**As
      filed with the Securities and Exchange Commission on March 31,
      2008**





**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, 2007




**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:


Title
                  of each class
              
              Name
                  of each exchangeon
                  which registered**American
                  Depositary Shares, each representing**
              ****
              **NASDAQ
                  Global Market****One
                  Ordinary Share****Ordinary
                  Shares, nominal value €0.13 per share**
              ****
              **NASDAQ Global Market**


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




**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, 2007: **9,200,757 Ordinary Shares**




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


Yes
o No
x




If
      this
      report is an annual or transition report, indicate by check mark if the
      registrant is not required to file reports pursuant to Section 13 or 15(d)
      of
      the Securities Exchange Act of 1934. Yes
o No
x




Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the preceding 12 months (or for such shorter period that the registrant was
      required to file such reports) and (2) has been subject to such filing
      requirements for the past 90 days. Yes
x  No
o




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




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




Indicate
      by check mark which basis of accounting the registrant has used to prepare
      the
      financial statements included in this filing:




U.S.
      GAAP X  International Financial Reporting Standards as issued by the International
      Accounting Standards Board __  Other __




If
      "Other" has been checked in response to the previous question indicate by check
      mark which financial statement item the registrant has elected to follow. Item
      17 __ Item 18 __




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














**TABLE
      OF CONTENTS**


**Page**Presentation
                  of Financial and Other Information
              
              
              4Forward-looking
                  Information
              
              
              4**PART
                  I****Item
                  1.** Identity of Directors, Senior Management and Advisors
              
              
              5**Item
                  2.** Offer Statistics and Expected Timetable
              
              
              5**Item
                  3.** Key Information
              
              
              5**Item
                  4.** Information on the Company
              
              
              18**Item
                  4A.** Unresolved Staff Comments
              
              
              30**Item
                  5.** Operating and Financial Review and Prospects
              
              
              30**Item
                  6.** Directors, Senior Management and Employees
              
              
              43**Item
                  7.** Major Shareholders and Related Party
                  Transactions
              
              
              48**Item
                  8.** Financial Information
              
              
              49**Item
                  9.** The Offer and Listing
              
              
              50**Item
                  10.** Additional Information
              
              
              52**Item
                  11.** Quantitative and Qualitative Disclosures about Market
                  Risk
              
              
              64**Item
                  12.** Description of Securities Other than Equity
                  Securities
              
              
              65**PART
                  II****Item
                  13.** Defaults, Dividend Arrearages and
                  Delinquencies
              
              
              66**Item
                  14.** Material Modifications to the Rights of Security Holders
                  and
                  Use of Proceeds
              
              
              66**Item
                  15.** Controls and Procedures
              
              
              66**Item
                  16A.** Audit Committee Financial Expert.
              
              
              67**Item
                  16B.** Code of Ethics
              
              
              67**Item
                  16C.** Principal Accounting Fees and Services
              
              
              67**Item
                  16D.** Exemptions from the Listing Standards for Audit
                  Committees
              
              
              68**Item
                  16E.** Purchases of Equity Securities by the Issuer and Affiliated
                  Purchasers
              
              
              68**PART
                  III****Item
                  17.** Financial Statements
              
              
              69**Item
                  18.** Financial Statements
              
              
              69**Item
                  19.** Exhibits
              
              
              69




2




[THIS
      PAGE INTENTIONALLY LEFT BLANK]




3




**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 = €0.6848, 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, 2007. 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
      TMS, EDAP, Technomed, Ablatherm, Ablasonic, Ablapak, Praktis, Pulsolith,
      Sonolith 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 suppliers;




·
            any
                event or other occurrence that would interrupt operations at our
                primary
                productionfacility,




·
            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;


·
            fluctuations
                in results of operations due to the cyclical nature of demand for
                medical
                devices;




·
            risks
                associated with the October 2007 private placement;




·
            risks
                relating to ownership of our securities;
                and




·
            changes
                in the fair value of the debentures and warrants issued in the October
                2007 private placement.




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.




4




**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 selected balance sheet data as of December 31, 2005,
      2006 and 2007 and the selected income statement data for the years ended
      December 31, 2005, 2006 and 2007 set forth below have been derived from our
      Consolidated Financial Statements included in this annual report. The selected
      balance sheet data as of December 31, 2003 and 2004 and the selected income
      statement data for the year ended December 31, 2003 and 2004 have been derived
      from our audited consolidated financial statements as of and for the years
      ended
      December 31, 2003 and 2004. These financial statements, together with our
      Consolidated Financial Statements have been 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,****2003**
            
            **2004**
            
            **2005******
            
            **2006******
            
            **2007**In
                thousands of euro, exceptper
                share data in euro**INCOME
                STATEMENT DATA**Total
                revenues
            
            
            18,473
            
            
            22,163
            
            
            20,810
            
            
            20,265
            
            
            22,327Total
                net sales
            
            
            18,030
            
            
            21,955
            
            
            20,717
            
            
            20,174
            
            
            22,213Gross
                profit
            
            
            5,379
            
            
            8,487
            
            
            8,497
            
            
            8,319
            
            
            9,179Operating
                expenses
            
            
            (13,500
            )
            
            (9,317
            )
            
            (9,820
            )
            
            (11,413
            )
            
            (13,268
            )Loss
                from operations
            
            
            (8,121
            )
            
            (830
            )
            
            (1,323
            )
            
            (3,094
            )
            
            (4,089
            )Income
                (loss) before income taxes
            
            
            (9,090
            )
            
            (871
            )
            
            (961
            )
            
            (3,375
            )
            
            (5,571
            )Income
                tax (expense) benefit
            
            
            114
            
            
            (278
            )
            
            (104
            )
            
            (56
            )
            
            140Net
                income (loss)
            
            
            (8,976
            )
            
            (1,149
            )
            
            (1,065
            )
            
            (3,431
            )
            
            (5,430
            )Basic
                and diluted earnings (loss) per share
            
            
            (1.15
            )
            
            (0.15
            )
            
            (0.14
            )
            
            (0.39
            )
            
            (0.59
            )Dividends
                per share(1)
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Weighted
                average sharesoutstanding
                used in basic and diluted calculation
            
            
            7,781,731
            
            
            7,781,731
            
            
            7,782,731
            
            
            8,817,007
            
            
            9,200,757**BALANCE
                SHEET DATA**Total
                current assets
            
            
            25,870
            
            
            22,041
            
            
            22,777
            
            
            26,393
            
            
            36,124Property
                and equipment, net
            
            
            2,903
            
            
            2,807
            
            
            3,130
            
            
            3,211
            
            
            4,179Total
                current liabilities
            
            
            11,074
            
            
            8,272
            
            
            9,874
            
            
            10,926
            
            
            12,884Total
                assets
            
            
            31,910
            
            
            27,901
            
            
            28,796
            
            
            32,473
            
            
            45,003Long-term
                debt, less current portion
            
            
            7
            
            
            -
            
            
            55
            
            
            58
            
            
            15,174Total
                shareholders’ equity
            
            
            18,961
            
            
            17,964
            
            
            17,372
            
            
            19,300
            
            
            14,499






(1)
            No
                dividends were paid with respect to fiscal years 2003 through 2006
                and
                subject to approval of the annual shareholders’ meeting to be held in June
                2008, the Company does not anticipate paying any dividend with respect
                to
                fiscal year 2007. See Item 8, ‘‘Financial Information — Dividends and
                Dividend Policy.’’




5




**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****€**
            
            **€**
            
            **€**
            
            **€**2003
            
            
            1.12
            
            
            0.79
            
            
            0.88
            
            
            0.792004
            
            
            0.85
            
            
            0.73
            
            
            0.80
            
            
            0.742005
            
            
            0.86
            
            
            0.74
            
            
            0.81
            
            
            0.842006
            
            
            0.84
            
            
            0.75
            
            
            0.79
            
            
            0.762007
            
            
            0.78
            
            
            0.67
            
            
            0.73
            
            
            0.68




(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****€**
            
            **€**
            
            **€**
            
            **€***2007*September
            
            
            0.70
            
            
            0.73
            
            
            0.70
            
            
            0.72October
            
            
            0.69
            
            
            0.71
            
            
            0.69
            
            
            0.70November
            
            
            0.68
            
            
            0.69
            
            
            0.67
            
            
            0.68December
            
            
            0.68
            
            
            0.70
            
            
            0.68
            
            
            0.69*2008*January
            
            
            0.67
            
            
            0.69
            
            
            0.67
            
            
            0.68February
            
            
            0.66
            
            
            0.69
            
            
            0.66
            
            
            0.68March,
                through March 16, 2008
            
            
            0.64
            
            
            0.66
            
            
            0.64
            
            
            0.65




On
      March
      17, 2008, the Noon Buying Rate was U.S.$1.00 = €0.6343




6




**RISK
      FACTORS**




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.




**Risks
      Relating to Our Business**




***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, Canada and other countries. However, the Ablatherm is not approved for
      commercial distribution in the United States. 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. After redesigning the clinical
      protocol, we resumed and plan to complete the clinical trials necessary to
      obtain FDA approval of the Ablatherm now that we have completed the October
      2007
      private placement, which resulted in net proceeds of approximately $17.4
      million. While we expect these funds to be sufficient to enable us to fund
      the
      clinical trials in their entirety, we cannot guarantee that the proceeds will
      in
      fact be enough to do so. 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 “—Our clinical
      trials for products using HIFU technology may not be successful” and Item 4,
“Information on the Company—High Intensity Focused Ultrasound (“HIFU”)
      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 pursue clinical 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 investors 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
      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.




7




***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 full public reimbursement in Germany and
      Italy and partial reimbursement from private insurers in 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 2007, 2006 and 2005, 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 2007, 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,
      and, in 2007, due to the sponsoring of the pre-market approval (‘‘PMA’’) trials
      for the FDA’s approval of our Ablatherm-HIFU solution for the treatment of
      prostate cancer in the United States. 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, and by the
      implementation of our US clinical trials to seek the FDA’s approval. 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. In October 2007, we raised a $20 million
      convertible debt via a Private Investment in Public Equity, aimed at financing
      our pre-market approval trial process to seek the FDA’s approval on our
      Ablatherm-HIFU solution for the treatment of prostate cancer in the United
      States (our Ablatherm device, considered as a Class III device by the FDA,
      must
      receive pre-market approval by the FDA to ensure its safety and effectiveness).
      Our future cash flow will be affected by the increased expenses to fund the
      trials, while there is no assurance that our cash flow will in fact be enough
      to
      do so or that clinical trials will be successful or that the FDA will grant
      approval to market our device even if the trials are successfully
      completed.




***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, we had positive
      operating income in both of our operating divisions (HIFU division and Urology
      Devices and Services (“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 research and development (“R&D”) and
      regulatory efforts in the UDS division to develop a new, high-range
      lithotripter. In 2007, we also had negative operating income in our UDS
      division, reflecting the R&D and regulatory efforts in the UDS division to
      develop a new, high-range lithotripter, and in connection with our FDA/PMA
      trials, reflecting the regulatory and clinical efforts to resume and conduct
      our
      Ablatherm-HIFU PMA trials. Total costs were equal to total revenues for our
      HIFU
      division in 2007, due to the increase in revenues and margin on HIFU equipment
      and RPP treatment sales. We cannot assure investors that we will realize
      sufficient revenue to become profitable in the future. See Item 5, ‘‘Operating
      and Financial Review and Prospects.’’




8




***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. On April 25, 2007, we
      signed an exclusive distribution agreement with China Medical Technologies
      (“Chinamed”) to distribute their HIFU devices in the European Union and Russia
      once their devices are approved for use in those jurisdictions and on September
      21, 2007, we signed a Consulting Agreement with them, pursuant to which we
      will
      assist them in obtaining market approvals in Europe for their HIFU products.
      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 investors 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.




9




***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
      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 investors 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.




10




***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.




***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 investors 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.




11




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 one product
      liability action in the United States by a patient 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 this action. This product liability claim, 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 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 2007, approximately 77% of our total operating expenses
      were denominated in euro, while approximately 29% 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, 2007, we had no
      outstanding hedging instruments. 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.




12




**Risks
      Relating to the October 2007 Private Placement**





***If
      we fail to register the resale of our securities by the applicable deadlines
      and
      maintain such registration, we will be subject to substantial penalties.***




Under
      the
      terms of the registration rights agreement we entered into in connection
      with the
      October 2007 private placement ,
      we
      agreed to secure the registration of a portion of the securities deliverable
      upon conversion of the debentures and in payment of interest under the
      debentures by certain dates. In addition, we agreed to secure the registration
      of the remaining securities deliverable on conversion of the debentures and
      all
      of the securities deliverable upon exercise of the warrants by certain dates.
      If
      we fail to achieve effectiveness by the required dates, or maintain the
      effectiveness of the registration statements required under this registration
      rights agreement, we are subject to significant penalties, including payment
      of
      liquidated damages. Because of the SEC’s recent interpretation of Rule 415 under
      the U.S. Securities Act, as amended (the “Securities Act”), we cannot guarantee
      we will successfully secure effectiveness of the registration statements or,
      if
      it is secured, that we will be able to maintain such effectiveness. Failure
      to
      meet these obligations will cause us to incur substantial penalties in the
      form
      of liquidated damages and could, given the passage of time, lead to an event
      of
      default under the debentures. Payment of liquidated damages or mandatory default
      amount will have a
      material adverse effect on our financial condition and results of  operation and our ability to continue as a going concern .




***If
      we are required for any reason to repay our outstanding debentures, we would
      be
      required*** ** ***to
      deplete our working capital*** ***or*** ***raise additional funds*** ***.*** ***Our failure to repay the debentures, if required, could result in legal action
      against us, which could*** ***require the sale of substantial assets*** *.*




The
      debentures are due and payable on October 30, 2012, unless sooner converted
      into
      ordinary shares. Any event of default could require the early repayment of
      the
      debentures at the mandatory default amount, including all other amounts of
      interest, costs, expenses and liquated damages due in respect of the defaulted
      debentures. We expect that the full amount of the debentures will be converted
      into ordinary shares in accordance with the terms of the debentures. If, prior
      to the maturity date, we are required to repay the debentures in full, we would
      be required to use our working capital and raise additional funds. If we were
      unable to repay the debentures when required, the holders could commence legal
      action against us to recover the amounts due. Any such action would have a
      material adverse effect on our financial condition and results of
      operations.




***The
      issuance of*** ** ***shares
      upon conversion of the debentures and exercise of*** ***outstanding
      warrants will cause immediate and substantial dilution to our existing
      shareholders.*** ****




The
      issuance of ordinary shares upon conversion of the debentures and exercise
      of
      the warrants will result in substantial dilution to the interests of other
      shareholders since the selling shareholders may ultimately convert and sell
      the
      full amount issuable on conversion. Based on the conversion price of the
      debentures and the exercise price of the warrants at the closing of the October
      2007 private placement, up to 4,913,102, including 188,965 shares issuable
      to
      our placement agent of our ordinary shares are issuable upon conversion and
      exercise, representing approximately 53% of our issued and outstanding share
      capital. In addition, interest on the debentures is payable, under
      certain circumstances, in
      ordinary shares, under a formula which is tied to the trading price of our
      ADRs,
      and under which there is no upper limit of shares that may be required to be
      issued under our election to pay interest in ordinary shares. Although no single
      selling shareholder may convert its debentures and/or exercise its warrants
      if
      such conversion or exercise would cause it to own more than 4.99% of our
      outstanding ordinary, this restriction does not prevent each selling shareholder
      from converting and/or exercising a portion of its holdings, selling those
      Securities and then converting the rest of its holdings. In this way, each
      selling shareholder could sell more than this limit while never holding more
      than this limit.




***We
      may not be authorized to issue enough ordinary shares or be able to fulfill
      the
      conditions precedent to pay interest on the debentures in the form of ordinary
      shares, and if we fail to do so after we have notified the debenture holders
      of
      our intention do so, an event of default under the debentures could
      occur.***




As
      noted
      above, interest on the debentures is payable, under certain circumstances,
      in
      ordinary shares, under a formula which is tied to the trading price of our
      ADRs.
      In order to pay interest in this manner, we need to notify our debenture holders
      at least 21 trading days prior to the relevant interest payment date and fulfill
      certain conditions during that notice period, up to and including the date
      interest is paid. Any such notice is irrevocable. Interest paid in ordinary
      shares is paid at the “interest conversion rate”, which is based on the trading
      price of our ADRs during the notice period, after our irrevocable notice has
      been given. In the event our share price were to fall during the notice period,
      we would have to deliver a higher number of shares than we may have originally
      planned at the time we gave the irrevocable notice. In the event the number
      of
      shares we are required to deliver exceeds the number of shares we are then
      authorized by our shareholders to issue, we may not be able to deliver all
      of
      the interest shares then due. Additionally, if, on the day we pay interest,
      we
      do not fulfill the relevant conditions, we are not permitted to pay interest
      in
      the form of ordinary shares. In the event we are not able to deliver shares
      for
      any reasons, we will be subject to late fees and our debenture holders may
      decline to receive interest paid in cash. In the event they do not accept
      payment in cash, we would not be able to make a complete interest payment or
      any
      interest payment at all, which will result in an event of
      default under the debentures .
      An
      event of default with respect to the debentures would have a
      material adverse effect on our financial  conditions
      and results of operations.




