax expense/(benefit)
        (91)
        84
        255Net loss (gain) on sale of assets
        
        (21)
        (389)Net loss (gain) on sale of investments available for sale
        
        
        Operating cash flow
        (1,486)
        755
        (974)Increase/Decrease in operating assets and liabilities:Decrease/(Increase) in trade accounts and notes and other receivables
        (1,201)
        (1,473)
        20Decrease/(Increase) in inventories
        429
        (681)
        2,341Decrease/(Increase) in prepaid expenses
        (353)
        41
        (9)(Decrease)/Increase in trade accounts and notes payable
        395
        632
        (439)(Decrease)/Increase in accrued expenses, other current liabilities
        315
        441
        (1,884)Working Capital requirement :
        (415)
        (1040)
        29Net cash used in operating activities
        (1,901)
        (285)
        (945)Cash flows from investing activitiesCapitalized assets produced by the Company
        (1,287)
        (1,042)
        (750)Net proceeds from sale of leased back assets
        737
        239
        342Acquisitions of property and equipment
        (208)
        (372)
        (247)Acquisitions of intangible assets
        (43)
        (24)
        (18)Acquisitions of short term investments
        (1,031)Net proceeds from sale of assets
        221
        113
        722Proceeds from sale of investments available for sale
        
        
        Increase in deposits and guarantees
        (18)
        (21)
        (108)Reimbursement of deposits and guarantees
        
        48
        75Net cash (used in) provided by investing activities
        (1,629)
        (1,059)
        16Cash flow from financing activitiesProceeds from capital increase
        5,239
        
        Proceeds from long term borrowings
        150
        288
        Repayment of long term borrowings
        (148)
        (93)
        (77)Repayment of obligations under capital leases
        (464)
        (378)
        (316)Increase/(decrease) in bank overdrafts and short-term borrowings
        409
        371
        310Net cash used in financing activities
        5,186
        188
        (83)Net effect of exchange rate changes on cash and cash equivalents
        (80)
        75
        (19)






F-6






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Net increase/(decrease) in cash and cash equivalents
        1,575
        (1,081)
        (1,031)Cash and cash equivalents at beginning of year
        8,317
        9,398
        10,429Cash and cash equivalents at end of year
        9,894
        8,317
        9,398




The accompanying notes are an integral part of the consolidated financial statements.















F-7






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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, distribution and maintenance 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), EDAP S.A and EDAP Gmbh. 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. EDAP Gmbh was created in July 2006. All intercompany transactions and balances are eliminated in consolidation.

1-4 Revenue recognition

Sales of goods:

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 are recognized when goods are delivered.



Sales of RPPs and leases:

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. If a contract of RPP





F-8






---



includes a minimum number of treatments, as long as this level has not been reached, the revenue is recognized on a linear basis over the contract period. Afterwards, the revenue is recognized when the treatment procedure has been completed. Revenues related to the leasing of devices are recognized on a linear basis.



Sales of spare parts and services:

Revenues related to spare parts are recognized when goods are delivered. Maintenance contracts rarely exceed one year and are recognized on a linear basis. Billings or cash receipts in advance of services due under maintenance contracts are recorded as deferred revenue.





F-9






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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 and short term investments

Cash equivalents are cash investments which are highly liquid and have initial maturities of 90 days or less.

Cash investments with a maturity higher than 90 days are considered as short term investments.

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 shorter
|--------------------------------------- | ---------------------------------
|Equipment                               | 3-10 years                       
|Furniture, 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 seven years.











F-10






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EDAP TMS S.A. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of euros unless otherwise noted, except per share data)



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.

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 years
|----------------------- | -------
|Licenses                | 5 years
|Tradename and trademark | 7 years

1-12Treasury 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 483 thousand, 517 thousand and 558 thousand for the years ended December 31, 2006, 2005 and  2004, respectively.











F-11






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EDAP TMS S.A. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of euros unless otherwise noted, except per share data)

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, 2006, EDAP TMS had total research tax credits receivable of 111 thousand.

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, 2006, 2005 and 2004 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.



F-12






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EDAP TMS S.A. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of euros unless otherwise noted, except per share data)

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.