13




***Our
      increased leverage as a result of the sale*** ** ***of
      the debentures*** ***and warrants*** ** ***in
      the October 2007 private placement*** ***m*** ***ay
      harm our financial*** ***condition
      and results of operations.*** ****** **




Our
      total
      consolidated long-term financial debt as
      of
      December 31, 2007 was €15.2 million (approximately $22.2 million) and represented
      approximately 34 %
      of our
      total capitalization ,
      including the current portion of indebtedness of approximately €0.058 million
      (approximately $0.085 million), as of that date . Our level
      of indebtedness could have important consequences
      on our future operations, including :




·
                Reducing
                    the availability of our cash flow to fund working capital, capital
                    expenditures and other general corporate purposes, and limiting
                    our
                    ability to obtain additional financing for these purposes;
                    and
  ·
                  Limiting
                      our flexibility in planning for, or reacting to, and increasing
                      our
                      vulnerability to, changes in our business, the industry in
                      which we
                      operate and the general
                      economy.




***Provisions
      in the debentures could discourage an acquisition of us or an investment in
      us
      by a third party, even if the acquisition or investment would be favourable
      to
      investors.***




The
      debentures prohibit us from engaging in certain transactions, each known as
      a
“fundamental transaction”, including any merger, the sale of all of our assets
      or a tender offer under which our shareholders are permitted to exchange their
      shares for cash, securities or property, unless the successor  entity
      agrees to comply with the requirement to provide our debenture holders, upon
      conversion, with the same property provided to our existing shareholders under
      the terms of the fundamental transaction. In addition, if we are party to a
      “fundamental transaction” or “change of control” (as defined in the debenture)
      or agree to dispose of in excess of 40% of our assets, the holders have the
      right to require us to redeem the debentures at their election shortly after
      they are notified of such a change. Any redemption under these circumstances
      will be at a premium equal to the higher of 130% of the then-outstanding
      principal amount of the debenture or the outstanding principal amount of the
      debenture, plus all accrued and unpaid interest, divided by the conversion
      price
      then in effect, multiplied by the VWAP (as defined in the debenture) then in
      effect.




In
      addition, under the terms of the securities purchase agreement we entered into
      in the October 2007 private placement, for so long as the debentures are
      outstanding, we are required to offer the investors who purchased debentures
      and
      warrants in the October 2007 private placement the right to participate in
      certain types of financings we arrange in the future, up to 50% of the value
      of
      such financing. We must provide this opportunity unless the offering is an
      underwritten public offering or an “exempt issuance”. Securities issued to our
      employees under plans, subject to certain volume limits, will be an exempt
      issuance, as will securities issued pursuant to strategic transactions with
      persons who are engaged in a business synergistic with ours. However, securities
      issued to persons who are not engaged in a synergistic business, such as a
      financial investor, are not exempt issuances.




14




The
      restrictions on the types of transactions we can engage in and the participation
      rights we may have to offer in future financings may operate to discourage
      third
      parties from engaging in these transactions with us, even if those transactions
      would be beneficial to us and our shareholders.




***Changes
      in the fair value of the debentures and warrants issued in the October 2007
      private placement at each balance sheet date could have a significant impact
      on
      our financial condition and results of operations.***




We
      use
      various market parameters to
      evaluate the fair value of the convertible debentures
      and warrants issued in the October 2007 private placement at each
      balance sheet date  which
      could have a significant impact on our financial condition and results of
      operation as a result of changes in these market parameters. The following
      market parameters are most
      likely to change at each balance sheet date  and
      the
      following paragraphs describe how hypothetical increases or decreases in those
      market parameters would have affected the fair value of the debentures and
      warrants as of December 31, 2007 :





·
            stock
                volatility: as of December 31, 2007 and every othermarketparameter
                being equal, an increase in the stock volatilityof5
                percentage points would have resulted in an increaseof4%
                in thefair
                value of the convertibledebenture
                and warrants,
                and a decrease in the stock volatilityof5
                percentage points would have resulted in a decreaseof4%
                in thefair
                value of the convertible debentures and warrants.





·
            the
                stock value: as of December 31, 2007 and every othermarketparameter
                being equal, an increase in the stock valueof10% would have resulted in an increaseof5%
                in the fair valueof
                the convertible debenture and warrants,
                and a decrease in the stock valueof10% would have resulted in a decreaseof8%
                in thefair valueof
                the convertible debentures and warrants.





·
            the
                risk free interest rate: as of December 31, 2007 and every othermarketparameter
                being equal, an increase in the risk free interest rateof1
                percentage point would have resulted in a decreaseof1%
                in thefair
                value,of
                the convertible debenturesandwarrants,
                anda
                decrease in the risk free interest rateof1
                percentage point would have resulted in an increaseof1%
                in thefair
                valueof
                the convertible debentures and warrants.





·
            combined
                sensitivity to market parameters: as of December 31, 2007, a 5 percentage
                point increase in stock volatility together with a 10% increase in
                the
                stock value and a 1 percentage point decrease in the risk free interest
                rate would have resulted in an increase of 10% in the fair value
                of the
                debentures and warrants; conversely, a 5 percentage point decrease
                in the
                stock volatility together with a 10% decrease in the stock value
                and a 1
                percentage point increase in the risk free interest rate would have
                resulted in a decrease of 10% in the fair value of the debentures
                and
                warrants.




**Risks
      Relating to Ownership of Securities**




***Our
      securities may be affected by volume fluctuations, and may fluctuate
      significantly in price.***




Our
      ADSs
      are currently traded on the NASDAQ Global Market. The average daily trading
      volume of our ADSs in December 2007 was 21,118, the high and low bid price
      of
      our ADSs for the last two financial years ended on December 31, 2007 and
      December 31, 2006, was $ 9.40 and $21.64, and $ 4.25 and $5.68, respectively,
      and the high and low bid price of our ADSs during 2007 was $9.40 and $4.37,
      respectively. Our ADSs have experienced, and are likely to experience in the
      future, significant price and volume fluctuations, which could adversely affect
      the market price of our ADSs without regard to our operating performance. The
      price of our Securities, and our ADSs in particular, may fluctuate as a result
      of a variety of factors beyond our control, including changes in our business,
      operations and prospects, regulatory considerations, results of clinical trials
      of our products or those of our competitors, developments in patents and other
      proprietary rights, and general market and economic conditions.




15




***We
      may issue additional securities that may be dilutive to our existing
      shareholders.***




The
      extraordinary general meeting of our shareholders held on May 22, 2007 delegated
      to our Board of Directors the authority to issue up to 6,000,000 additional
      shares, either in the form of shares or through the issuance of securities
      exercisable for or convertible into our shares. We used this authorization
      to
      issue the debentures and warrants in the October 2007 private placement. These
      securities were issued without preferential subscription rights. In addition,
      600,000 of the shares authorized at the May 22, 2007 shareholders’ meeting were
      allowed to be granted to certain of our employees through the issuance of
      subscription options. On October 29, 2007, 504,088 options to subscribe to
      504,088 new shares were granted to certain employees. Finally, 18,840 new
      ordinary shares may be granted to certain of our employees if they achieve
      certain performance goals during 2008 pursuant to the Shareholders’
authorization dated February 17, 2005. The issuance of additional ordinary
      shares, including any additional ordinary shares issuable pursuant to the
      exercise of preferential subscription rights that may not be available to all
      of
      our shareholders, would reduce the proportionate ownership and voting power
      of
      then-existing shareholders.




***We
      are subject to different corporate disclosure standards that may limit the
      information available to holders of our ADSs.***




As
      a
      foreign private issuer, we are not required to comply with the notice and
      disclosure requirements under the Securities Exchange Act of 1934, as amended
      (the “Exchange Act”), relating to the solicitation of proxies for shareholder
      meetings. Although we are subject to the periodic reporting requirements of
      the
      Exchange Act, the periodic disclosure required of non-U.S. issuers under the
      Exchange Act is more limited than the periodic disclosure required of U.S.
      issuers. Therefore, there may be less publicly available information about
      us
      than is regularly published by or about other public companies in the United
      States.




***We
      currently do not intend to pay dividends, and cannot assure shareholders that
      we
      will make dividend payments in the future.***




We
      have
      not paid any dividend on our shares since 1994, and do not anticipate paying
      any
      dividends for the foreseeable future. In particular, in connection with the
      October 2007 private placement, we agreed not to pay cash dividends on any
      of
      our equity securities. Thereafter, declaration of dividends on our shares will
      depend upon, among other things, future earnings, if any, the operating and
      financial condition of our business, our capital requirements, general business
      conditions and such other factors as our Board of Directors deems relevant.
      See
      Item 8, “Financial Information—Dividends and Dividend Policy”.




***Judgments
      of U.S. courts, including those predicated on the civil liability provisions
      of
      the federal securities laws of the United States, may not be enforceable in
      French courts.***




An
      investor in the United States may find it difficult to:





·
            effect
                service of process within the United States against us and our non-U.S.
                resident directors and officers;·
            enforce
                U.S. court judgments based upon the civil liability provisions of
                the U.S.
                federal securities laws against us and our non-U.S. resident directors
                and
                officers in France; or·
            bring
                an original action in a French court to enforce liabilities based
                upon the
                U.S. federal securities laws against us and our non-U.S. resident
                directors and officers.





***Holders
      of ADSs have fewer rights than shareholders and have to act through the
      Depositary to exercise those rights.***




Holders
      of ADSs do not have the same rights as shareholders and accordingly, cannot
      exercise rights of shareholders against us. The Bank of New York, as depositary
      (the “Depositary”), is the registered shareholder of the deposited shares
      underlying the ADSs, and therefore holders of ADSs will generally have to
      exercise the rights attached to those shares through the Depositary. We will
      use
      reasonable efforts to request that the Depositary notify the holders of ADSs
      of
      upcoming votes and ask for voting instructions from them. If a holder fails
      to
      return a voting instruction card to the Depositary by the date established
      by it
      for receipt of such voting instructions, or if the Depositary receives an
      improperly completed or blank voting instruction card, or if the voting
      instructions included in the voting instruction card are illegible or unclear,
      then such holder will be deemed to have instructed the Depositary to vote its
      shares and the Depositary shall vote such shares in favour of any resolution
      proposed or approved by our Board of Directors and against any resolution not
      so
      proposed or approved.




16




***Preferential
      subscription rights may not be available for U.S.
      persons.***




Under
      French law, shareholders have preferential rights to subscribe for cash
      issuances of new shares or other securities giving rights to acquire additional
      shares on a *pro
      rata* basis.
      U.S. holders of our Securities may not be able to exercise preferential
      subscription rights for their shares unless a registration statement under
      the
      Securities Act is effective with respect to such rights or an exemption from
      the
      registration requirements imposed by the Securities Act is available. We may,
      from time to time, issue new shares or other securities giving rights to acquire
      additional shares (such as warrants) at a time when no registration statement
      is
      in effect and no Securities Act exemption is available. If so, U.S. holders
      of
      our securities will be unable to exercise their preferential rights and their
      interests will be diluted. We are under no obligation to file any registration
      statement in connection with any issuance of new shares or other
      securities.




For
      holders of our shares in the form of ADSs, the Depositary may make these rights
      or other distributions available to holders after we instruct it to do so and
      provide it with evidence that it is legal to do so. If we fail to do this and
      the Depositary determines that it is impractical to sell the rights, it may
      allow these rights to lapse. In that case the holders will receive no value
      for
      them.




17




**Item
      4. Information on the Company**




We
      develop and market the Ablatherm ® ,
      an
      advanced 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 for localized prostate cancer 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 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 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 (the “Distribution
      Agreement”), with a subsidiary of HealthTronics Surgical Services, Inc.
      ("HealthTronics"), under which HealthTronics agreed to distribute our
      lithotripters in the United States. Under the Distribution Agreement, 1,000,000
      warrants were allocated to HealthTronics, which were to be exercised upon the
      completion of certain milestones linked to the grant of the Ablatherm pre-market
      approval and certain minimum sales of lithotripters in the United States. On
      December 29, 2005, we amended the Distribution Agreement after HealthTronics
      decided to focus all of its efforts on implementing Ablatherm clinical trials
      in
      the United States to gain FDA approval and to cease pursuing distribution of
      our
      lithotripters in the United States. In connection with this amendment, 200,000
      warrants that had been issued to HealthTronics were cancelled since their
      exercise was directly linked to future purchases of our lithotripters.




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 were and are being used 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.




On
      April
      3, 2007, we executed a Termination Agreement whereby HealthTronics agreed to
      transfer the Ablatherm FDA study to us. Under the Termination Agreement,
      HealthTronics exercised 200,000 warrants which had been granted under the
      Distribution Agreement to acquire 200,000 of our ordinary shares for an
      aggregate exercise price of $300,000. The 600,000 remaining warrants granted
      under the Distribution Agreement were cancelled. We also agreed to file a
      registration statement under the Securities Act of 1933 to enable HealthTronics
      to resell its shares in transactions that are registered under the Securities
      Act. Under the Termination Agreement, HealthTronics agreed to pay us $600,000
      after the resale registration statement was effective for 60 days and to
      transfer to us one Ablatherm device and six lithotripters HealthTronics had
      previously acquired and to return to us two Ablatherm devices we owned.




18





On
      April
      3, 2007, we executed an Agreement and Release whereby HealthTronics agreed
      to
      transfer the Ablatherm FDA study to us. The Agreement and Release was amended
      on
      July 9, 2007. Under the Agreement and Release, as amended, HealthTronics
      exercised 200,000 warrants which had been granted under the Distribution
      Agreement to acquire 200,000 of our ordinary shares for an aggregate exercise
      price of $300,000. The 600,000 remaining warrants granted under the Distribution
      Agreement were cancelled. Pursuant to a registration rights agreement, we also
      agreed to file a registration statement under the Securities Act to enable
      HealthTronics to resell its ordinary shares (in the form of ordinary shares
      or
      ADSs) in transactions that are registered under the Securities Act. Under the
      Agreement and Release, HealthTronics agreed to pay us $600,000 within five
      days
      of the earlier of (a) 60 days after the effective date of the resale
      registration statement (such sixty-day period being subject to extension in
      certain circumstances) and (b) the date that HealthTronics had sold all of
      our
      ordinary shares. Further, under the terms of the Agreement and Release, HealthTronics agreed to use its reasonably best efforts to resell its ordinary shares in accordance with a registration statement. Finally, pursuant to the Agreement and Release, HealthTronics
      transferred to us one Ablatherm device and six lithotripters that HealthTronics
      had previously acquired and returned to us two Ablatherm devices we owned.
      We
      filed a resale registration statement on Form F-3 on July 16, 2007 reflecting
      the terms of the amended Agreement and Release. We were unable, however, to
      resolve a comment from the SEC staff on the Form F-3 registration statement
      relating to the availability of Form F-3 for the resale of the ordinary shares
      held by HealthTronics. As a result, with HealthTronics concurring, we elected
      to
      withdraw the resale registration statement by letter dated September 18, 2007.
      In an e-mail communication to us, HealthTronics has confirmed to us that they
      intend to honor their obligations under the Agreement and Release and
      specifically to pay us the $600,000 amount within five days after they sell
      our
      ordinary shares. The timing of that payment, however, is unclear. The ordinary
      shares held by HealthTronics may now be sold without registration under Rule
      144
      under the Securities Act, provided that the requirements of the rule for resales
      by non-affiliates are satisfied. We are in continuing discussion with
      HealthTronics regarding these matters. Given
      the
      contingent nature of the $600,000 settlement, the amount has not been reflected
      in our financial statements for the year ended December 31, 2007.




On
      October 31, 2007, we completed a private placement of $20 million principal
      amount of 9% Senior Convertible Debentures due 2012. In addition, the purchasers
      of the convertible debentures and our placement agent (the “Placement Agent”)
      received warrants to purchase our ordinary shares for an average exercise price
      of $6.68 per share which expire in 2013. The October 2007 private placement
      resulted in net proceeds of approximately $17.4 million. We agreed to use the
      proceeds of the private placement to finance costs associated with the
      regulatory approval for the commercialization of Ablatherm HIFU in the United
      States (including related clinical trials) and for general and administrative
      expenses.




In
      December 2007, to clarify and simplify our French organizational structure,
      we
      decided to merge the two operational French entities EDAP SA and Technomed
      Medical Systems SA into a single entity named EDAP TMS France S.A. (formerly
      Technomed Medical Systems SA), which is wholly owned by EDAP TMS SA. This
      reorganization will be effective from January 1, 2008, subject to approval
      by
      the shareholders of each of the French operational entities in late June 2008.
      Pending shareholder approval of the merger, EDAP SA will lease its HIFU business
      activities to EDAP TMS France. The merger will not change our business segments
      and we will continue to report on our two business activities as the HIFU
      division and UDS division, as described below.





In
      2007,
      following the termination of the Distribution Agreement signed with
      HealthTronics, EDAP Technomed Inc, our Delaware subsidiary, regained the
      sponsorship of our Ablatherm IDE study and has pursued our clinical trials
      in
      the United States. Therefore, a portion of the proceeds resulting from our
      October 2007 private placement were transferred to EDAP Technomed Inc. to
      finance our US Ablatherm-HIFU clinical trials.





Our
      legal
      name is EDAP TMS S.A. and our commercial name is EDAP TMS. EDAP TMS S.A. was
      incorporated on December 3, 1979 as a *Société
      Anonyme* organized under the laws of the Republic of France for 60 years from the date
      of
      incorporation. Our principal executive offices are located at Parc d’Activités
      la Poudrette- Lamartine, 4/6, rue du Dauphiné, 69120 Vaulx-en-Velin, France and
      our telephone number is +33 (0) 4 72 15 31 50. Mr. Lee Sanderson, CPA, 945
      Concord Street, Framingham, MA 01701, USA, is our agent for service of process
      in the United States.




19




**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 divisions has allowed us to expand our market share by optimizing
      worldwide distribution capabilities, all of which is coordinated through our
      subsidiaries.




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




Our
      HIFU
      and UDS divisions operate in Europe, the Americas, Asia and the rest of the
      world.   Total net sales for the HIFU division (in net contributions to
      Group total sales) were € 9.3 million, € 7.6 million, and €7.8 million for 2007,
      2006, and 2005, respectively (all in Europe and the rest of the world, outside
      Asia and the United States).   Total revenues for the UDS division were
€12.9 million (including €6.5 million in Asia and €6.4 million in Europe and the
      rest of the world), €12.6 million (€5.4 million in Asia and €7.2 million in
      Europe and the rest of the world), and €12.9 million (€6.8 million in Asia and
€6.1 million in Europe and the rest of the world), each for 2007, 2006, and
      2005, 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)EDAP
                TMS France S.A.
            
            
            France
            
            
            100
            %EDAP
                S.A.(2)
            
            
            France
            
            
            100
            %EDAP
                Technomed Inc.
            
            
            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)
            Will
                legally cease to exist upon approval of merger into EDAP TMS France
                by its
                shareholders




**High
      Intensity Focused Ultrasound (‘‘HIFU’’) Division**




The
      HIFU
      division is engaged in the development, manufacturing 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 €9.3 million during the fiscal year ended December 31, 2007.




***HIFU
      Division Business Overview***




The
      HIFU
      division currently develops, manufactures 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. The HIFU division had a fixed
      installed base of 58 Ablatherm machines worldwide (with an additional four
      used
      for clinical studies) and 176 trained clinical sites were using this technology
      as of December 31, 2007.




20




In
      addition to developing, manufacturing and marketing HIFU devices, the HIFU
      division also generates revenues from leasing equipment, as well as from the
      sale of disposables, spare parts and maintenance services. 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 under
      this model, 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,
      manufacturing, 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, 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 and 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. In addition
                to that current operational basis, we are seeking FDA approval to
                enter
                the US market with our Ablatherm-HIFU
                device.




·
            *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 R&D projects in 2007 to develop HIFU applications beyond
                prostate cancer. The division is considering sustaining R&D spending
                in 2008 and future years to strengthen its technological leadership
                in
                HIFU and expand its application beyond
                urology.




***HIFU
      Products***




Currently,
      the only commercial product 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, South Africa, New Zealand, the Philippines, Mexico
      and
      Russia. Clinical trials are underway in the United States. 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 area
      has been treated, while controlling and imaging the treatment in real time
      due
      to its integrated imaging system. Cell destruction by HIFU is accomplished
      by a
      combination of thermal and cavitation effects caused by focused application
      of
      piezoelectric-generated high-intensity ultrasound. The procedure is generally
      performed under spinal anesthesia.




21




***HIFU
      Division Patents and Intellectual Property***




As
      of
      December 31, 2007, the HIFU division’s patent portfolio contained 61 patents
      consisting of 27 in the United States, 25 in the European Union and Japan and
      9
      in Israel and the rest of the world. They belong to 25 groups of patents
      covering key technologies related to therapeutic ultrasound principles, systems
      and associated software.




During
      2007, three new patents were granted. One is dedicated to the design of the
      latest Ablatherm Integrated Imaging probe version. Another one covers the
      Ablapak disposable in the United States and the last one, in Canada, concerns
      a
      new transducer design for High Intensity Contact Ultrasound applications
      (“HICU”).




Fifteen
      additional patents covering certain other aspects of our HIFU technology in
      the
      European Union (5), the United States (3), the Japan (6) and the rest of the
      world (1) are also under review. These patents relate to new transducer design
      for both HIFU and HICU technologies. Taking into consideration the Chinese
      research and industry involvement in therapeutic ultrasound applications and
      business, we currently intend to extend this patent portfolio to
      China.




Our
      ongoing research and development objectives are to maintain our leadership
      position in the treatment of prostate cancer and to extend the HIFU technology
      to new applications and minimally invasive systems. These research projects
      are
      conducted in cooperation with the French National Institute for Health and
      Medical Research (“INSERM”) which give rise in some cases to the filing,
      followed by the grant of co-owned patents. We have entered into various license
      agreements with INSERM whereby we commit to pay a fixed amount of royalties
      to
      INSERM based on the net revenues generated from the sales of HIFU devices using
      co-owned patents. Under these agreements, which last for the life of each
      co-owned patents we have the exclusive right to the commercial use of the
      co-owned patents, including the right to out-license such commercial rights.




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 Director of research and development. 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 at that time and this license agreement therefore
      allows Theraclion to pursue the development of HIFU for this application. We
      own
      no interest in Theraclion.




In
      2007,
      a preliminary evaluation of the use of HIFU technology for ophthalmologic
      applications was performed. In July 2007, we entered into an agreement with
      a
      third party whereby we committed to use our best efforts to negotiate a license
      of our HIFU patents for its use in the treatment of glaucoma.




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. 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 our ability to market
      HIFU systems.




***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.




22




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 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—Our future revenue growth and income depend, among other things, on the
      success of our 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 intended to discontinue
      Ablatherm FDA trials. On April 3, 2007, we executed a Termination Agreement
      whereby HealthTronics agreed to transfer the Ablatherm FDA study to us. See
      Item
      4, “Information on the Company - History and Development of the
      Company.”




On
      June
      29, 2007, the FDA officially approved the transfer of the study to EDAP
      Technomed Inc. and the trials resumed as per the approved protocol. In October
      2007, we completed a private placement raising net proceeds of $17.4 million
      allowing us to finance and conduct the US trials for the expected period of
      time. See 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. Patients
      are still being enrolled.




In
      2006,
      a clinical trial was launched to evaluate new Ablatherm treatment options
      allowing the treatment of larger prostates. This clinical study has been
      completed in 2007 and a new software improving the device specifications was
      released at the end of 2007.




23




In
      2007,
      a new clinical trial using Ablatherm-HIFU and dedicated to the treatment of
      high
      risk patients was started in France. Patient enrolment is in
      progress.




The
      first
      clinical paper reporting long term results using Ablatherm HIFU was published
      in
      November 2007. The results of the study confirm the efficacy of HIFU in patients
      with localized prostate cancer.




***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 diagnosed every year to be approximately
      220,000, 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 US 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.




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 the use of HIFU to other
      areas
      of treatment will require a significant investment in research and development,
      an investment which we will be undertake 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
      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
      Ablatherm-HIFU device competes 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 cancerous tumors, but the Company is only marketing its HIFU products in
      China. On April 25, 2007, we signed an exclusive distribution agreement with
      Chinamed to distribute their HIFU devices in the European Union and Russia
      once
      their devices are approved for use in those jurisdictions and on September
      21,
      2007, we signed a Consulting Agreement with Chinamed, pursuant to which we
      will
      assist them in obtaining market approvals in Europe for their HIFU products
      for
      other applications than the treatment of prostate cancer.




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.




24




***HIFU
      Division Sales and Distribution of Products***




The
      HIFU
      division markets and sells its products through our own direct marketing and
      sales organization as well as through selected third-party distributors and
      agents in several countries. Using our direct subsidiaries or representative
      offices network, the HIFU division maintains direct marketing and sales forces
      in France, Germany, Russia and Italy, which currently represent its largest
      HIFU
      markets. Additionally, the HIFU division markets and sells its products through
      our distribution platform in South Korea and South East Asia.




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, mainly in key European countries where HIFU
      awareness is growing, comprehensive media and web programs to educate patients
      on the availability of HIFU technology to treat localized prostate cancer and
      strong participation in focused dedicated urological events. Our dedicated
      web
      site www.hifu-planet.com for
      patients and physicians is regularly visited.




**Urology
      Devices and Services (‘‘UDS’’) Division**




The
      UDS
      division is engaged in the development, marketing, manufacturing and servicing
      of medical devices for the minimally invasive diagnosis or treatment of
      urological disorders, mainly urinary stones, and other clinical indications.
      The
      UDS division made a net contribution to consolidated sales of €12.9 million
      during the fiscal year ended December 31, 2007.




***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 three models of lithotripters: the Sonolith Praktis, which is
      available for commercial distribution in the European Union, Japan, Canada
      and
      the United States, the Sonolith Vision, which is available for commercial
      distribution in the European Union, Japan and Canada and the Sonolith I-Sys,
      which is available in the European Union only. The newly designed fully
      integrated ESWL device: the Sonolith I-Sys is to gradually replace the Sonolith
      Vision when the Sonolith I-Sys is approved in the United States, Japan and
      Canada. The UDS division had an installed base of 474 ESWL lithotripters
      worldwide as of December 31, 2007.




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, Up to December 31,
      2007, the UDS division, as an additional part of its contract manufacturing
      business, manufactured HIFU related devices and accessories, including
      disposables, on behalf of the HIFU division. As from January 1, 2008, the HIFU
      division integrated its own manufacturing as part of EDAP TMS France. The UDS
      division through our Japanese and Italian subsidiaries also derives marginal
      revenues from the distribution of Prostatron parts and related services under
      the distribution agreement entered into with Urologix in October
      2000.




The
      UDS
      division, through our Japanese subsidiary signed an agreement with a Japanese
      company, Medi Trend KK to distribute the Muscle Trainer Device manufactured
      by
      Neotonus, a US company, in Japan. This device helps users to exercise all of
      the
      muscles of the pelvic floor region. The UDS division also 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.




25




***UDS
      Division Business Strategy***




The
      UDS
      division’s business strategy is to capitalize on its expertise in ESWL and its
      position in urology to achieve long-term growth as a leader in the development,
      production, marketing and distribution of minimally invasive medical devices
      for
      urological and other clinical indications. To achieve this strategic goal,
      the
      UDS division intends to capitalize and expand on its expertise as the
      manufacturer of minimally invasive devices such as its ESWL lithotripters.
      Until
      December 31, 2007, the UDS division manufactured the Ablatherm and the
      disposable Ablapack on behalf of the HIFU division. All the costs related to
      the
      manufacturing of these machines were supported by the UDS division, which
      invoiced the HIFU division at cost plus a margin and records the sales of the
      devices as revenues. As from January 1, 2008, all manufacturing costs are born
      by EDAP TMS France. 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, as well as 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.
                Our
                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 our FDA-inspected and ISO 9001 (V:2000)
                and
                ISO 13485 (V:2003) certified facilities allow 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 I-Sys and the Sonolith Vision are offered to large hospitals that
      can
      afford a fully dedicated and integrated lithotripter. The UDS division also
      sells disposable parts for lithotripters, including the piezo-electric elements
      of the LT02 (although the manufacturing of new machines was discontinued in
      2002) and the electrodes of the Sonolith line, which need to be replaced
      approximately every year and approximately every ten treatments, respectively.
      These parts incorporate key proprietary technologies, and the UDS division
      has
      retained sole marketing rights for these parts.


**Product**
              
              **Procedure**
              
              **Development
                  Stage******
              
              **Clinical
                  and Regulatory Status**Sonolith
                  Praktis compact lithotripter
              
              Electroconductive
                treatment
                  of
                urinary
                  stones
              
              Commercial
                  Production
              
              Approved
                  for distribution:
                European
                  Union
                Japan
                United
                  States
                Canada
                Russia
                South
                  Korea
                Australia
                New
                  ZealandSonolith
                  Vision
              
              Electroconductive
                treatment
                  of
                urinary
                  stones
              
              Commercial
                  Production
              
              Approved
                  for distribution:
                European
                  Union
                Japan
                Canada
                South
                  Korea
                Australia
                New
                  ZealandSonolith
                  I-Sys
              
              Electroconductive
                treatment
                  of
                surinary
                  stones
              
              Commercial
                  Production
              
              Approved
                  for distribution:
                European
                  Union




26




The
      Sonolith Praktis, the Sonolith Vision and the Sonolith I-Sys 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 or I-Sys, which are more fully dedicated and
      integrated electroconductive lithotripters for larger hospitals.




***UDS
      Division Patents and Intellectual Property***




As
      of
      December 31, 2007, the UDS division’s patent portfolio contained 16 patents
      consisting of 5 in the United States, 8 in the European Union and Japan and
      3 in
      Israel and the rest of the world. They belong to 9 groups of patents covering
      key technologies relating to ESWL systems and associated software
      capabilities.




During
      2007, two additional patents covering a new shock wave generation technology
      were granted in the United States and, for the first time, in China. One US
      Patent related to obsolete X-ray imaging technology has been abandoned. 3
      additional patents, 1 in Europe, 1 in Japan and 1 in Israel are also in the
      examination process. One patent is dedicated to the I-Sys lithotripter
      technology.




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.




As
      with
      the development of our HIFU technology, we cooperate with INSERM to develop
      our
      ESWL technology. This cooperation gave rise to co-owned patents in some cases.
      We have entered into various license agreements with INSERM whereby we commit
      to
      pay a fixed amount of royalties to INSERM based on the net revenues generated
      from the sales of ESWL devices using co-owned patents. Under these agreements,
      which last for the life of each co-owned patents we have the exclusive right
      to
      the commercial use of the co-owned patents, including the right to out-license
      such commercial rights.




***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 Sonolith I-Sys is
      available in the European Union only. 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.




27




Since
      its
      introduction in clinical practice nearly 20 years ago, ESWL has become the
      standard treatment for urinary calculi. ESWL consists of fragmenting calculi
      within the body using extracorporeal shockwaves without any surgery. We believe
      that the market for lithotripters includes both buyers looking for a
      sophisticated, higher-priced machine (generally hospitals and larger urology
      clinics) and buyers looking for simpler and less expensive machines (typically
      smaller clinics). We also believe that after a period of fast growth in the
      mid-1980s and early 1990s, the market for lithotripters is now mature and has
      become primarily a replacement and service and maintenance market.




We
      believe that companies with a large installed base of ESWL lithotripters will
      be
      most successful in the replacement market. Consequently, we intend to capitalize
      on our share of the installed base of ESWL lithotripters to gain a significant
      position in the replacement market for those machines. We expect the ESWL
      business to continue to contribute, at historically consistent levels, to the
      UDS division’s financial results despite the mature nature of the market, due to
      revenues from maintenance contracts and demand for replacement machines. See
      Item 5, ‘‘Operating and Financial Review and Prospects’’.




***UDS
      Division Competition***




The
      ESWL
      market is characterized by severe price competition among manufacturers, with
      the result that, in recent years, the average unit price of ESWL lithotripters
      has declined. The UDS division expects this trend to continue. See Item 5,
      ‘‘Operating and Financial Review and Prospects.’’ The UDS division’s major
      competitors in developed countries are Siemens, Storz and Dornier.




***UDS
      Division Sales and Distribution of Products***




The
      UDS
      division markets, sells and services its products through our 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. 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 Services and Distribution***




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 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.




**Manufacturing**




Our
      current operations consist of manufacturing medical products in our facility
      that is FDA-approved and certified under international standards ISO 9001 and
      ISO 13485. We believe that this facility can extend its outsourced services
      to
      provide device and disposable development and manufacturing services to a wide
      range of medical equipment development companies. Up until December 31, 2007,
      the HIFU division subcontracted the manufacturing of its HIFU devices and
      accessories, including disposables. From January 1, 2008, each division is
      manufacturing its own products though EDAP TMS France.




Our
      manufacturing policy is to manufacture the critical components for our devices
      and accessories (unless a subcontractor can manufacture the component more
      cost-effectively), perform final assembly and quality control processes and
      maintain our own set of production standards. We purchase the majority of the
      raw materials used in our products from a number of suppliers, but for several
      components of our products, rely on a single source. Our policy is to conduct
      regular quality audits of suppliers’ manufacturing facilities. Our principal
      suppliers are located in France, Germany, Denmark, Korea and the United States.
      Management believes that the relationships with our suppliers are
      good.




28




**Quality
      and Design Control**




The
      manufacturing operations of EDAP TMS France 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. EDAP TMS France’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 EDAP TMS France’s
      manufacturing facilities with international standards for quality assurance,
      design and manufacturing process control. EDAP TMS France also complies with
      the
      applicable requirements that will allow it to affix the CE Marking to certain
      of
      its products. Our manufacturing site also complies with Japanese and Canadian
      regulations, as well as with the US Quality System Regulation. See ‘‘—Government
      Regulation—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 our medical devices and of the healthcare
      systems in these jurisdictions generally.




***Healthcare
      Regulation in the United States***




We
      and
      our 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 Investigational Device Exemption
      (“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 US 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.




29




***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 European Community
      approval ‘‘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.




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 Holder". 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, 2007, 2006 and 2005 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.




30






**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 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. We provide training and usually provide a one-year
      warranty upon installation. We recognize 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, the revenue is recognized on a linear basis over the contract
      period. For treatments in excess of minimum levels, the revenue is recognized
      when the treatment procedure has been completed. Revenues from devices leased
      to
      customers under operating leases are recognized on a straight-line
      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.




***Leases
        and Sales and leaseback transactions***


In accordance with SFAS 13, Accounting for Leases, we classify all leases at the inception date as either a capital lease or an operating lease. A lease is a capital lease if it meets any one of the following criteria; otherwise, it is an operating lease:



| |  | Ownership is transferred to the lessee by the end of the lease term;
| | - | --------------------------------------------------------------------

| |  | The lease contains a bargain purchase option;
| | - | ---------------------------------------------

| |  | The lease term is at least 75% of the property's estimated remaining economic life;
| | - | -----------------------------------------------------------------------------------

| |  | The present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We enter into sale and leaseback transactions from time to time. In accordance with SFAS 13 and EITF 93-8, any profit or loss on the sale is deferred and amortized prospectively over the term of the lease, in proportion to the leased asset if a capital lease, or in proportion to the related gross rental charged to expense over the lease term, if an operating lease.