1-20 Employee stock option plans

At December 31, 2006, the Company had six stock-based employee compensation plans. The Company adopted SFAS 123R, Share-Based Payment, effective January 1, 2006. SFAS 123R requires the recognition of fair value of stock compensation as an expense in the calculation of net income (loss). Prior  to January 1, 2006, the Company followed the Accounting Principle Board (APB) Opinion 25, Accounting for Stocks Issued to Employees, and related interpretation for the accounting of stock compensation, as permitted by SFAS 123, Accounting for Stock Based Compensation.

The Group has elected the modified prospective transition method for adopting SFAS 123R. Compensation cost recognized in the year ended December 31, 2006 includes (1) compensation for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provision of SFAS 123 and determined using the Black-Scholes valuation method, and (2) compensation cost for all share-based payments granted subsequently to January 1, 2006, based on the grants date fair value estimated in accordance with the original provisions of SFAS 123(R) and determined using the Black-Scholes valuation model. Results from prior periods have not been restated.

For options that are subject to garded vesting on a service conditions, the Company recognizes the stock compensation expense under the accelerated recognition method specified in FASB Interpretation (FIN) 28 Accounting for Stock Appreciation Rights and Other Variable Stock Options or Award Plan. For options that cliff vest at the end of the vesting period, the Company recognizes the stock compensation expense ratably over the vesting period.



SFAS 123R requires the presentation of pro forma information for the comparative period prior to the adoption as if the group had accounted for all our employee stock options under the fair value method of the original SFAS 123. The following tables illustrate the effect on net income (loss) per share if the group had applied the fair value recognition provision of SFAS 123 to stock-based employee compensation to the prior year-end periods.











F-13






---









For the purpose of this proforma disclosure, the value of the options and warrants was estimated using Black Scholes evaluation model method and amortized to expense over their respective vesting period:



Year Ended December 31,2005
        2004Net loss, as reported
        (1,065)
        (1,149)Add: Stock-based employee compensation expense included inReported net loss, net of related tax effects
        125
        14Deduct: Total stock-based employee compensation expenseDetermined under fair value-based method for all awards, netof related tax effects
        (231)
        (44)Pro forma net loss
        (1,171)
        (1,179)Loss per share:Basic, as reported
        (0.14)
        (0.15)Basic, pro forma
        (0.15)
        (0.15)Diluted, as reported
        (0.14)
        (0.15)Diluted, pro forma
        (0.15)
        (0.15)




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 31,2006
        2005
        2004Weighted-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



(i) Accounting for Certain Hybrid Financial Instruments



FAS No. 155 "Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and No. 140" was issued in February 2006 and is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity's first fiscal year that begins after September 15, 2006. FAS No.155 provides entity with relief from having to separately determine the fair value of an embedded derivative that would otherwise be required to be bifurcated from its host contract in accordance with FAS No. 133. FAS No. 155 allows an entity to make an irrevocable election to measure such hybrid financial instrument at fair value in its entirety with changes in fair value recognized in earnings.

The adoption of FAS No. 155 will have no material effect on the Group's earnings and shareholder's equity, as determined under U.S GAAP.



F-14






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(ii) Accounting for Servicing of Financial Assets



FAS No. 156 "Accounting for Servicing of Financial Assets, an amendment of FASB Statements No. 140" was issued in March 2006 and is effective prospectively to all transactions occurring after the beginning of an entity's first fiscal year that begins after September 15, 2006. FAS No. 156 requires that an entity separately recognize a servicing asset or a servicing liability when it undertakes an obligation to service a financial asset under a servicing contract in certain situations.

The adoption of FAS No. 156 will have no material effect on the Group's earnings and shareholder's equity, as determined under U.S GAAP.



(iii) Fair Value Measurements



FAS No. 157 Fair Value Measurements was issued in September 2006 and is effective prospectively for fiscal years beginning after November 15, 2007. FAS No. 157 provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. The statement also sets out a fair value hierarchy.

The adoption of FAS No. 157 is not expected to have significant effect on the Group's earnings and shareholder's equity, as determined under U.S GAAP.



(iv) Accounting for Defined Benefit Pension and Other Postretirement Plans



FAS No. 158 Employers Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB Statements No.87, 88, 106, 132(R), was issued in September 2006 and is effective for fiscal years ending after December 15,2006. FAS No. 158 requires a full recognition of the plan overfunded or underfunded status of its benefit plans in the balance sheet. Therefore, unrecognized actuarial gain and loss and prior service costs and credits need to be recognized in Other Comprehensive Income and are recycled to the income statement based on current amortization and recognition criteria. In addition, the statement also required a company to measure its plan assets and benefit obligations as of its year-end balance sheet date.



(v) FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" - an interpretation of FASB Statement No. 109



On July 2006, the FASB issued FIN No. 48 which is effective for fiscal years beginning after December 15, 2006, and should be applied to all tax positions upon initial adoption. FIN No. 48 clarifies the accounting for income taxes by prescribing a "more-likely-than-not" recognition threshold a tax position is required to meet before being recognised in the financial statements. Once the recognition threshold has been met, FIN No. 48 requires to recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority.

The Interpretation also requires making explicit disclosures about uncertainties in Company's income tax positions.

The adoption of FIN No. 48 is not expected to have significant effect on the Group's earnings and shareholder's equity, as determined under U.S GAAP.



(vi) Planned Major Maintenance Activities



On September 2006, the FASB issued FSP No. AUG AIR-1 Accounting for Planned Major Maintenance Activities which is effective for the fiscal year beginning after December 15, 2006 and should be applied retrospectively. The FSP prohibits the use of the accrue-in advance method of accounting for planned major maintenance activities. It continues to permit the application of the other three alternative methods of accounting for planned major maintenance activities: direct expense, built-in overhaul, and deferral.



F-15






---



The adoption of the FSP No. AUG AIR-1 will have no material effect on the Group's earnings and shareholder's equity, as determined under U.S GAAP.



(vii) Fair Value Option for Financial Assets and Financial Liabilities



FAS No. 159 "The Fair Value Option for Financial Assets and Financial Liabilities" was issued in February 2007 and is effective as of the beginning of the first fiscal year that begins after November 15, 2007. FAS No. 159 offers an irrevocable option to carry the vast majority of financial assets and liabilities at fair value, with changes in fair value recorded in earnings. The adoption of FAS No. 159 is not expected to have significant effect on the Group's earnings and shareholder's equity, as adjusted to accord with U.S. GAAP.



(viii) Quantification of financial statement misstatements



In September 2006, the SEC issued Staff Accounting Bulletin No. 108 (SAB 108) regarding the quantification of financial statement misstatements. SAB 108 requires a dual approach for quantifications of errors consisting of "the roll-over method" and the "iron curtain method". The roll-over method focuses primarily on the impact of a misstatement on the income statementincluding the reversing effect of prior year misstatements and the iron-curtain method, on the other hand, focuses primarily on the effect of correcting the period-end balance sheet with less emphasis on the reversing effects of prior year errors on the income statement.

EDAP adopted the provisions of SAB 108 for the year ended December 31, 2006. The adoption of this standard did not have a material impact on EDAP.





F-16






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EDAP TMS S.A. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of euros unless otherwise noted, except per share data)



2CASH EQUIVALENTS AND SHORT TERM INVESTMENTS



Cash and cash equivalents are comprised of the following:

December 31,2006
        2005Total cash and cash equivalents
        9,894
        8,317Short term investment
        1,031
        -Total cash and short term investments
        10,925
        8,317




3TRADE ACCOUNTS AND NOTES RECEIVABLE, NET



Trade accounts and notes receivable consist of the following:

December 31,2006
        2005Trade accounts receivable
        10 631
        9 281Notes receivable
        192
        151Less: allowance for doubtful accounts
        (681)
        (663)Total
        10 142
        8 769






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 31,2006
        2005Value-added taxes receivable
        420
        521Research and development tax credit receivable from the French State
        111
        64Other receivables from the French State
        52
        31Others
        149
        234Total
        732
        850






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-17






---





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 31,2006
        2005Components, spare parts
        3 678
        3 759Work-in-progress
        495
        369Finished goods
        521
        1 196Total gross inventories
        4 694
        5 324Less: provision for slow-moving inventory
        (928)
        (874)Total
        3 766
        4 450






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 388 thousand, 386 thousand and 252 thousand for the years ended December 31, 2006, 2005 and 2004, respectively.

6PROPERTY AND EQUIPMENT, NET

Property and equipment consist of the following:

December 31,2006
        2005Equipment
        6 690
        5 852Furniture, fixture, and fittings and other
        2 341
        2 280Total gross value
        9 031
        8 132Less: accumulated depreciation and amortization
        (5 820)
        (5 002)Total
        3 211
        3 130




Depreciation and amortization expense related to property and equipment amounted to 1,200 thousand, 1,145 thousand and 934 thousand for the years ended December 31, 2006, 2005 and 2004, respectively.