***Warrants***




In
      accordance with EITF 96-18, we accounted for the warrants issued to
      HealthTronics in 2004 and 2005 under the now terminated Distribution Agreement
      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.




31




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




As
      part
      of the October 2007 $20 million issuance of the convertible debentures, we
      issued warrants to both the investors in the convertible debentures and to
      the
      bank that assisted us as placement agent (the “Placement Agent”). In
      accordance with EITF 00-19, the warrants issued to the investors in the
      convertible debentures (the “Investor Warrants”) and the Placement Agent (the
“Placement Agent Warrants”) are classified as a liability because the Company
      may be required to settle them on a net cash basis upon the occurrence of
      certain events outside the control of the Company. We accounted for the Investor
      Warrants based on their fair value at inception date, with subsequent changes
      in
      fair value recorded as financial earnings (or loss) at each balance sheet date. We use a binomial pricing model to determine the fair value of the
      Investor Warrants: the binomial model was developed to capture the specific
      nature of this instrument, and in particular the possibility that the holder
      may
      exercise the call option at any time from the inception date. The application
      of
      the model to the warrants requires the use of subjective assumptions, including
      historical share price volatility, the expected life of the warrants, our
      risk-free interest rate, and the liquidity discount factor. A change in one
      or
      more of these assumptions could result in a material change to the estimated
      fair value of the Investor Warrants and the Placement Agent Warrants. See
      Item
      3, “Key Information - Risk Factors - Changes in the fair value of the debentures
      and warrants issued in the October 2007 private placement of each balance sheet
      date could have a significant impact on our financial condition and results
      of
      operations”, “- Convertible Debentures” below **** and
      Notes
      14 and 20 to the Financial Statements.




***Convertible
      Debentures***




On
      October 29, 2007, the Company raised $20 million in non-secured, convertible
      debentures with detachable warrants. At the inception date, the Company elected
      to measure the instrument and its embedded derivatives in its entirety at fair
      value, with changes in fair value reported in the income statement under
      financial income, pursuant to §16 of SFAS 133, as amended by SFAS 155. Thus, the
      convertible debentures together with their embedded derivatives are recorded
      as
      a liability, with subsequent changes in fair value recorded in financial income
      and expenses. The Company used a binomial valuation model to measure the fair
      value of the Investor Warrants and a binomial valuation model with a Company
      specific credit spread to measure the fair value of the convertible debentures.
      - See
      Item
      3, “Key Information - Risk Factors - Changes in the fair value of the debentures
      and warrants issued in the October 2007 private placement of each balance sheet
      date could have a significant impact on our financial condition and results
      of
      operations” and
      Notes 14 and 20 to the Financial Statements for a detailed description of the
      fair value calculations.




***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.




32




***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, 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. At December 31, 2007, we determined that certain inventories were
      not appropriately valued and therefore reserved €0.3 million against these
      inventories.




***Litigation***





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. In February 2008, we settled
      a claim alleging a patient was injured during a Prostatron treatment procedure.
      The cost for settling this claim was $15,000, which was covered by our product
      liability insurance.




***Deferred
      Tax***




As
      of
      December 31, 2007, we had approximately €245 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 carry-forwards 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 and services,
      all
      net of commissions, as well as other revenues.




Net
      sales
      of goods have historically been comprised of net sales of medical devices
      (Prostatrons, ESWL lithotripters and Ablatherms) and net sales of disposables
      (mostly Ablapaks in the HIFU division and electrodes in the Lithotripsy
      division). With respect to lithotripter revenues, we booked in 2004 and 2005
      a
      non-cash charge as a reduction of revenue as the warrants we granted to
      HealthTronics under the Distribution Agreement vested as a result of the
      purchase by HealthTronics of a certain number of lithotripters and one
      Ablatherm. Following HealthTronics’ announcement that it wished to terminate the
      Distribution Agreement, we entered in a termination agreement pursuant to which
      HealthTronics exercised 200,000 of the warrants that it had been granted under
      the Distribution Agreement and the remaining 600,000 warrants have been
      cancelled. 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.




33




Net
      sales
      of RPP (Revenue-Per-Procedure) and leases include the revenues from the sale
      of
      Ablatherm treatment procedures and from the leasing of Ablatherm machines.
      We
      provide Ablatherms 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 the basis of the number of individual treatments
      provided. With this business model, the hospital or clinic does not make an
      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 but, 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 and services include revenues arising from maintenance services
      furnished by us for the installed base of Prostatrons, ESWL lithotripters and
      Ablatherms.




We
      derive
      a significant portion of both net sales of medical devices and net sales of
      spare parts 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 30% of our total
      consolidated revenue in 2007. Net sales of medical devices in Asia represented
      approximately 37% of such sales in 2007 and consisted primarily of sales of
      ESWL
      lithotripters and consumables. Net sales of spare parts, supplies and services
      in Asia represented approximately 38% of such sales in 2007 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 2007, approximately 77% of our research and development, selling, marketing
      and general and administrative expenses were denominated in euro, while
      approximately 29% of our sales were denominated in currencies other than euro
      (primarily the US Dollar and 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 sometimes 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 €3.2 million,
€2.4 million and €1.8 million in 2007, 2006 and 2005, respectively, representing
      approximately 14%, 12%, and 9% of total revenues in 2007, 2006 and 2005,
      respectively. The increase in research and development in 2007 compared to
      2006
      was primarily due to an increase in HIFU and ESWL development activities, the
      development of the new Sonolith I-sys lithotripter and the launch of the Phase
      II/III PMA trial in the United States to expand our leadership in HIFU for
      prostate cancer (the cost of which represented 4% of total revenues in 2007).
      Beginning in 2008, 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 12% of total revenues, which we expect
      will allow us to maintain our strategy to launch new clinical studies (thus
      strengthening our clinical credibility), to continue 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.




34




Selling
      and marketing expenses amounted to €5.5 million in 2007, €4.6 million in 2006
      and €3.8 million in 2005. The increase of 18.5% from 2006 to 2007 was primarily
      due to an increase in marketing expenses 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 stay at significant levels in the future to consolidate the
      Ablatherm-HIFU technology’s status as a standard of care for prostate cancer in
      Europe.




In
      2007,
      we recorded €0.2 million of non-recurring operating expenses, net, including
€0.5 million of employee termination expenses and a €0.3 million non-recurring
      profit with the return of the lithotripsy and HIFU devices from HealthTronics
      as
      part of the termination of the Distribution Agreement. 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, we
      did not record any non-recurring operating expense. See Note 18 of the Notes
      to
      the Consolidated Financial Statements.




On
      February 25, 2004, we entered into the Distribution Agreement with HealthTronics
      granting it, among other things, (i) the right to begin clinical trials in
      the
      United States 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 1,000,000 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 to cease pursuing Ablatherm FDA approval, we have negotiated a
      termination the Distribution Agreement with HealthTronics. 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 2005 as a reduction of revenue related to the vesting of a series
      of warrants linked to HealthTronics' 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.




See
      Item
      3, ‘‘Key Information—Risk Factors—We sell our products in many parts of the
      world and, as a result, our business is affected by fluctuations in currency
      exchange rates’’ and Item 11, ‘‘Quantitative and Qualitative Disclosures About
      Market Risk’’ for a description of the impact of foreign currency fluctuations
      on our business and results of operations.




35




**Fiscal
      Year Ended December 31, 2007 Compared to Fiscal Year Ended December 31,
      2006**




As
      from
      the first quarter of 2007, we elected to report our segment information on
      a
“net contribution” basis, so that each segment’s results comprise the
      elimination of our intra-group revenues and expenses and thus reflect the true
      contribution to consolidated results of the segment. See Note 28 to the
      Financial Statements. We have reclassified our 2006 results using this method
      for comparative purposes.




*Total
      revenues* .




Our
      total
      revenues increased 10% from €20.3 million in 2006 to €22.3 million in 2007,
      principally due to the transition in the HIFU division to the new RPP model
      and
      the increase in the number of HIFU treatments.




*HIFU
      division* .
      The
      HIFU division’s total net sales increased 22% from €7.6 million in 2006 to €9.3
      million in 2007, principally due to an increase in Ablatherm RPP and revenues
      related to disposables and service activity.




The
      HIFU
      division’s net sales of medical devices increased 2%, from €2.6 million in 2006
      to €2.7 million in 2007, with six Ablatherm units sold in 2007 compared to eight
      units sold in 2006. The increase in the average unit sales price from €326
      thousand in 2006 to €444 thousand in 2007 was due to the fact that three of the
      devices sold in 2006 were used machines and only new machines were sold in
      2007.




Net
      sales
      of treatments on a mobile and fixed RPP basis increased 33%, from €2.8 million
      in 2006 to €3.7 million in 2007. This was 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 that increase in the number of total HIFU treatments, net sales of
      consumables increased 60% from €0.7 million in 2006 to €1.2 million in 2007, and
      net sales of HIFU-related spare parts, supplies, leasing and services increased
      17% from €1.5 million in 2006 to €1.7 million in 2007.




Other
      HIFU-related revenue decreased from €66 thousand in 2006 to €60 thousand in
      2007.




*UDS
      division* .
      The UDS
      division’s net sales increased 3% from €12.6 million in 2006 to €12.9 million in
      2007.




The
      UDS
      division’s net sales of medical devices increased 8% from €6.0 million in 2006
      to €6.5 million in 2007 with 38 devices sold in 2006 and 2007 and a better
      Average Sales Price in 2007 due to better sales in the higher price segment,
      mostly due to the launch of the new Sonolith I-sys and despite a negative
      Japanese yen/euro exchange rate.




Net
      sales
      of UDS-related spare parts, supplies and services decreased 2% from €6.6 million
      in 2006 to €6.4 million in 2007, primarily related to the expiration of more
      profitable service contracts on older generation lithotripsy machines that
      were
      not renewed.




Other
      UDS-related revenue increased from €26 thousand in 2006 to €53 thousand in 2007.




*Cost
      of sales* .




Cost
      of
      sales increased 10% from €11.9 million in 2006 to €13.1 million in 2007, stable
      at 59.2% as a percentage of net sales.




*Operating
      expenses* .




Operating
      expenses increased 16%, or €1.9 million, from €11.4 million in 2006 to €13.3
      million in 2007. This increase in operating expenses resulted from costs
      associated with the resumption of the FDA clinical trials and sustained efforts
      in Europe to improve market education on HIFU and to enhance our Ablatherm-HIFU
      position.




The
      costs
      associated with the FDA/PMA trial accounted for €1.7 million of expenses,
      comprising mostly clinical and administrative expenses due to the takeover
      of
      the PMA trial sponsorship from HealthTronics and the resumption of the selection
      of clinical centers and patient enrollment. These FDA/PMA trials also included
      a
      one-time settlement that resulted in a €0.3 million gain recognized as part of
      the termination agreement negotiated with HealthTronics.




36




Excluding
      the FDA/PMA trials, marketing and sales expenses increased €0.8 million, or 17%,
      mostly in the HIFU division which accounted for €0.5 million of the increase, or
      21%, as a result of the continuing efforts to increase market acceptance and
      penetration in Europe through the HIFU-RPP model, while expenses in the UDS
      division increased €0.3 million to prepare for the launch of the new Sonolith
      I-Sys lithotripsy device.




Excluding
      the FDA/PMA trials, research and development expenses decreased from €2.4
      million in 2006 to €2.3 million in 2007, mostly due to the reallocation of
      research and development resources to support the FDA/PMA trials, while research
      and development expenses in the UDS division were stabilized after a more
      significant effort in the previous year to develop the new lithotripsy
      machine.




Excluding
      the FDA/PMA trials, general and administrative expenses decreased from €4.1
      million in 2006 to €3.7 million in 2007, a decrease of 9%, while non-recurring
      expenses increased €0.3 million due to the impact of the severance packages of
      some senior executives.




*Operating
      loss* .




As
      a
      result of the factors discussed above, we recorded a consolidated operating
      loss
      of €4.1 million in 2007, which included expenses for general corporate purposes
      and the expenses incurred for the resumption of the FDA/PMA trials, as compared
      to a consolidated operating loss of €3.1 million in 2006.




Excluding
      the expenses of the FDA/PMA trials, the consolidated operating loss in 2007
      was
€2.7 million, an improvement of €0.4 million when compared to the previous
      year.




We
      realized an operating profit in the HIFU division of €0.2 million in 2007,
      compared to an operating loss of €0.1 million in 2006 and an operating loss in
      the UDS division of €0.6 million in 2007, as compared to operating loss of €1.1
      million in 2006.




*Interest
      result, net* .
      Interest result, net was a loss of €1.2 million in 2007, including €1.1 million
      of debt fair value variation, compared with a profit of €0.2 million in
      2006.




*Foreign
      currency exchange gains (loss), net* .
      In
      2007, we recorded a net foreign currency exchange loss of €0.3 million, compared
      to a loss of €0.4 million in 2006, in each case mainly due to the continued
      weakening of the Japanese yen against the euro.




*Other
      income (expense), net* .
      Other
      income (expense), net was a gain of €16 thousand in 2007, compared to a loss of
€5 thousand in 2006.




*Income
      taxes* .
      We
      recorded a corporate income tax profit of €140 thousand in 2007 compared to an
      expense of €56 thousand in 2006.




*Net
      loss* .




We
      realized a consolidated net loss of €5.4 million in 2007 compared with
      consolidated net loss of €3.4 million in 2006, as a result of the factors
      mentioned above.




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




The
      segment results for 2006 and 2005 as discussed below are not presented on a
“net
      contribution” basis newly adopted as from the first quarter of 2007, and the
      segment results discussed below include the intra-group transactions with the
      other segments which are eliminated in the “consolidation”
adjustments.




*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.




37




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.




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.




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.




HIFU
      division research and development expenses increased 18% from €1.0 million in
      2005 to €1.2 million in 2006. HIFU division research and development 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.




UDS
      division research and development 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 research and development 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.




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.




HIFU
      division selling expenses remained stable at €1.4 million in 2006 (18% of net
      sales).




38




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.




*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.




*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.




**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, 2007.




**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 would potentially undertake.
      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 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. Additionally, failure to meet our obligations arising out of the
      convertible debentures issued in the October 2007 private placement would cause
      us to incur substantial penalties in the form of liquidated damages and could,
      over the passage of time, lead to an event of default under the debentures.
      Payment of liquidated damages or mandatory default amount will have a material
      adverse effect on our financial condition and results of operation.  See
      Item
      3, “Key Information - Risk Factors - Risks Relating to the October 2007 Private
      Placement.”




39




Our
      cash
      position as of December 31, 2007, 2006 and 2005, was €18.6 million (including
€1.1 million of short term treasury investments), €10.9 million (including €1.0
      million of short term treasury investments), and €8.3 million, respectively. We
      experienced positive cash flows of €7.7 million in 2007 and €1.5 million in
      2006, and negative cash flows of €1.1 million in 2005. In 2007, our positive
      cash flow situation was primarily due to raising approximately $17.4 million
      (€11.9 million) in net proceeds by issuing $20 million aggregate principal
      amount of our convertible debentures in a private placement, to fund the FDA/PMA
      trial for the Ablatherm-HIFU device. Excluding the proceeds from the issuance
      of
      the convertible debentures, we experienced negative cash flows of €4.2 million
      in 2007. 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 placement. Excluding the proceeds from this capital raise,
      we
      experienced negative cash flows of €3.7 million in 2006.




In
      2007,
      net cash used in operating activities was €2.8 million compared with net cash
      used in operating activities of €1.9 million and €0.3 million 2006 and 2005,
      respectively.




In
      2007,
      net cash used in operating activities reflected principally:




·
            a
                net loss of €5.3 million,




·
            elimination
                of €3.1 million of net expenses without effects on cash, including €1.3
                million of depreciation and amortization and €1.1 million due to changes
                in the fair value of financial debt and
                warrants,




·
            an
                increase in trade accounts receivable of €1.6 million,




·
            an
                increase in inventories of €0.8 million, mostly in anticipation of the
                launch of the new lithotripsy
                machine




·
            an
                increase in payables of €1.0 million,




·
            an
                increase in accrued expenses and other current liabilities of €0.7
                million.




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, including €1.3
                million of depreciation and
                amortization,




·
            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
      2007,
      net cash used in investing activities was €1.1 million compared with net cash
      used of €1.6 million in investing activities in 2006 and €1.1 in 2005,
      reflecting principally an increased investment of €1.9 million in capitalized
      assets produced by the company (mainly Ablatherm devices as a support of the
      RPP
      business model in HIFU), an investment of €0.6 million in property and
      equipment, net proceeds from sales of lease-back assets of €1.2 million and net
      proceeds from sales of assets of €0.2 million.




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.




40




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
      2007,
      net cash provided by financing activities was €11.8 million compared with net
      cash provided in financing activities of €5.2 million in 2006, and net cash used
      of €0.2 million in 2005, reflecting principally the raising of net proceeds of
      €11.9 million in convertible debt, €0.4 million of net proceeds of capital
      raising through the exercise of warrants and stock options, a short-term debt
      increase of €0.3 million, repayment of long term borrowing for €0.1 million and
      repayment of capital lease obligations totaling €0.6 million.




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
      totaling €0.4 million.




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 to expand this business model
      in
      the near future.