Capitalized costs on assets held under capital leases of 1,557 thousand and 1,297 thousand are included in property and equipment at December 31, 2006 and 2005, respectively. Accumulated amortization of these assets leased to third parties was 828 thousand and 550 thousand, at December 31, 2006 and 2005, respectively. Amortization expense on assets held under capital leases is included in total amortization expense and amounted to 277 thousand, 267 thousand and 217 thousand for the years ended December 31, 2006, 2005 and 2004, respectively.





F-18






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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, 2006.

The Company completed the required annual impairment test in the fourth quarter of 2006. 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 31,2006
        2005Licenses
        486
        443Tradename and trademark
        540
        585Patents
        412
        412Organization costs
        363
        363Total gross value
        1 801
        1 803Less: accumulated amortization
        (1 730)
        (1 717)Total
        71
        86


Amortization expenses related to intangible assets amounted to 57 thousand, 57 thousand and 71 thousand, for the years ended December 31, 2006, 2005 and 2004, 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 31,2006
        2005Trade accounts payable
        3 987
        3 532Notes payable
        731
        773Total
        4 718
        4 305




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-19






---



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 31,2006
        2005Deferred revenues on maintenance contracts
        447
        375Deferred revenue  on  RPP
        67
        -Deferred revenue  on  sale of devices
        627
        645Deferral of the gain on sale-lease-back  transactions
        141
        189Total
        1 282
        1 210Less long term portion
        613
        439Current portion
        669
        771




10OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:

December 31,2006
        2005Provision for warranty costs
        700
        700Value added tax payable
        580
        543Accruals for social expenses
        344
        348Conditional government subsidies
        588
        398Advance from debtors
        11
        29Retirement indemnities
        20Others
        215
        287Total
        2 458
        2 305




Changes in the provision for warranty costs are as follows:

December 31,2006
        2005Beginning of year
        700
        660Amount used during the year (payments)
        (483)
        (477)New warranty expenses
        483
        517End of year
        700
        700






F-20






---





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, 2006, this equipment consists of medical devices for an amount of 1,051 thousand and vehicles for an amount of        81 thousand. Future minimum lease payments under capital leases for the years ending December 31, are as follows:

December 31, 20062007
        
        
        
        4912008
        
        
        
        3412009
        
        
        
        2542010
        
        
        
        99Thereafter
        
        
        
        61Total minimum lease payments
        
        
        
        1246Less: amount representing interest
        
        
        
        (114)Present value of minimum lease payments
        
        
        1132Less: current portion
        
        
        
        436Long-term portion
        
        
        
        696


Interest paid under capital lease obligations was 48 thousand, 28 thousand, and 19 thousand for the years ended December 31, 2006, 2005, and 2004, respectively.

11-2 Operating leases

As of December 31, 2006, operating leases having initial or remaining non-cancelable lease terms greater than one year consist 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
        Japan2007
        
        
        267
        1852008
        
        
        267
        1182009
        
        
        
        -
        -Total
        
        
        
        533
        303


Total rent expense under operating leases amounted to 689 thousand, 703 thousand and 899 thousand for the years ended December 31, 2006, 2005 and 2004, 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-21






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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, 2006, short-term borrowings consist of 430 thousand of account receivables factored and for which the Company is supporting the risk of uncollectibility and loans in euros amounting to 878 thousand with the following conditions:

Amount
        Maturation
        Interest rateTMS SA
        103
        December 21, 2007
        Euribor + 0,5%EDAP SA
        517
        June 29, 2007
        Euribor + 0,5%EDAP SA
        103
        September 28, 2007
        Euribor + 0,5%EDAP SA
        155
        December 21, 2007
        Eonia + 0,5%Total
        878


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.

13LONG-TERM DEBT

Long-term debt consists of the following:

December 31,2006
        2005Japanese yen term loan
        
        
        
        49
        202Italy
        
        
        
        132
        -Total
        
        
        
        181
        202Less current portion
        
        
        
        (123)
        (147)Total long-term portion
        
        
        
        58
        55




Long-term debt at December 31, 2006 matures as follows:

2007
        
        
        
        
        1232008
        
        
        
        
        58Total
        
        
        
        
        181


As of December 31, 2006, long-term debt consist of a loan in Japanese yen amounting to JPY 28.1 million (179 thousand) with a 2.4% interest rate, due to mature on May 11, 2007; and a loan in euro amounting to 150 thousand with a quarterly variable interest rate based on Euribor + 1.375%, due to mature on September 18, 2008.

14OTHER LONG-TERM LIABILITIES

Other long-term liabilities consist of the following:

December 31,2006
        2005Provision for retirement indemnities
        577
        469Other
        303
        106Total
        880
        575






F-22






---





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, 2006 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  France2006
        2005
        2004Weighted average assumptions:Discount rate
        
        
        4.50%
        4.00%
        4.50%Salary increase
        
        
        2.00%
        2.00%
        2.00%Retirement age
        
        
        65
        65
        65Average retirement remaining service period
        
        
        26
        27
        26




Pension Benefits  Japan2006
        2005
        2004Weighted average assumptions:Discount rate
        
        
        1.75%
        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, 2006 (in thousands of euros):



France
        JapanProjected benefit obligation
        
        218
        239Normal cost
        
        21
        31Accumulated benefit obligation
        
        152
        208Provision presentation according to FAS 158 :Non current liabilities
      
      France
      JapanCurrent liabilities
      
      212 769
      223 914Non current asset
      
      4 945
      15 488Accumulated other comprehensive incomeTotal
      
      17 716
      (101 654)235 430
      137 748












F-23






---



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 thousands of euros) during fiscal year ending December 31, 2006:



France
        2006
        2005
        2004Change in benefit obligationsBenefit obligations at beginning of year
        229
        132
        155Service cost
        23
        17
        19Interest cost
        9
        6
        7Plan amendments
        -
        -
        -(gain) / loss
        (44)
        74
        (49)Benefits paids
        -
        -
        -Benefit obligations at end of year
        218
        229
        132Change in plan assetsFair value of plan assets at beginning of year
        -
        -
        -Employer contribution
        -
        -
        -Return on plan assets
        -
        -
        -Benefits paid
        -
        -
        -Fair value of plan assets at end of yearUnrecognized actuarial (gain) loss
        (17)
        27
        (49)Unrecognized prior service cost
        -
        -
        -Accrued pension cost
        235
        202
        181




JAPAN
        2006
        2005
        2004Change in benefit obligationsBenefit obligations at beginning of year
        262
        217
        140Service cost
        32
        35
        -Interest cost
        3
        3
        -Plan amendments
        -
        -
        -Termination benefits
        -
        -
        25(gain) / loss
        (3)
        7
        136Benefits paids
        (25)
        -
        (84)Exchange rate impact
        (30)Benefit obligations at end of year
        239
        262
        217Change in plan assetsFair value of plan assets at beginning of year
        -
        -
        -






F-24






---





Employer contribution
        -
        -
        -Return on plan assets
        
        -
        -Benefits paid
        
        -
        -Fair value of plan assets at end of yearUnrecognized actuarial (gain) loss
        101
        130
        136Unrecognized prior service cost
        0
        0
        0Accrued pension cost
        138
        132
        81








F-25






---



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, 2006, EDAP TMS S.A.s common stock consisted of 9,324,497 issued shares, fully paid, and with a par value of 0.13 each. 8,817,007 of the shares were outstanding.

15-2 Pre-emptive subscription rights

Shareholders have preemptive rights to subscribe on apro ratabasis 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 26,438 thousand and 22,906 thousand at December 31, 2006 and 2005, 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, 2006, the 507,490 shares of treasury stock consisted of (i) 105,150 shares acquired on December 2, 1996 for 418 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 507,490 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, 2006, 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-26






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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-27






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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, subject to the achievement of certain milestones in the years 2006 and 2007. On July 3, 2006, 13,800 rights to subscribe to new shares were distributed to new entrants, subject to the achievement of certain milestones in the years 2006 and 2007. As of December 31, 2006, none of the milestones for the





F-28






---



year 2006 have been reached. As of December 31, 2006, only 524,900 rights were still in force due to employees departure. This plan  is accounted for in compliance with FASB 123-(R).