On
      October 31, 2007, we completed the private placement of $20 million aggregate
      principal amount of our 9% Senior Convertible Debentures due 2012. In addition,
      the purchasers of the convertible debentures and our Placement Agent received
      warrants to purchase our ordinary shares, which expire in 2013. The October
      2007
      private placement resulted in net proceeds of approximately $ 17.4 million.
      The terms of the convertible debentures allow us to use the proceeds of the
      private placement to finance costs associated with the regulatory approval
      for
      the commercialization of Ablatherm HIFU in the United States (including related
      clinical trials) and for general and administrative expenses. The warrants
      may
      be exercised for cash or, under certain circumstances, through a cashless
      exercise procedure. If all of the warrants issued under the October 2007 private
      placement are fully exercised for cash, including the warrants issued to the
      Placement Agent, we will receive approximately $12.8 million in cash from those
      warrant holders. We will use any proceeds received from the exercise of warrants
      for the purposes agreed to under the terms of the October 2007 private
      placement. **** For
      further description on the terms of the convertible debentures and the use
      of
      proceeds relating to the issuance of the convertible debentures, see the Form
      of
      Securities Purchase Agreement dated as of October 29, 2007, included as Exhibit
      4.5 to this annual report .




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 for 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, 2007, there
      were
      no outstanding hedging instruments.




41




**Contractual
      Obligations and Commercial Commitments as of December 31, 2007 (in thousands
      of
      euro, excluding interest expenses)**





**Payments
                Due by Period******
            
            **Total**
            
            **Less
                than 1**
              **year**
            
            **1-3
                years**
            
            **4-5
                years**
            
            **More
                than 5 years**Short-Term
                Debt
            
            
            1,593
            
            
            1,593
            
            
            —
            
            
            —
            
            
            —Long-Term
                Debt
            
            
            15,232
            
            
            58
            
            
            —
            
            
            15,174
            
            
            —Capital
                Lease Obligations
            
            
            1,557
            
            
            522
            
            
            1,015
            
            
            20
            
            
            —Operating
                Leases
            
            
            394
            
            
            390
            
            
            4
            
            
            —
            
            
            —




**New
      Accounting Pronouncements**




On
      September 15, 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157 “Fair Value Measurements” ("SFAS 157"). SFAS No. 157 defines fair value,
      establishes a framework for measuring fair value and expands disclosures about
      fair value measurements. SFAS 157 is effective as of the beginning of the first
      fiscal year beginning after November 15, 2007. We are still evaluating the
      potential impact from the adoption of SFAS 157.




On
      February 15, 2007, the FASB issued Statement of Financial Accounting Standards
      No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities:
      Including an amendment of FASB Statement No.115” (“SFAS 159”). SFAS No. 159
      permits all entities to elect to measure many financial instruments and certain
      other items at fair value with changes in fair value reported in earnings.
      SFAS
      159 is effective as of the beginning of the first fiscal year that begins after
      November 15, 2007, with earlier adoption permitted. We do not anticipate that
      the adoption of this statement will have a material effect on our financial
      condition and results of operations.




In
      December 2007, the FASB issued FASB Statement No. 141 (Revised 2007) “Business
      Combinations” (“SFAS 141(R)”), which requires us to record fair value estimates
      of contingent consideration and certain other potential liabilities during
      the
      original purchase price allocation, expense acquisition costs as incurred and
      does not permit certain restructuring activities previously allowed under
      Emerging Issues Task Force Issue No. 95-3 to be recorded as a component of
      purchase accounting. SFAS 141(R) applies prospectively to business combinations
      for which the acquisition date is on or after the beginning of the first annual
      reporting period beginning on or after December 15, 2008, except for the
      presentation and disclosure requirements, which shall be applied retrospectively
      for all periods presented. We will adopt this standard at the beginning of
      our
      fiscal year ending December 31, 2009 for all prospective business acquisitions.
      We have not determined the effect that the adoption of SFAS No. 141(R) will
      have
      on our financial results.




In
      December 2007, the FASB issued FASB Statement No. 160 “Non-controlling Interests
      in Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS 160”),
      which requires non-controlling interests in subsidiaries to be included in
      the
      equity section of the balance sheet. SFAS 160 applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008, except
      for the presentation and disclosure requirements, which shall be applied
      retrospectively for all periods presented. We will adopt this standard at the
      beginning of our fiscal year ending after November 30, 2009 for all prospective
      business acquisitions. We have not determined the effect that the adoption
      of
      SFAS 160 will have on our financial results.




42




**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.’’




**Off-Balance
      Sheet Arrangements**




We
      have
      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 7, 2008. The Chief Executive Officer and the
      Chief Financial Officer listed below have entered into employment contracts
      with
      us or our subsidiaries (which permit the employee to resign subject to varying
      notice periods). In addition, in case of a change of control of the Company,
      or
      of a termination of their employment contract by the Company without cause,
      the
      Senior Executive Officers are entitled to receive severance packages totaling
      approximately €0.4 million. On March 31, 2007, a transition occurred whereby
      the Chief Executive Officer stepped down to join the Board of Directors, and
      the
      Chief Operating Officer was officially appointed Chief Executive
      Officer.


Name
                
                Age
                
                PositionPhilippe
                    Chauveau
                
                72
                
                Chairman
                    of the Board of DirectorsIn
                    1997, Philippe Chauveau was named chairman of EDAP TMS S.A.'sSupervisory
                    Board, involving a two-tier board structure overseeing aManagement
                    Board. In 2002, both these boards were replaced by a single Boardof
                    Directors, which Philippe Chauveau headed as Chairman and CEO.
                    Whileremaining
                    Chairman of the Board, he was succeeded by Hugues de Bantel asCEO
                    in 2004, and by Marc Oczachowski in 2007. Since 2000, PhilippeChauveau
                    also served as founding Chairman of the Board of Scynexis Inc.,funded
                    by private equity, which is an innovative drug discovery company
                    basedin
                    the United States, partnering with major pharmaceutical companiesworldwide.
                    He is also personal executive coach to senior research leaders
                    atHoffmann
                    LaRoche. Additionally, he is involved in management developmentprograms
                    at Solvay Business School  in Brussels, Belgium. He was Vice-President
                    of research and development at AT&T Bell Labs and has also servedas
                    Chairman of Apple Computer Europe, preceded by increasing marketingroles
                    in ITT and in Procter & Gamble. He has an Honours Degree from TrinityCollege
                    Dublin with a B.A. and a Bsc.Marc
                    Oczachowski
                
                37
                
                Chief
                  Executive Officer of EDAP TMS S.A. and President of the HIFU Division
                  and
                  the UDS DivisionMarc
                    Oczachowski joined the Company in May 1997 as Area Sales Manager,based
                    in Lyon, France. From March 2001 to January 2004, he held managementpositions
                    as General Manager of EDAP Technomed Malaysia. He wasappointed
                    Chief Operating Officer of EDAP TMS in November 2004 andbecame
                    Chief Executive Officer of the Company on March 31,2007.
                    Previouslyhe
                    worked for Sodem Systems,  which manufactures orthopaedic power
                    tools, asArea
                    Sales Manager. He is a graduate of Institut Commercial de Lyon,
                    France.Eric
                    Soyer
                
                41
                
                Chief
                    Financial Officer of EDAP TMS S.A.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 company
                    listed onthe
                    Paris stock exchange, 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 a BA degree from Clermont Graduate School
                    of
                    Management, an MBA degree from the University of Kansas and an
                    Executive
                    MBA degree from the HEC Paris School of
                    Management.
  43




**Board
      of Directors**




The
      following table sets forth the names and backgrounds of the members of the
      Board
      of Directors. The mandate for each member of the Board of Directors expires
      on
      the date of the annual meeting of shareholders approving the financial results
      for fiscal year 2007, in June 2008. There is no contract providing for benefits
      upon termination of the directors’ mandates.




Philippe
                Chauveau
            See
                biography under “—Senior
                Executive Officers.”




Pierre
                Beysson
              Age:
                66
            
            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 a mergers and acquisitions 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 has an MBA from Harvard Business
                School.Karim
                Fizazi
              Age:
                42
            
            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 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.Jean-Philippe
                Deschamps
              Age:
                66
            
            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 organization.
                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.Hugues
                de Bantel
              Age:
                38
            
            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 EDAP TMS France (formerly TMS S.A.)
                on
                November 6, 2002, and President of EDAP S.A. on November 13, 2003.
                He was
                appointed Chief Executive Officer of the Company on July 1, 2004.
                On March
                31, 2007, he stepped down from his CEO position and joined the Board
                of
                Directors. He is currently preparing an MBA at IMD, Lausanne, Switzerland.
                Before joining EDAP TMS, 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).




44




**Compensation
      and Options**




The
      whole
      Board of Directors acts as a ‘‘Compensation Committee’’ to review the
      compensation of our Senior Executive Officers, as per the approved charter
      of
      the “Compensation Committee”, and to propose any changes to compensation paid to
      the Board of Directors, provided that the majority of independent members
      participate in the votes for Management compensations. 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 2007 was approximately €0.6 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 2007.




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 their 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.
      As of
      December 31, 2007, none of these warrants have been exercised and Hugues de
      Bantel, President of each subsidiary until March 22, 2007, renounced the
      allocated warrants.




As
      of
      December 31, 2007, Senior Executive Officers held an aggregate of 197,763
      options to purchase or to subscribe to shares of our common stock, with a
      weighted average exercise price of €3.68 per shares. Of these options, 6,000
      expire on December 31, 2008, 6,425 expire on June 18, 2012, 30,000 expire on
      February 24, 2014 and 155,338 expire on October 29, 2017.




**Audit
      Committee**




The
      Board
      of Directors’ Audit Committee comprises four fully independent Members: Mr.
      Pierre Beysson acting as Head of the Audit Committee, Mr. Philippe Chauveau,
      Dr.
      Karim Fizazi and Pr. Jean-Philippe Deschamps. The purpose of the Committee,
      conforming to its  annually approved charter, is to:





·
            Provide
                assistance to the Board of Directors in fulfilling their oversight
                responsibility to the shareholders, potential shareholders, the investment
                community and others relating to: the integrity of our financial
                statements, our compliance with legal and regulatory requirements,
                ouraccounting practices and financial reporting processes, the effectiveness
                of our disclosure controls and procedures and internal control over
                financial reporting,the
                independent auditor’s qualifications and independence, and the performance
                of our 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 our
                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, 2005, we employed 134 individuals on a full-time basis, employed
      as
      follows:




Sales
                & Marketing
            
            
            Manufac-turing
            
            
            Service
            
            
            Research
                & Dvpt
            
            
            Regula-tory
            
            
            Clinical
                Affairs
            
            
            Adminis-trative
            
            
            TotalFrance
            
            
            13
            
            
            22
            
            
            24
            
            
            8
            
            
            3
            
            
            2
            
            
            15
            
            
            87Italy
            
            
            3
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            3
            
            
            6Germany
            
            
            2
            
            
            0
            
            
            2
            
            
            0
            
            
            0
            
            
            0
            
            
            2
            
            
            4Japan
            
            
            9
            
            
            0
            
            
            13
            
            
            0
            
            
            2
            
            
            0
            
            
            4
            
            
            28Malaysia
            
            
            2
            
            
            0
            
            
            3
            
            
            0
            
            
            0
            
            
            0
            
            
            2
            
            
            7South
                Korea
            
            
            1
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            1
            
            
            2**Total
                =**
            
            
            30
            
            
            22
            
            
            40
            
            
            8
            
            
            5
            
            
            2
            
            
            27
            
            
            134





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




45




As
      of
      December 31, 2007, we employed 148 individuals on a full-time basis, employed
      as
      follows:




Sales
                & Marketing
            
            
            Manufac-turing
            
            
            Service
            
            
            Research
                & Dvpt
            
            
            Regula-tory
            
            
            Clinical
                Affairs
            
            
            Adminis-trative
            
            
            TotalFrance
            
            
            14
            
            
            29
            
            
            20
            
            
            10
            
            
            4
            
            
            2
            
            
            16
            
            
            95Italy
            
            
            3
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            2
            
            
            5Germany
            
            
            3
            
            
            0
            
            
            2
            
            
            0
            
            
            0
            
            
            0
            
            
            3
            
            
            8Japan
            
            
            8
            
            
            0
            
            
            15
            
            
            0
            
            
            2
            
            
            0
            
            
            4
            
            
            29Malaysia
            
            
            2
            
            
            0
            
            
            3
            
            
            0
            
            
            0
            
            
            0
            
            
            2
            
            
            7South
                Korea
            
            
            1
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            1
            
            
            2Russia
            
            
            1
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            1USA
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            0
            
            
            1
            
            
            0
            
            
            1**Total
                =**
            
            
            32
            
            
            29
            
            
            40
            
            
            10
            
            
            6
            
            
            3
            
            
            28
            
            
            148




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




**Share
      Ownership**




As
      of
      March 16, 2008, the total number of shares issued was 9,624,497, with 423,740
      shares held as Treasury Stocks, thus bringing the total number of shares
      outstanding to 9,200,757.




As
      of
      March 16, 2008, the Board of Directors and the Senior Executive Officers of
      the
      Company held a total of 119,103 Shares representing 1.24% of the total share
      capital and (after subtracting treasury stock which under French law carries
      no
      voting rights) 1.29% of the voting rights of the Company.




**Options
      to Purchase or Subscribe for Securities**




As
      of
      March 16, 2008, we had sponsored five stock purchase and subscription option
      plans.




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.




46




On
      February 17, 2005, the shareholders of EDAP TMS S.A. authorized the Board of
      Directors to grant up to 625,000 free shares to be issued to certain employees
      of the Company, subject to compliance with the conditions and performance
      criteria fixed by the Board of Directors. On March 30, 2005, 500,900 rights
      to
      subscribe for free shares were granted by the Board of Directors, based on
      certain performance criteria to be met for years 2005 and 2006. However, given
      the dramatic shift of business model during 2005 from the sales of Ablatherm
      equipment towards the sales of treatment procedures (RPPs), on January 6, 2006,
      the Board of Directors decided to cancel the 2005 allocation plan and to set
      up
      a new one reflecting the new business model for years 2006 and 2007. On January
      6, 2006, in accordance with the Performance Stock Plan authorized by the
      shareholders, 564,100 rights to subscribe to new shares were distributed,
      including new entrants. 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 subscribe to new
      shares, based on these fixed performance criteria were then cancelled and these
      shares will then never be subscribed and issued. On March 8, 2007, a revised
      business model was approved by the Board of Directors for years 2007 and 2008.
      On that date, 47,100 rights to subscribe to new shares were granted to new
      entrants, subject to the achievement of certain milestones based on the revised
      2007-2008 business model. As of December 31, 2007 none of the milestones for
      the
      year 2007, fixed by the January 6, 2006 Board of Directors, have been reached,
      and only one milestone fixed by the March 8, 2007 Board of Directors, has been
      reached, thus triggering the allocation of 7,065 new shares to some employees.
      As per the Performance Stock Plan approved on March 8, 2007, these shares will
      only be issued on July 2009. As of December 31, 2007, 211,435 rights to
      subscribe to new shares, based on these fixed performance criteria for the
      year
      2007 were then cancelled and these shares will then never be subscribed and
      issued. As of December 31, 2007, only 18,840 rights out of the 625,000 initially
      granted were still in force, based on 2008 milestones.




On
      May
      22, 2007, the shareholders of EDAP TMS S.A. authorized the Board of Directors
      to
      grant up to 600,000 options to subscribe to 600,000 new Shares and up to 105,328
      options to purchase pre-existing 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
      December 31, 2007, the duration of our stock option contracts was as
      follows:




**months
                until expiration**
            
            **Number
                of Shares**12
            
            
            46,90024
            
            
            1,21248
            
            
            52,00054
            
            
            6,42574
            
            
            171,000120
            
            
            504,088




As
      of
      December 31, 2007, a summary of stock option activity to purchase or to
      subscribe to Shares under these plans is as follows:




2007
            
            2006
            
            2005Options
            
            Weighted
                average exercise price
              (€)
            
            Options
            
            Weighted
                average exercise price
              (€)
            
            Options
            
            Weighted
                average exercise price
              (€)Outstanding
                on January 1,
            
            502,162
            
            
            2.36
            
            
            593,262
            
            
            2.50
            
            
            580,262
            
            
            2.49Granted
            
            504,088
            
            
            3,99
            
            
            
            
            
            
            
            
            15,000
            
            
            2.78Exercised
            
            (183,750
            )
            
            2.03
            
            
            (72,600
            )
            
            3,20
            
            
            (1,000
            )
            
            1.62Forfeited
            
            (7,250
            )
            
            2,60
            
            
            (18,500
            )
            
            2,60
            
            
            (1,000
            )
            
            3.81Expired
            
            (33,625
            )
            
            3.81
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                on December 31,
            
            781,625
            
            
            3.42
            
            
            502,162
            
            
            2.38
            
            
            593,262
            
            
            2.50Exercisable
                on December 31,
            
            234,787
            
            
            2,63
            
            
            405,162
            
            
            2,73
            
            
            409,652
            
            
            2.45Shares
                purchase options available for grant on December 31
            
            105,328
            
            
            -
            
            
            0
            
            
            -
            
            
            0
            
            
            -




47




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, 2007:




Outstanding
                options
            
            Exercisable
                optionsExercise
                price (€)
            
            Options
            
            Weighted
                average remaining contractual life
            
            Weighted
                average exercise price
              (€)
            
            Options
            
            Weighted
                average exercise price
              (€)3.99
            
            
            504,088
            
            
            10
            
            
            3.99
            
            
            -
            
            
            -3.81
            
            
            37,900
            
            
            1
            
            
            3.81
            
            
            37,900
            
            
            3.812.60
            
            
            171,00
            
            
            6.2
            
            
            2.60
            
            
            128,250
            
            
            2.602.08(1)
            
            
            52,000
            
            
            4.0
            
            
            2.08
            
            
            52,000
            
            
            2.082.02(2)
            
            
            6,425
            
            
            4.5
            
            
            2.02
            
            
            6,425
            
            
            2.021.83
            
            
            10,212
            
            
            1.5
            
            
            1.83
            
            
            10,212
            
            
            1.831.83
                to 3.99
            
            
            781,625
            
            
            3.9
            
            
            3.51
            
            
            234,787
            
            
            2.63




(1)
            All
                the 52,000 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 6,425 options were granted on June 18, 2002 with an exercise
                price
                expressed in U.S. dollars ($1.92) and converted here to euros based
                on the
                noon buying rate on June 18, 2002 ($1 = €1.0545).




**Exemptions
      from Certain NASDAQ Corporate Governance Rules**




NASDAQ
      rules provide for 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, 2008, 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 10.42% of the total
      share capital of the Company and (after subtracting treasury stock, which under
      French law carries no voting rights) 10.90% of voting rights, Wells Capital
      Management, Inc., formerly Benson Associates LLC, owned 841,809 Shares
      representing 8.75% of the total share capital of the Company and (after
      subtracting treasury stock, which under French law carries no voting rights)
      9.14% of voting rights and Bruce & Co., Inc, owned 729,929 shares
      representing 7.58% of the total share capital of the Company and (after
      subtracting treasury stock, which under French law carries no voting rights)
      7.93% of voting rights. The Shares owned by these persons do not carry special
      voting rights.




48




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, 2008, 9,624,497 Shares were issued, including 9,200,757 outstanding
      and 423,740 treasury Shares. At the same date, there were 9,461,889 ADSs, each
      representing one Share, all of which were held of record by 21 registered
      holders in the United States (including The Depository Trust Company).




**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 our medical devices installed in Korea. The
      amounts payable under this contract were €71 thousand, €61 thousand and €136
      thousand, for 2007, 2006 and 2005 respectively. Dae You also acts as an agent
      to
      promote our medical devices in South Korea, and receives commissions on sales.
      Dae You has purchased medical devices from us, which it operates in partnership
      with hospitals or clinics. These purchases amounted to €558 thousand, €588
      thousand and €396 thousand in 2007, 2006 and 2005 respectively. As of December
      31, 2007, receivables from Dae You amounted to €52 thousand and our payables to
      them amounted to €28 thousand. As of December 31, 2006, receivables amounted to
€73 thousand and payables to €24 thousand.




We
      purchase certain technological elements from Siemens AG, an affiliate of our
      shareholder Siemens France Holding. Total purchases amounted to €183 thousand in
      2007, €444 thousand in 2006 and €547 thousand in 2005. As of December 31, 2007,
      payables due to Siemens AG amounted to €1 thousand and as of December 31, 2006,
      payables amounted to €18 thousand.




The
      Company signed an exit agreement, including a severance package, with a former
      senior executive which provides compensation of approximately €512 thousand
      including social charges.




**Item
      8. Financial Information**




**Consolidated
      Financial Statements**




See
      Item
      18, ‘‘Financial Statements.’’




**Export
      Sales**




As
      of
      December 31, 2007, 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,
      the Company is a party to one product liability action 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 this case following the sale
      of
      the Prostatron business in October 2000. 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 claim and suit would
      not
      have a material adverse effect on the results of its operations, cash flows,
      or
      financial position as of December 31, 2007, and for the year then
      ended.




49




**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—Withholding Tax.’’




No
      dividends were paid with respect to fiscal years 2003 through 2007, and we
      do
      not anticipate paying any dividends for the foreseeable future. In particular,
      in connection with the October 2007 private placement, we agreed not to pay
      cash
      dividends on any of our equity securities. Thereafter, declaration of dividends
      on our shares will depend upon, among other things, future earnings, if any,
      the
      operating and financial condition of our business, our capital requirements,
      general business conditions and such other factors as our Board of Directors
      deems relevant.




**Significant
      Changes**




Except
      as
      otherwise disclosed in this Annual Report, there has been no material change
      in
      the financial position of EDAP TMS S.A. and its consolidated subsidiaries since
      December 31, 2007.




**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 may be evidenced by an American Depositary Receipt issued by The Bank
      of New York, our Depositary. The principal United States trading market for
      the
      ADSs, which is also the principal trading market for the ADSs overall, is the
      NASDAQ Global 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 our ADSs effective on April
      25,
      2002.




**Trading
      Markets**




The
      following tables set forth, for the years 2003 through 2007, the reported high
      and low sales prices of the ADSs on NASDAQ.


**NASDAQ****High**
              
              **Low****$**2007
              
              
              9.40
              
              
              4.252006
              
              
              21.64
              
              
              5.122005
              
              
              5.68
              
              
              3.102004
              
              
              3.92
              
              
              1.552003
              
              
              1.99
              
              
              1.00




50




The
      following tables set forth, for the years 2006 and 2007, the reported high
      and
      low sales prices of the ADSs on NASDAQ for each full financial
      quarter:




**NASDAQ****High**
            
            **Low****$****2007:**First
                Quarter
            
            
            9.40
            
            
            5.62Second
                Quarter
            
            
            8.85
            
            
            5.67Third
                Quarter
            
            
            8.00
            
            
            4.60Fourth
                Quarter
            
            
            6.62
            
            
            4.25**2006:**First
                Quarter
            
            
            21.64
            
            
            5.30Second
                Quarter
            
            
            19.46
            
            
            7.02Third
                Quarter
            
            
            12.20
            
            
            6.50Fourth
                Quarter
            
            
            8.60
            
            
            5.12




The
      following table sets forth, for the most recent six months (from October 2007
      through March 10, 2008), the reported high and low sale prices of the ADSs
      on
      NASDAQ for each month:




**NASDAQ****High**
            
            **Low****$****2007:**October
            
            
            8.60
            
            
            7.00November
            
            
            7.55
            
            
            5.12December
            
            
            6.89
            
            
            5.33**2008:**January
            
            
            4.99
            
            
            3.55February
            
            
            5.12
            
            
            3.62March
                (through March 16, 2008)
            
            
            4.84
            
            
            4.01




51




**Item
      10. Additional Information**




**Memorandum
      and Articles of Association**




Set
      forth
      below is a brief summary of significant provisions of our articles of
      association ( *statuts* )
      and
      applicable French laws. This is not a complete description and is qualified
      in
      its entirety by reference to our *statuts* .
      Each
      time they are modified, we file copies of our 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.




Our
      corporate affairs are governed by its articles of association and by Book II
      of
      the French Commercial Code, as amended.




Our
      articles of association were last updated in August 2007 to act the recent
      increase in share capital related to the exercise of subscription options and
      warrants.




**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**




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 annual
      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 the term of such Director comes to an end. Directors
      may always be re-elected; a director may also be dismissed at any time at the
      shareholders’ meeting.




The
      mandate for each member of the current 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, a 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.




52




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 our business and supervises our
      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 our 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.




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 of Directors 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 our 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 was replaced by Marc Oczachowski, current Chief Operating
      Officer. Hugues de Bantel was appointed a member of the Board of Directors.




53




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 our 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.




Our
      shareholders 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.




Our
      articles of association provide that, if so agreed by the shareholders, reserves
      that are available for distribution under French law and our articles of
      association may be distributed as dividends, subject to certain
      limitations.




If
      we
      have made distributable profits since the end of the preceding fiscal year
      (as
      shown on an interim income statement certified by our statutory auditors),
      the
      Board of Directors has the authority under French law, without the approval
      of
      shareholders, to distribute interim dividends to the extent of such
      distributable profits. We have 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 annual 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 our 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, our assets remaining after payment of our debts,
      liquidation expenses and all of our 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.




54




***Changes
      in Share Capital (French Law)***




Our
      share
      capital 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.




Our
      share
      capital 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 us
      of
      our 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
      us, 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 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 our 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 our 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 our 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.




55




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. Upon our request, the Bank of New York will send
      to
      holders of ADSs notices of shareholders’ meetings and other reports and
      communications that are made generally available to. 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. An ADS
      holder must timely and properly return its voting instruction card to the
      Depositary to exercise the voting rights relating to the shares represented
      by
      its ADSs. The Depositary will use its reasonable efforts to vote the underlying
      shares in the manner indicated by the ADS holder. In addition, if an ADS holder
      does not timely return a voting instruction card or the voting instruction
      card
      received is improperly completed or blank, that holder will be deemed to have
      given the Depositary a proxy to vote, and the Depositary will vote in favor
      of
      all proposals recommended by the Board of Directors and against all proposals
      that are not recommended by the Board of Directors.




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 we control
      directly or indirectly 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 our share registry to his or her spouse, to another shareholder or to a
      legal
      representative, in the case of a legal entity, or by sending a proxy in blank
      to
      the Company without nominating any representatives. In the latter case, the
      Chairman of the shareholders’ meeting will vote such blank proxy in favor of all
      resolutions proposed by the Board of Directors and against all
      others.




The
      presence in person or by proxy of shareholders having not less than 25% (in
      the
      case of an ordinary general meeting or an extraordinary general meeting deciding
      upon any capital increase by capitalization of reserves) or 33 1/3% (in the
      case
      of an extraordinary general meeting) of the Shares entitled to vote is necessary
      to reach a quorum. If a quorum is not reached at any meeting, the meeting is
      adjourned. Upon recommencement of an adjourned meeting, there is no quorum
      requirement in the case of an ordinary general meeting or an extraordinary
      general meeting deciding upon any capital increase by capitalization of
      reserves. The presence in person or by proxy of shareholders having not less
      than 25% of the Shares is necessary to reach a quorum in the case of any other
      type of extraordinary general meeting.




At
      an
      ordinary general meeting or an extraordinary general meeting deciding upon
      any
      capital increase by capitalization of reserves, a simple majority of the votes
      of the shareholders present or represented by proxy is required to approve
      a
      resolution. At any other extraordinary general meeting, a two-thirds majority
      of
      the votes cast is required. However, a unanimous vote is required to increase
      liabilities of shareholders. Abstention from voting by those present or
      represented by proxy is viewed as a vote against the resolution submitted to
      a
      vote.




In
      addition to his/her rights to certain information regarding the Company, any
      shareholder may, during the two-week period preceding a shareholders’ meeting,
      submit to the Board of Directors written questions relating to the agenda for
      the meeting. The Board of Directors is required to respond to such questions
      during the meeting.




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.




56




As
      set
      forth in our articles of association, shareholders’ meetings are held at our
      registered office of the Company or at any other locations specified in the
      written notice. We do not have 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*




Our
      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 we may issue or cause to be
      issued confirmations of shareholdings registered in such registry to the persons
      in whose names the shares are registered. Such confirmations do not constitute
      documents of title and are not negotiable instruments.




***Ownership
      of ADSs or Shares by Non-French Residents (French Law)***




Under
      French law, there is no limitation on the right of non-French residents or
      non-French security holders to own, or where applicable, vote securities of
      a
      French company. A non-resident of France must file a *déclaration
      administrative* ,
      or
      administrative notice, with French authorities in connection with the
      acquisition of a controlling interest in any French company. Under existing
      administrative rulings, ownership, by a non-resident of France or a French
      corporation which is itself controlled by a foreign national, of 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).




***Certain
      Exemptions (French Law)***




Under
      the
      U.S. securities laws, as a foreign private issuer, we are 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. We are also exempt from certain of the
      current NASDAQ corporate governance requirements. 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)***




We
      are a *société
      anonyme* ,
      or
      limited liability corporation, organized under the laws of the Republic of
      France. The majority of our directors and executive officers reside in the
      Republic of France. All or a substantial portion of our assets and the assets
      of
      such persons are located outside the United States. As a result, it may not
      be
      possible for investors to effect service of process within the United States
      upon such persons or to enforce, either inside or outside the United States,
      judgments against such persons obtained in U.S. courts or to enforce in U.S.
      court judgments obtained against such persons in courts in jurisdictions outside
      the United States, in each case, in any action predicated upon the civil
      liability provisions of the federal securities laws of the United States. In
      an
      original action brought in France predicated solely upon the U.S. federal
      securities laws, French courts may not have the requisite jurisdiction to grant
      the remedies sought, and actions for enforcement in France of judgments of
      U.S.
      courts rendered against French persons referred to in the second sentence of
      this paragraph would require such French persons to waive their right under
      Article 15 of the French Civil Code to be sued in France only. We believe that
      no such French persons have waived such right with respect to actions predicated
      solely upon U.S. federal securities laws. In addition, actions in the United
      States under the U.S. federal securities laws could be affected under certain
      circumstances by the French law of July 16, 1980, which may preclude or restrict
      obtaining evidence in France or from French persons in connection with such
      actions.




57




**Material
      Contracts**




On
      August
      3, 2006, we closed a private placement of 961,676 ordinary shares in the form
      of
      ADSs, 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 ADSs with the
      SEC
      are covered by the Registration Rights Agreement.




On
      October 31, 2007, we completed the private placement of $20 million principal
      amount of 9% Senior Convertible Debentures due 2012. In addition, the purchasers
      of the convertible debentures and the Placement Agent received warrants to
      purchase our ordinary shares, which expire in 2013. The October 2007 private
      placement resulted in net proceeds of approximately $17.4 million. The
      Securities Purchase Agreement, dated as of October 29, 2007, among EDAP TMS
      S.A.
      and each purchaser was furnished to the SEC on Form 6-K dated October 31, 2007,
      and incorporated by reference in our Form F-3 registration statement filed
      with
      the SEC on November 30, 2007. The terms for registering the underlying ADSs
      with
      the SEC are included in the Registration Rights Agreement, dated as of October
      29, 2007, among EDAP TMS S.A. and the investors signatory thereto, which was
      furnished to the SEC on Form 6-K dated October 31, 2007 and incorporated by
      reference in our Form F-3 filed with the SEC on November 30, 2007.




**Exchange
      Controls**




Under
      current French foreign exchange control regulations, there are no limitations
      on
      the amount of cash payments that we may remit to residents of foreign countries.
      Laws and regulations concerning foreign exchange controls do require, however,
      that all payments or transfers of funds made by a French resident to a
      non-resident be handled by an accredited intermediary. All registered banks
      and
      credit institutions in France are accredited intermediaries.




Under
      French law, there is no limitation on the right of non-French residents or
      non-French security holders to own, or where applicable, vote securities of
      a
      French company. A non-resident of France must file a *déclaration
      administrative* ,
      or
      administrative notice, with French authorities in connection with the
      acquisition of a controlling interest in any French company. Under existing
      administrative rulings, ownership by a non-resident of France or a French
      corporation which is itself controlled by a foreign national, of 20% or more
      of
      a listed company’s share capital or voting rights is regarded as a controlling
      interest, but a lower percentage may be held to be a controlling interest in
      certain circumstances (depending upon such factors as the acquiring party’s
      intentions, its ability to elect directors or financial reliance by the French
      company on the acquiring party).




**French
      Taxation**




The
      following generally summarizes the material French tax consequences of
      purchasing, owning and disposing of Shares or ADSs. The statements relating
      to
      French tax laws set forth below are based on the laws in force as of the date
      hereof, and are subject to any future changes in applicable laws and tax
      treaties.




58




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. It does not constitute legal or
      tax
      advice. 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 by a French
      corporation, such as EDAP, to non-residents normally are subject to a 25% French
      withholding tax (reduced
      to 18% since January 1 st 2008
      when non-residents are individuals resident from one of the countries of the
      European Economic Area, except Liechtenstein .
      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 prior to the payment
      of a
      dividend, then French tax generally will be withheld at the reduced rate
      provided under the treaty.





*Taxation
      of dividends*




Dividends
      received by French resident individuals are either included in their total
      income and subject to the progressive income tax, or they can alternatively
      be
      subject to an 18% levy source at the option of the beneficiary.




When
      no
      option is exercised by the French resident individuals, they are taxed on only
      60% of the dividends they receive and, in addition to second
      fixed annual allowance of €3,050 for couples subject to joint taxation and
€1,525 for single persons, widows or divorced persons **,** 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.





As
      a
      result of the French Finance Bill for 2008, French resident individuals can
      elect to have all or part of the dividends received subject to an 18% levy
      at
      source at the irrevocable option of the shareholder exercised no later than
      at
      the time of the payment if t occurs in France. If the option is exercised only
      for a portion of the dividends received during the year (whether they are
      distributed by EDAP or any other company), the remaining dividends subject
      to
      the progressive income tax lose the benefit of the aforementioned allowances
      and
      the Tax Credit. Holders of Shares are invited to contact their financial or
      tax
      advisor to be informed of the consequences of such option on their tax situation
      and the terms and conditions of exercising the option and the payment of the
      levy at source as well as the reporting obligations related to such option
      when
      the paying agent is not located in France.




Dividends
      paid to non-residents are not normally eligible for the Tax Credit described
      above. However, qualifying non-resident individuals who
      were
      previously entitled to a refund of the *avoir
      fiscal* may
      benefit, under the same conditions as for the *avoir
      fiscal* , from a
      refund of the Tax Credit (net of applicable withholding tax) under certain
      conditions, subject to compliance with the procedures for claiming benefits
      under the applicable treaty. The French tax authorities have not yet issued
      any
      guidance with regard to the procedures for claiming the refund of the Tax Credit
      to non-resident individuals.




59





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, alone
      or
      together with their spouse, ascendants or descendants, **** at
      any
      time during the preceding five years, are not subject to French income tax
      or
      capital gains tax on the sale or disposition of Shares or ADSs.




A
      1.1% *ad
      valorem* registration duty (subject to a maximum of €4,000 per transfer) applies to
      certain transfers of shares in French companies. This duty does not apply to
      transfers of shares in listed companies that are not evidenced by a written
      agreement, or if any such agreement is executed outside France.