F-29






---







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, 2006, a summary of stock option activity to purchase or to subscribe to Shares under these plans is as follows:

2006
        2005
        2004Options
        Weighted average exercise price
()
        Options
        Weighted average exercise price
()
        Options
        Weighted average exercise price
()Outstanding on January 1,
        593,262
        2.50
        580,262
        2.49
        391,262
        2.68Granted
        
        
        15,000
        2.78
        325,000
        2.19Exercised
        (72,600)
        3,20
        (1,000)
        1.62
        0Forfeited
        (18,500)
        2,60
        (1,000)
        3.81
        (136,000)
        2.34Expired
        -
        -
        -
        -
        -
        -Outstanding on December 31,
        502,162
        2.38
        593,262
        2.50
        580,262
        2.49Exercisable on December 31,
        405,162
        2,73
        409,652
        2.45
        219,547
        2.99Shares 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, 2006:

Outstanding options
        Exercisable optionsExercise price ()
        
        Options
        Weighted average remaining contractual life
        Weighted average exercise price
()
        Options
        Weighted average exercise price
()3.81
        
        71,525
        1.5
        3.81
        71,525
        3.812.78
        
        15,000
        8.1
        2.78
        15,000
        2.782.60
        
        200,000
        7.2
        2.60
        103,000
        2.602.08(1)
        
        93,000
        5.0
        2.08
        93,000
        2.082.02(2)
        
        12,425
        5.5
        2.02
        12,425
        2.021.83
        
        10,212
        2.5
        1.83
        10,212
        1.831.28
        
        100,000
        7.2
        1.28
        100,000
        1.281.28 to 3.81
        
        502,162
        5.9
        2.39
        405,162
        2.34


(1)
        All the 93,000 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 12,425 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-30






---



EDAP TMS S.A. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of euros unless otherwise noted, except per share data)

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 the current President of each 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 3.6% and
2.6% 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, i.e. December 18, 2005. These warrants to subscribe to shares expire on the earlier of December 18, 2007 or when employment with the Company ceases. A compensation charge has been booked for an amount of 0 thousand as at December 31, 2006, 115 as at December 31, 2005 and 0 as at December 31, 2004.

16NET SALES

Net sales consist of the following:






2006
        2005
        2004Sales of goods
        10,849
        12,198
        13,823Sales of RPPs  & Leases
        3,805
        3,146
        2,986Sales of spare parts & services
        5,520
        5,606
        5,320Total sales
        20,174
        20,952
        22,129Warrants granted
        -
        (235)
        (174)Total net sales
        20,174
        20,717
        21,955





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-31







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'slithotripters in the US, therefore the parties decided to amend the terms and conditions of the contract. From then, no more warrants were directly linked to
the purchase of additional lithotripters and  revenues from the sales of lithotripters have not been impacted by warrants.

The 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:


2006
        2005
        2004Royalties
        
        -
        47
        163Grants and others
        
        91
        46
        45Total
        
        91
        93
        208

In 2006, EDAP SA received grants of 45 thousand from ANVAR a French government agency.

TMS S.A. and EDAP S.A. received grants of 6 thousand in 2005 and 25 thousand in 2004, from the French Ministry of Research and Development.



18OPERATING EXPENSES

Operating expenses include bad debt expenses amounting to 86 thousand, 274 thousand and 204 thousand, for the years ended December 31, 2006, 2005, and 2004. These operating expenses also include allowance for slow moving inventory which is classified as cost of goods sold and amounts to 388 thousand, 386 thousand and 252 thousand for the years ended December 31, 2006, 2005 and 2004 respectively.

In 2006, the Company recorded non recurring expenses of 0.3 million including 0.2 million of employee termination expenses and 0.1 million of capital increase expenses.

In 2004, following the Companys decision in 2003 to reduce headcount in both divisions, the Company recorded non-recurring expenses of 0.3 million, including 0.2 million of employee termination expenses.



19INTEREST INCOME, NET

Interest (expense) income, net consists of the following:


2006
        2005
        2004Interest income
        
        
        224
        187
        146Interest expense
        
        
        (71)
        (52)
        (75)Total
        
        
        153
        135
        71





F-32






EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(in thousands of euros unless otherwise noted, except per share data)

20OTHER INCOME (EXPENSE), NET




Other income (expense), consists of the following:


2006
        2005
        2004Other income (expense), net
        
        
        (5)
        9
        (74)Total
        
        
        (5)
        9
        (74)



21INCOME TAXES

21-1 Loss before income taxesLoss before income taxes is comprised of the following:
      2006
      2005
      2004France
        
        
        (2,990)
        (755)
        (361)Other countries
        
        
        (385)
        (206)
        (510)Total
        
        
        (3,375)
        (961)
        (871)

21-2 Income tax (expense)/ benefit


Income tax (expense)/benefit consists of the following:
        2006
        2005
        2004Current income tax expense:France
        
        
        4
        38
        6Other countries
        
        
        (69)
        (57)
        (29)Sub-total current income tax expense
        
        (65)
        (19)
        (23)Deferred income tax (expense) benefit:France
        
        
        72
        (90)
        (255)Other countries
        
        
        (63)
        5
        -Sub-total deferred income tax (expense) benefit
        
        9
        (85)
        (255)Total
        
        
        (56)
        (104)
        (278)

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 31,2006
        2005Elimination of intercompany profit in inventory
        
        
        169
        212Other items
        
        
        
        540
        431Net operating loss carryforwards
        
        
        
        6,874
        5,941Total deferred tax assets
        
        
        
        7,583
        6,584Capital leases treated as operating leases for tax
        
        
        (38)
        (9)Exit tax
        
        
        
        (81)
        (161)Other items
        
        
        
        (224)
        (198)Total deferred tax liabilities
        
        
        
        (343)
        (368)Net deferred tax assets
        
        
        
        7,240
        6,216Valuation allowance for deferred tax assets
        
        
        (7,156)
        (6,223)Deferred tax assets (liabilities), net of allowance
        
        
        84
        (7)








F-33






EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)


Net operating loss carryforwards of 1,889 thousand, 1,801 thousand, 1,910 thousand, 230 thousand, 739 thousand and 13,507 thousand as of December 31, 2006 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 6,874 thousand. Realization of these assets is contingent on future taxable earnings in the applicable tax jurisdictions. As of December 31, 2006, 6,486 thousand out of these 6,874 thousand net operating loss carry-forwards have no expiration date. The remaining tax loss carry-forwards expire in years 2007 through 2013. 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.

In 2006 and 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, 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. In 2006 half of this amount has been paid, and the last installment will be paid in 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:


2006
        2005
        2004French statutory rate
        33.8%
        33.8%
        34.3%Research and development tax credit
        1.4%
        7.6%Income of foreign subsidiaries taxed at different tax rates
        1.3%
        1.5%
        1.9%Effect of net operating loss carryforwards and valuationAllowances
        (27.6%)
        (22.5%)
        (31.4%)Non deductible entertainment expenses
        (1.4%)
        (4.9%)
        (2.6%)Other
        (9.1%)
        (27.7%)
        (34.1%)Effective tax rate
        (1.6%)
        (12.2%)
        (31.9%)




















F-34









EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
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, 2006, 2005 and 2004 is as follows:




For the year ended Dec. 31, 2006
        For the year ended Dec. 31, 2005
        For the year ended Dec. 31, 2004Loss  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
            AmountBasic EPSLoss available tocommon Shareholders
        (3,430,985)
        8,817,007
        (0.39)
        (1,065,375)
        7,782,731
        (0.14)
        (1,148,792)
        7,781,731
        (0.15)Effect of dilutive securities:Stock options
        
        740,526
        
        
        590,843
        
        
        292,479Diluted EPSLoss available tocommon shareholders,Including assumedConversions
        (3,430,985)
        9,557,533
        (0.39)
        (1,065,375)
        8,373,574
        (0.14)
        (1,148,792)
        8,074,210
        (0.15)



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, 2006, and for the year then ended.


















F-35









EDAP TMS S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands of euros unless otherwise noted, except per share data)
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, 2006 and 2005.






December 31,
        December 31,2006 
      Recorded 
      Value
        2006 
  Estimated
  Fair Value
        2005 
      Recorded 
      Value
        2005 
  Estimated 
  Fair ValueAssets:Cash and cash equivalents
        9,894
        9,894
        8,317
        8,317Trade accounts and notes receivable, net (1)
        10,142
        10,142
        8,769
        8,769Short term investment
        1,031
        1,031
        -
        -Liabilities:Short-term borrowings
        1,308
        1,308
        155
        155Trade accounts payable
        3,987
        3,987
        3,532
        3,532Notes payable
        731
        731
        773
        773Long-term debt
        58
        54
        55
        53

(1) Certain prior years amounts have been reclassified to conform to the current years presentation

The recorded amount of cash and cash equivalents, restricted short term investment, 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-36








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, 2006 and 2005. Ultimate losses may vary from the current estimates, and any adjustments are reported in earnings in the periods in which they become known.