*Estate
      and Gift Tax*




France
      imposes estate and gift tax on shares or ADSs of a French corporation 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
      corporation, provided that such ownership interest is, directly or indirectly,
      less than 10% of the corporation’s share capital and does not enable the
      shareholder to exercise influence over the corporation. 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 Convention
      Between the Government of the United States of America and the Government of
      the
      French Republic for the Avoidance of Double Taxation and the Prevention of
      Fiscal Evasion with Respect to Taxes on Income and Capital of August 31, 1994
      (the “Treaty”), which entered into force on December 30, 1995 (as amended by any
      subsequent protocols), and the tax regulations issued by the French tax
      authorities, and are 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
      concurrently:




·
            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.




If
      a
      partnership holds Shares of ADSs, the tax treatment of a partner generally
      will
      depend on the status of the partner and the activities of the partnership.
      If a
      US Holder is a partner in a partnership that holds Shares or ADSs, the holder
      is
      urged to consult its own tax advisor regarding the specific tax consequences
      of
      owning and disposing of its Shares and ADSs.




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.




60




This
      summary does not purport to be a comprehensive description of all of the tax
      considerations that may be relevant to any particular investor, and does not
      discuss tax considerations that arise from rules of general application or
      that
      are generally assumed to be known by investors. In particular, the summary
      does
      not deal with Shares or ADSs that are not held as capital assets, and does
      not
      address the tax treatment of holders that are subject to special rules, such
      as
      banks, insurance companies, dealers in securities or currencies, regulated
      investment companies, persons that elect mark-to-market treatment, persons
      holding Shares or ADSs as a position in a synthetic security, straddle or
      conversion transaction, persons that own, directly or indirectly, 5% or more
      of
      the Company’s voting stock or 10% or more of the Company’s outstanding capital
      and persons whose functional currency is not the U.S. dollar.




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.




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.




Holders
      should consult their own tax advisors regarding the tax consequences of the
      purchase, ownership and disposition of Shares or ADSs in the light of their
      particular circumstances, including the effect of any state, local, or other
      national laws.




***Dividends***




Generally,
      dividend distributions to non-residents of France are subject to French
      withholding tax at a 25% rate. However, under the Treaty,  the
      rate
      of French withholding tax on dividends paid to a U.S. holder is reduced to
      15%
      and a US holder may claim a refund from the French tax authorities of the amount
      withheld in excess of the Treaty rate of 15%, if any.




**** French
      withholding tax will be withheld at the 15% Treaty rate if a U.S. holder has
      established before the date of payment that the holder is a resident of the
      United States under the Treaty by following the simplified procedure described
      below **.**




In
      addition, individual U.S. holders may be entitled to a refund of the Tax Credit,
      less a 15% withholding, provided that (i) they are subject to U.S. federal
      income tax on the Tax Credit and the dividend to which it relates ,
      and
      (ii) they are the effective beneficiaries of such dividend .
      The
      French tax authorities have not yet issued guidance with respect to the
      procedures for claiming the refund of the Tax Credit to non-resident
      individuals.




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 2007 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 2008 taxable
      year. Accordingly, dividends paid by us in 2008 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).




61




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 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 guidelines in Instruction n° 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, in order to obtain the
      reduced withholding tax rate on distributions made on or after January 1,
      2005.




Pursuant
      to these 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 or trusts, claims for Treaty benefits and related attestations
      are
      made by the partners, beneficiaries or grantors who also have to supply certain
      additional documentation.




In
      order
      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 prior to 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.




62




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 the *Centre
      des Impôts des Non-Résidents* in
      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.




***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 2007 and does not anticipate being a PFIC in 2008. 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 able 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.




63




***French
      Wealth Tax***




The
      French wealth tax does not generally apply to Shares or ADSs of a U.S. holder
      if
      the holder is a resident of the United States for purposes of the
      Treaty.




**U.S.
      Information Reporting and Backup Withholding Rules**




Payments
      of dividends and sales proceeds that are made within the United States or
      through certain U.S.-related financial intermediaries are subject to information
      reporting and may be subject to backup withholding unless the holder (i) is
      a
      corporation or other exempt recipient or (ii) provides a taxpayer identification
      number and certifies that no loss of exemption from backup withholding has
      occurred. Holders that are not U.S. persons generally are not subject to
      information reporting or backup withholding. However, such a holder may be
      required to provide a certification of its non- U.S. status in connection with
      payments received within the United States or through a U.S.-related financial
      intermediary.




**Documents
      on Display**




We
      are
      subject to the informational requirements of the Securities Exchange Act of
      1934, as amended. In accordance with these requirements, we file reports and
      other information with the Securities and Exchange Commission (“SEC”). These
      materials, including this annual report and the exhibits hereto, may be
      inspected and copied at the SEC’s public reference room at 100F Street, N.E.,
      Washington, D.C. 20549 and at the SEC’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
      SEC’s Public Reference Room by calling the SEC 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, 2007, 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 2007, approximately 77% of our total operating expenses were
      denominated in euro. During the same period, approximately 71% 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, 2007 relative
      to
      the U.S. dollar and the Japanese yen would have resulted in an increase in
      income before taxes and minority interests of approximately €118,000 for the
      year ended December 31, 2007, compared to a decrease of approximately €65,000
      for the year ended December 31, 2006. 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, 2007 we had no outstanding hedging
      instruments.




64




***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 and U.S. dollars.
      Approximately €0.05 million and €0.2 million of our outstanding indebtedness at
      December 31, 2006 and 2005, respectively, were denominated in Japanese yen.
      At
      December 31, 2007, we had no outstanding indebtedness denominated in Japanese
      yen. None of our outstanding indebtedness was denominated in U.S. dollars at
      December 31, 2006 and 2005 and at December 31, 2007 we had approximately €15.3
      million of outstanding debt denominated in U.S. dollars.




In
      addition, we had approximately €11.4 million, €0.4 million and €0.5 million of
      cash denominated in U.S. dollars at December 31, 2007, 2006 and 2005,
      respectively, and €1.0 million, €1.2 million and €0.9 million of cash
      denominated in Japanese yen at December 31, 2007, 2006 and 2005, respectively.




**Item
      12. Description of Securities Other than Equity Securities**




Not
      Applicable.


65




**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**




***Disclosure
      Controls and Procedures***




Under
      the
      supervision and with the participation of the Company’s management, including
      the Chief Executive Officer and Chief Financial Officer, the Company conducted
      an evaluation of the effectiveness of its disclosure controls and procedures
      (as
      such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities
      Exchange Act of 1934, as amended (the “Exchange Act”)), as of December 31, 2007.
      Based on this evaluation, the Company’s Chief Executive Officer and Chief
      Financial Officer concluded that the Company’s disclosure controls and
      procedures were effective as of such date. The Company’s disclosure controls and
      procedures are designed to ensure that information required to be disclosed
      by
      us in the reports we file under the Exchange Act is recorded, processed,
      summarized and reported within the time periods specified in the SEC’s rules and
      forms and that such information is accumulated and communicated to management,
      including the Chief Executive Officer and Chief Financial Officer, to allow
      timely discussions regarding required disclosure.




***Management’s
      Report on Internal Control Over Financial Reporting***




Management
      is responsible for establishing and maintaining adequate internal control over
      financial reporting. Internal control over financial reporting is a process
      designed to provide reasonable assurance regarding the reliability of financial
      reporting and the preparation of financial statements for external purposes
      in
      accordance with generally accepted accounting principles.




The Company’s internal controls over financial reporting include those policies
      and procedures  that:




·
            Pertain
                to the maintenance of records that in reasonable detail accurately
                and
                fairly reflectthe
                transactions and dispositions of the assets of the
                Company;




·
            Provide
                reasonable assurance that transactions are recorded as necessary
                to
                permitpreparation
                of financial statements in accordance with generally accepted
                accountingprinciples,
                and that receipts and expenditures of the Company are being made
                only
                inaccordance
                with authorizations of the Company’s management and directors;
                and




·
            Provide
                reasonable assurance regarding prevention or timely detection of
                unauthorizedacquisition,
                use or disposition of the Company’s assets that could have a material
                effect onthe
                financial statements.




Because
      of inherent limitations, internal controls over financial reporting may not
      prevent or detect misstatements. Projections of any evaluation of effectiveness
      to future periods are subject to the risk that controls may become inadequate
      because of changes in conditions, or that the degree of compliance with the
      policies or procedures may deteriorate.






Management
      assessed the effectiveness of internal control over financial reporting as
      of
      December 31, 2007 based upon the framework as set forth by the Committee of
      Sponsoring Organizations of the Treadway Commission (COSO) in Internal
      Control-Integrated Framework. Based on the Management’s assessment, management
      concluded that the Company’s internal control over financial reporting was
      effective as of December 31, 2007.




66




This
      annual report does not include the attestation report of the Company’s
      registered public accounting firm regarding internal control over financial
      reporting. Management’s report was not subject to attestation by the Company’s
      registered public accounting firm pursuant to temporary rules of the Securities
      and Exchange Commission that permit the Company to provide only management’s
      report in this annual report.




***Change
      in Internal Control over Financial Reporting***




No
      change
      in the Company’s internal control over financial reporting occurred as of the
      end of the period covered by this report that has materially affected, or is
      reasonably likely to materially affect the Company’s 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 2007, there were no waivers of its applicability. We have attached
      the code of ethics as an exhibit to this report and have made it available
      on
      our website at www.edap-tms.com .




**Item
      16C. Principal Accountant Fees and Services**




The
      ‘‘Audit and Non-Audit Services Pre-Approval Policy’’ was approved by our Audit
      Committee on December 22, 2003 (the “2003 Rules”) 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 2007 financial year:





**Nature
                of the Fees**
            
            **2005
                (in €)**
            
            **2006
                (in €)**
            
            **2007
                (in €)**Audit
                fees
            
            
            136,020
            
            
            175,780
            
            
            162,394Audit-related
                fees
            
            
            97,305
            
            
            96,850
            
            
            53,040Tax
                fees
            
            
            -
            
            
            -All
                other fees
            
            
            -
            
            
            -**Total**
            
            
            **233,325**
            
            
            **272,630**
            
            
            **215,434**




***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.




67




***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 2007 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
      2007,
      neither the Company nor affiliated purchasers made purchases of equity
      securities of the Company registered pursuant to Section 12 of the Exchange
      Act.




68




**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.


69




**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 August 29, 2007 (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)).(2)




(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)).(1)




(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)).(1)


(d)
                Termination Agreement dated as of April 3, 2007 among the Company,
                HT
                Prostate Therapy Management Company, LLC, EDAP S.A. and Technomed
                Medical
                Systems, S.A.


(e)
                Amendment to Termination Agreement dated July 9, 2007, among the
                Company,
                HT Prostate Therapy Management Company, LLC, EDAP S.A. and Technomed
                Medical Systems, S.A.




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)).(1)


(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)).(1)


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 furnished on August 18, 2006 (File No.
                000-29374)). (1)


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 2to
                the Report of Foreign Private Issuer on Form 6-K/A furnished on August
                18,
                2006 (File No. 000-29374)).(1)




70




4.5
          Form of Securities Purchase Agreement dated as of October 29, 2007 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 furnished on October 31, 2007 (File No. 000-29374)).(1) 4.6
            Form
                of Registration Rights Agreement dated as of October 29, 2007, among
                EDAP
                TMS S.A. and the investors signatory thereto (incorporated herein
                by
                reference to Exhibit 2to
                the Report of Foreign Private Issuer on Form 6-K furnished on October
                31,
                2007 (File No. 000-29374)).(1)





8.1
            List
                of subsidiaries of EDAP TMS S.A. as of March 1, 2008.




11.1
            Code
                of Ethics of the Company, approved by the Board of Directors on July
                22,
                2005.


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.


15.1
            Consent
                of Ernst & Young.




*(1)*
            *Previously
                filed.*


*(2)*
            *Previously
                filed with certain confidential portions omitted under Rule 24b-2
                under
                Securities Exchange Act of 1934.*




71




**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 31, 2008
            
            /s/ MARC
              OCZACHOWSKI*Marc
                Oczachowski*
              *Chief
                Executive Officer*




Dated:March 31, 2008
            
            /s/ ERIC
              SOYER*Eric
                  Soyer*
                *Chief
                  Financial Officer*




72




**INDEX
      TO FINANCIAL STATEMENTS**




**Audited
      Consolidated Financial Statements for EDAP TMS S.A. and Subsidiaries for the
      Years Ended December 31, 2007, 2006 and 2005**


**Audited
                  Consolidated Financial Statements for EDAP TMS S.A. and Subsidiaries
                  for
                  the Years Ended December 31, 2007, 2006 and 2005**Report
                  of Independent Auditors
              
              
              74Consolidated
                  Balance Sheets as of December 31, 2007 and 2006
              
              
              75Consolidated
                  Statements of Income for the years ended December 31, 2007, 2006
                  and 2005
              
              
              76Consolidated
                  Statements of Comprehensive Income for the years ended December
                  31, 2007,
                  2006 and 2005
              
              
              77Consolidated
                  Statements of Shareholders’ Equity for the years ended December 31, 2007,
                  2006 and 2005
              
              
              78Consolidated
                  Statements of Cash Flows for the years ended December 31, 2007,
                  2006 and
                  2005
              
              
              79Notes
                  to Consolidated Financial Statements
              
              
              80


73




**Report
      of Independent Registered Public Accounting Firm**




Board
      of
      Directors and Shareholders of EDAP TMS S.A.




We
      have
      audited the accompanying consolidated balance sheets of EDAP TMS S.A. and
      subsidiaries as of
      December 31,  2006 and 2007, and the related consolidated statements of
      income ,
      changes
      in shareholders' equity and cash flows for the three years ended December 31,
      2007. 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. and
      subsidiaries at
      December 31, 2006 and 2007, and the consolidated results of its operations
      and its cash flows for the three years ended December 31, 2007, 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
              CHAPOULAUDRepresented
                by
              Laurent
                Chapoulaud




March
      31,
      2008


Lyon,
      France


74


**EDAP
      TMS S.A. AND SUBSIDIARIES**




**CONSOLIDATED
      BALANCE SHEETS**


**As
      of December 31, 2007 and 2006**


**(in
      thousands of euros unless otherwise noted)**




**ASSETS**
            
            **Notes**
            
            **2007**
            
            **2006****Current
                assets**Cash
                and cash equivalents
            
            
            2
            
            
            17,523
            
            
            9,894Net
                Trade accounts and notes receivable
            
            
            3
            
            
            10,876
            
            
            10,142Other
                receivables
            
            
            4
            
            
            1,149
            
            
            732Inventories
            
            
            5
            
            
            4,306
            
            
            3,766Deferred
                tax assets
            
            
            22-3
            
            
            245
            
            
            85Other
                assets, current portion
            
            
            6
            
            
            935
            
            
            744Short-term
                investment
            
            
            2
            
            
            1,089
            
            
            1,031Total
                current assets
            
            
            
            
            
            36,124
            
            
            26,393Other
                assets, non-current
            
            
            6
            
            
            1,800
            
            
            −Property
                and equipment, net
            
            
            7
            
            
            4,179
            
            
            3,211Intangible
                assets, net
            
            
            8
            
            
            79
            
            
            71Goodwill
            
            
            8
            
            
            2,412
            
            
            2,412Deposits
                and other non-current assets
            
            
            
            
            
            410
            
            
            386Total
                assets
            
            
            
            
            
            45,003
            
            
            32,473**LIABILITIES
                AND SHAREHOLDERS’ EQUITY****Current
                liabilities**Trade
                accounts and notes payable
            
            
            9
            
            
            5,661
            
            
            4,718Deferred
                revenues, current portion
            
            
            10
            
            
            452
            
            
            669Social
                security and other payroll withholdings taxes
            
            
            
            
            
            813
            
            
            715Employee
                absences compensation
            
            
            
            
            
            443
            
            
            467Income
                taxes payable
            
            
            
            
            
            49
            
            
            31Other
                accrued liabilities
            
            
            11
            
            
            3,293
            
            
            2,458Short-term
                borrowings
            
            
            13
            
            
            1,593
            
            
            1,308Current
                portion of capital lease obligations
            
            
            12
            
            
            521
            
            
            436Current
                portion of long-term debt
            
            
            14
            
            
            58
            
            
            123Total
                current liabilities
            
            
            
            
            
            12,884
            
            
            10,926Deferred
                revenues, non current
            
            
            10
            
            
            708
            
            
            613Capital
                lease obligations, non current
            
            
            12
            
            
            1,035
            
            
            696Convertible debentures carried at fair value
            
            
            14
            
            
            11,691
            
            
            −Financial instruments
                carried at fair value
            
            
            14
            
            
            3,484
            
            
            −Other
                Long-term debt, non current
            
            
            14
            
            
            −
            
            
            58Other
                long-term liabilities
            
            
            15
            
            
            703
            
            
            880Total
                liabilities
            
            
            
            
            
            30,504
            
            
            13,172**Shareholders’
                equity**Common
                stock, €0.13 par value;9,624,497
                shares issued and 9,200,757 shares outstanding; 9,324,497 shares
                issued
                and 8,817,007 shares outstanding at December 31, 2007
                and 2006, respectively
            
            
            
            
            
            1,251
            
            
            1,212Additional
                paid-in capital
            
            
            
            
            
            25,896
            
            
            25,476Retained
                earnings
            
            
            
            
            
            (8,265
            )
            
            (2,835
            )Cumulative
                other comprehensive loss
            
            
            
            
            
            (3,082
            )
            