In 2006 and 2005, 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, 2006, there were no outstanding hedging instruments



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 2006, 2005 and 2004 and the key balance sheet figures, by segment, for fiscal years 2006 and 2005.

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-37










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:


2006
        2005
        2004Segment operating loss
        
        
        (3,094)
        (1,323)
        (830)Interest income, net
        
        
        153
        135
        71Foreign Currency exchange (losses) gains, net
        
        (430)
        218
        (38)Other income, net
        
        
        (5)
        9
        (74)Income tax (expense) credit
        
        
        (56)
        (104)
        (278)Consolidated net loss
        
        
        (3,431)
        (1,065)
        (1,149)

A summary of the Companys operations by business unit is presented below for years ending December 31, 2006, 2005 and 2004:




HIFU Division
        UDS Division
        EDAP TMS
(Corporate)
        Consolidation
        Total consolidated2006External sales of medical devices
        2,633
        5,975
        
        
        8,608External sales of spares parts,Supplies & services
        4,989
        6,578
        
        
        11,566Internal segment revenues
        12
        3,001
        
        (3,013)Total sales
        7,633
        15,554
        
        (3,013)
        20,174Warrants grantedTotal net sales
        7,633
        15,554
        
        (3,013)
        20,174External other revenues
        66
        25
        
        
        91Internal other revenues
        17
        
        
        (17)
        -Total revenues
        7,715
        15,579
        
        (3,030)
        20,265Total COS
        (3,607)
        (11,069)
        
        2,730
        (11,946)Gross margin
        4,108
        4,511
        
        (300)
        8,319R&D
        (1,231)
        (1,212)
        
        
        (2,442)Selling expenses
        (2,475)
        (2,146)
        
        
        (4,621)G&A
        (696)
        (1,700)
        (1,687)
        
        (4,083)Non recurring operating expenses
        
        
        (267)
        
        (267)Total expenses
        (4,402)
        (5,057)
        (1,954)
        
        (11,413)Operating income (loss)
        (294)
        (546)
        (1954)
        (300)
        (3,094)Total Assets
        13,125
        20,945
        7,857
        (9,454)
        32,473Capital expenditures
        1,050
        515
        
        
        1,565Long-lived assets
        2,384
        3,650
        46
        
        6,080Goodwill
        645
        1,767
        
        
        2,412














F-38








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 consolidated2005External 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-39










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 consolidated2004External 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-40










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 
      inventoryRestated balance as of January 1, 2004
        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
        874Charges to costs and expenses
        86
        388Deductions: write-off provided in prior periods
        (68)
        (334)Restated balance as of December 31, 2006
        681
        928



29SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATIONInterest and income taxes paid are as follows:
2006
        2005
        2004Income taxes paid (refunds received)
        204
        (66)
        (82)Interest paid
        22
        7
        19Interest received
        150
        119
        120Non-cash transactions:
        2006
        2005
        2004Capital lease obligations incurred
        1,132
        859
        998





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 61 thousand, 136 thousand and 63 thousand, for 2006, 2005 and 2004 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-41










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 588 thousand, 396 thousand and 401 thousand in 2006, 2005 and 2004 respectively.

As of December, 31 2006, receivables amounted to 73 thousand and payables to 24 thousand. As of December 31, 2005, receivables amounted to 148 thousand and payables to 83 thousand.

The Company purchases certain technological elements to Siemens AG. Total purchases amounted to 444 thousand in 2006, 547 thousand in 2005 and 405 thousand. As of December 31, 2006, payables due to Siemens AG amounted to 18 thousand and as of December 31, 2005, payables due to Siemens AG amounted to 46 thousand.



31SUBSEQUENT EVENTS
Following the announcement by HealthTronics of its intention not to pursue Ablatherm FDA approval.
We are negotiating a Termination Agreement with HealthTronics, which we expect to be signed in the coming weeks.





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