            (3,016
            )Treasury
                stock, at cost; 423,740 and 507,490 shares at December 31, 2007 and
                2006,
                respectively
            
            
            
            
            
            (1,301
            )
            
            (1,538
            )Total
                shareholders’ equity
            
            
            16
            
            
            14,499
            
            
            19,300Total
                liabilities and shareholders’ equity
            
            
            
            
            
            45,003
            
            
            32,473




The
        accompanying notes are an integral part of the consolidated financial
        statements
  75




**EDAP
      TMS S.A. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF INCOME**


**For
      the years ended December 31, 2007, 2006 and 2005**


**(in
      thousands of euros unless otherwise noted)**





**Notes**
            
            **2007**
            
            **2006**
            
            **2005**Sales
                of goods
            
            
            
            
            
            11,752
            
            
            10,849
            
            
            12,198Sales
                of RPPs & leases
            
            
            
            
            
            4,814
            
            
            3,805
            
            
            3,146Sales
                of spare parts and services
            
            
            
            
            
            5,647
            
            
            5,520
            
            
            5,606Total
                sales
            
            
            
            
            
            22,213
            
            
            20,174
            
            
            20,952Warrants
                granted
            
            
            
            
            
            -
            
            
            -
            
            
            (235
            )Total
                net sales
            
            
            17
            
            
            22,213
            
            
            20,174
            
            
            20,717Other
                revenues
            
            
            18
            
            
            113
            
            
            91
            
            
            93Total
                revenues
            
            
            
            
            
            22,327
            
            
            20,265
            
            
            20,810Cost
                of goods
            
            
            
            
            
            (7,130
            )
            
            (5,582
            )
            
            (6,453
            )Cost
                of RPPs & leases
            
            
            
            
            
            (2,169
            )
            
            (1,576
            )
            
            (1,115
            )Cost
                of spare parts and services
            
            
            
            
            
            (3,849
            )
            
            (4,789
            )
            
            (4,744
            )Total
                cost of sales
            
            
            
            
            
            (13,148
            )
            
            (11,946
            )
            
            (12,313
            )Gross
                profit
            
            
            
            
            
            9,179
            
            
            8,319
            
            
            8,497Research
                and development expenses
            
            
            
            
            
            (3,194
            )
            
            (2,442
            )
            
            (1,784
            )Selling
                and marketing expenses
            
            
            
            
            
            (5,476
            )
            
            (4,621
            )
            
            (3,758
            )General
                and administrative expenses
            
            
            
            
            
            (4,374
            )
            
            (4,082
            )
            
            (4,278
            )Non-recurring
                operating expenses
            
            
            19
            
            
            (224
            )
            
            (267
            )
            
            -Loss
                from operations
            
            
            
            
            
            (4,089
            )
            
            (3,094
            )
            
            (1,323
            )Financial
                (expense) income, net
            
            
            20
            
            
            (1,243
            )
            
            153
            
            
            135Foreign
                currency exchange gain (loss), net
            
            
            
            
            
            (254
            )
            
            (430
            )
            
            218Other
                income (expense), net
            
            
            21
            
            
            16
            
            
            (5
            )
            
            9Loss
                before taxes
            
            
            
            
            
            (5,571
            )
            
            (3,375
            )
            
            (961
            )Income
                tax (expense) benefit
            
            
            22
            
            
            140
            
            
            (56
            )
            
            (104
            )Net
                loss
            
            
            
            
            
            (5,430
            )
            
            (3,431
            )
            
            (1,065
            )Basic
                and diluted(1)net loss per share
            
            
            1-18
            
            
            (0.59
            )
            
            (0.39
            )
            
            (0.14
            )Basic
                and diluted(1)Weighted average shares outstanding
            
            
            1-18
            
            
            9,200,757
            
            
            8,817,007
            
            
            7,782,731




(1)  Due
      to
      the net losses in 2005, 2006 and 2007, the assumed net exercise of stock
      options/warrants and stock relating to the convertible bonds in those years
      was
      excluded, as the effect would have been anti-dilutive.





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


76





**EDAP
      TMS S.A. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF COMPREHENSIVE INCOME**


**For
      the years ended December 31, 2007, 2006 and 2005**


**(in
      thousands of euros unless otherwise noted)**





**2007**
            
            **2006**
            
            **2005**Net
                loss
            
            
            (5,430
            )
            
            (3,431
            )
            
            (1,065
            )Other
                comprehensive loss:Foreign
                currency translation adjustments
            
            
            (71
            )
            
            (55
            )
            
            110Provision
                for retirement indemnities
            
            
            5
            
            
            (84
            )Comprehensive
                loss, net of tax
            
            
            (5,496
            )
            
            (3,570
            )
            
            (955
            )





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


77


**EDAP
      TMS S.A. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY**


**For
      the years ended December 31, 2007, 2006 and 2005**


**(in
      thousands of euros unless otherwise noted)**





**Number
                of Shares**
            
            **Common
                Stock**
            
            **Additional
                paid-in Capital**
            
            **Retained
                Earnings**
            
            **Cumula-tive
                Other Compre-hensive Income (loss)**
            
            **Treasury
                Stock**
            
            **Total**Balance
                as of January 1, 2005
            
            
            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
            )
            
            19,300Net
                loss
            
            
            
            
            
            
            
            
            
            
            
            (5,430
            )
            
            
            
            
            
            
            
            (5,430
            )Translation
                adjustment
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (71
            )
            
            
            
            
            (71
            )Warrants
                and stock options granted
            
            
            383,750
            
            
            39
            
            
            420
            
            
            
            
            
            
            
            
            237
            
            
            695Capital
                increaseProvision
                for retirement indemnities
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            5
            
            
            
            
            
            5Balance
                as of December 31, 2007
            
            
            9,200,757
            
            
            1,251
            
            
            25,896
            
            
            (8,265
            )
            
            (3,082
            )
            
            (1,301
            )
            
            14,499




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


78


**EDAP
      TMS S.A. AND SUBSIDIARIES**




**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**For
      the years ended December 31, 2007, 2006 and 2005**


**(in
      thousands of euros unless otherwise noted)** .




**2007**
            
            **2006**
            
            **2005****Cash
                flows from operating activities**Net
                loss
            
            
            (5,430
            )
            
            (3,431
            )
            
            (1,065
            )Adjustments
                to reconcile net loss to net cash used in operating
                activities:Depreciation
                and amortization
            
            
            1,296
            
            
            1,257
            
            
            1,202Change
                in fair value on Convertible Debentures
            
            
            747
            
            
            —
            
            
            —Change
                in fair value on Investors Warrants and Placement Agent
                Warrants
            
            
            371
            
            
            —
            
            
            —Other
                Non-cash compensation
            
            
            72
            
            
            32
            
            
            360Change
                in allowances for doubtful accounts & slow-moving
                inventories
            
            
            412
            
            
            273
            
            
            128Change
                in long-term provisions
            
            
            (18
            )
            
            229
            
            
            67Net
                capital loss on disposals of assets
            
            
            407
            
            
            245
            
            
            —Deferred
                tax expense/(benefit)
            
            
            (161
            )
            
            (91
            )
            
            84Net
                loss (gain) on sale of assets
            
            
            —
            
            
            —
            
            
            (21
            )Operating
                cash flow
            
            
            (2,304
            )
            
            (1,486
            )
            
            755Increase/Decrease
                in operating assets and liabilities:Decrease/(Increase)
                in trade accounts and notes and other receivables
            
            
            (1,599
            )
            
            (1,201
            )
            
            (1,473
            )Decrease/(Increase)
                in inventories
            
            
            (820
            )
            
            429
            
            
            (681
            )Decrease/(Increase)
                in other assets
            
            
            278
            
            
            (353
            )
            
            41(Decrease)/Increase
                in trade accounts and notes payable
            
            
            1,009
            
            
            395
            
            
            632(Decrease)/Increase
                in accrued expenses, other current liabilities
            
            
            707
            
            
            315
            
            
            441Net
                increase/decrease in operating assets and liabilities
            
            
            (426
            )
            
            (415
            )
            
            (1040
            )**Net
                cash used in operating activities**
            
            
            (2,729
            )
            
            (1,901
            )
            
            (285
            )**Cash
                flows from investing activities**Additions
                to capitalized assets produced by the Company
            
            
            (1,947
            )
            
            (1,287
            )
            
            (1,042
            )Net
                proceeds from sale of leased back assets
            
            
            1,192
            
            
            737
            
            
            239Acquisitions
                of property and equipment
            
            
            (513
            )
            
            (208
            )
            
            (372
            )Acquisitions
                of intangible assets
            
            
            (46
            )
            
            (43
            )
            
            (24
            )Acquisitions
                of short term investments
            
            
            (58
            )
            
            (1,031
            )
            
            —Net
                proceeds from sale of assets
            
            
            168
            
            
            221
            
            
            113Increase
                in deposits and guarantees
            
            
            (34
            )
            
            (18
            )
            
            (21
            )Reimbursement
                of deposits and guarantees
            
            
            —
            
            
            —
            
            
            48**Net
                cash used in investing activities**
            
            
            (1,238
            )
            
            (1,629
            )
            
            (1,059
            )**Cash
                flow from financing activities**Proceeds
                from capital increase(2007: exercise of warrants and stock options)
            
            
            352
            
            
            5,239
            
            
            —Proceeds
                from long term borrowings, net of financing costs
            
            
            11,876
            
            
            150
            
            
            288Repayment
                of long term borrowings
            
            
            (121
            )
            
            (148
            )
            
            (93
            )Repayment
                of obligations under capital leases
            
            
            (569
            )
            
            (464
            )
            
            (378
            )Increase/(decrease)
                in bank overdrafts and short-term borrowings
            
            
            285
            
            
            409
            
            
            371**Net
                cash used in financing activities**
            
            
            11,824
            
            
            5,186
            
            
            188Net
                effect of exchange rate changes on cash and cash equivalents
            
            
            (227
            )
            
            (80
            )
            
            75**Net
                increase/(decrease) in cash and cash equivalents**
            
            
            7,629
            
            
            1,575
            
            
            (1,081
            )Cash
                and cash equivalents at beginning of year
            
            
            9,894
            
            
            8,317
            
            
            9,398**Cash
                and cash equivalents at end of year**
            
            
            17,523
            
            
            9,894
            
            
            8,317




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


79


**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.




80





**EDAP
      TMS S.A. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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




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. Revenues from devices leased to customers under
      operating leases are recognized on a straight-line 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.




***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 judgments 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.


81


**EDAP
      TMS S.A. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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




***1-9
      Property and equipment***




Property
      and equipment is stated at historical cost. Depreciation and amortization of
      property and equipment are calculated using the straight-line method over the
      estimated useful life of the related assets, as follows:


Leasehold
                    improvements
                
                
                10
                    years or lease term if shorterEquipment
                
                
                3-10
                    yearsFurniture,
                    fixtures, fittings and other
                
                
                2-10
                    years





Equipment
      includes industrial equipment and research equipment that has alternative future
      uses. Equipment also includes devices that are manufactured by the Company
      and
      leased to customers through operating leases related to Revenue-Per-Procedure
      transactions and devices subject to sale and leaseback transactions.  This equipment is depreciated over a period of seven years.




***1-10
      Long-lived assets***




The
      Company reviews the carrying value of its long-lived assets, including fixed
      assets and intangible assets, for impairment whenever events or changes in
      circumstances indicate that the carrying amount of such assets may not be fully
      recoverable. Recoverability of long-lived assets is assessed by a comparison
      of
      the carrying amount of the assets (or the Group of assets, including the asset
      in question, that represents the lowest level of separately-identifiable cash
      flows) to the total estimated undiscounted cash flows expected to be generated
      by the asset or group of assets. If the future net undiscounted cash flows
      is
      less than the carrying amount of the asset or group of assets, the asset or
      group of assets is considered impaired and an expense is recognized equal to
      the
      amount required to reduce the carrying amount of the asset or group of assets
      to
      its then fair value. Fair value is determined by discounting the cash flows
      expected to be generated by the assets, when the quoted market prices are not
      available for the long-lived assets. Estimated future cash flows are based
      on
      assumptions and are subject to risk and uncertainty.




***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.
      Under Statement of Financial Accounting Standards 142, “Goodwill and other
      intangible assets”, the impairment test is performed in two steps. The first
      step compares the fair value of the reporting unit with its carrying amount,
      including goodwill. If the fair value of the reporting unit is less than its
      carrying amount, a second step is performed to measure the amount of impairment
      loss. The second step allocates the fair value of the reporting unit to the
      Company’s tangible and intangible assets and liabilities. This derives an
      implied fair value for the reporting unit’s goodwill. If the carrying amount of
      the reporting units goodwill exceeds the implied fair value of that goodwill,
      an
      impairment loss is recognized equal to that excess. For the purpose of any
      impairment test, the Company relies upon projections of future undiscounted
      cash
      flows and takes into account assumptions regarding the evolution of the market
      and its ability to successfully develop and commercialize its products.




Changes
      in market conditions could have a major impact on the valuation of these assets
      and could result in additional impairment losses.


82


**EDAP
      TMS S.A. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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




Intangible
      assets consist primarily of purchased patents relating to lithotripters,
      purchased licenses, a purchased trade name and a purchased trademark. The basis
      for valuation of these assets is their historical acquisition cost. Amortization
      of intangible assets is calculated by the straight-line method over the shorter
      of the contractual or estimated useful life of the assets, as
      follows:


Patents
              
              
              5
                  yearsLicenses
              
              
              5
                  yearsTrade
                  name and trademark
              
              
              7
                  years




***1-12*** ***Treasury
          Stocks***




Treasury
      stock 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
      Shipping and handling costs***




Shipping
      and handling costs incurred by the Company are reflected in cost of goods
      sold.




***1-14
      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 €645 thousand, €483 thousand and €517 thousand for the years
      ended December 31 2007, 2006 and 2005 respectively.




***1-15
      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.




***1-16
      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, 2007, EDAP TMS had total research tax
      credits receivable of €222 thousand.




83




**EDAP
      TMS S.A. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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




***1-17
      Advertising costs***




Advertising
      costs are recorded as an expense in the period in which they are incurred.
      Advertising costs amounted to €831 thousand, €584 thousand and €382 thousand for
      the years ended December 31 2007, 2006 and 2005 respectively.




***1-18
      Foreign currency translation and transactions***




*Translation
      of the financial statements of consolidated companies*




The
      reporting currency of EDAP TMS S.A. for all years presented, is the euro (€).
      The functional currency of each subsidiary is its local currency. In accordance
      with Statement of Financial Accounting Standards No. 52, all accounts in the
      financial statements are translated into euro from the functional currency
      at
      exchange rate 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.




***1-19
      Earnings per share***




Basic
      earnings per share is computed by dividing income available to common
      shareholders by the weighted average number of shares of common stock
      outstanding for the period. Diluted earnings per share reflects potential
      dilution that could occur if securities or other contracts to issue common
      stock
      were exercised or converted into common stock or resulted in the issuance of
      common stock that then shared in the earnings of the Company. The dilutive
      effects of the Company’s common stock options and warrants is determined using
      the treasury stock method to measure the number of shares that are assumed
      to
      have been repurchased using the average market price during the period, which
      is
      converted from U.S. dollars at the average exchange rate for the
      period.




***1-20
      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 instrument 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.




Gains and losses from   derivative instruments are recorded in the income statememt.




84




**EDAP
      TMS S.A. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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




***1-21
      Employee stock option plans***




At
      December 31, 2007, the Company had five 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 graded 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.




For
      the
      purpose of this pro forma 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**Net
                  loss, as reported
              
              
              (1,065
              )Add:
                  Stock-based employee compensation expense included inReported
                  net loss, net of related tax effects
              
              
              125Deduct:
                  Total stock-based employee compensation expenseDetermined
                  under fair value-based method for all awards, net of
                  related tax effects
              
              
              (231
              )Pro
                  forma net loss
              
              
              (1,171
              )Loss
                  per share:Basic,
                  as reported
              
              
              (0.14
              )Basic,
                  pro forma
              
              
              (0.15
              )Diluted,
                  as reported
              
              
              (0.14
              )Diluted,
                  pro forma
              
              
              (0.15
              )




85




**EDAP
      TMS S.A. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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




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,****2007**
            
            **2006**(1)
            
            **2005**Weighted-average
                expected life (years)
            
            
            10
            
            
            —
            
            
            2Expected
                volatility rates
            
            
            75
            %
            
            —
            
            
            75
            %Expected
                dividend yield
            
            
            —
            
            
            —
            
            
            —Risk-free
                interest rate
            
            
            4.4
            %
            
            —
            
            
            4.3
            %Weighted-average
                exercise price (€)
            
            
            3.99
            
            
            —
            
            
            2.78Weighted-average
                fair value of options granted during the year (€)
            
            
            3.43
            
            
            —
            
            
            1.82




(1)
      The Company did not make any grants during the year ended December 31, 2006.




***1-22
      Convertible debentures and detachable warrants***




Warrants:




As
      part
      of the October 2007 $20 million issuance of the 9% Senior Convertible
      Debentures, we issued warrants to both the investors in the convertible
      debentures and to the bank that assisted us as the Placement Agent. See Note
      14
      for further discussion.




In
      accordance with EITF 00-19, the warrants issued to the investors in the
      convertible debentures (“Investor Warrants”) and the Placement Agent (“Placement
      Agent Warrants”) are classified as a liability because the Company may be
      required to net-cash and settle them upon the occurrence of certain events
      outside the control of the Company. We accounted for the Investor Warrants
      based
      on their fair value at inception date, with subsequent changes in fair value
      recorded as financial earnings (or loss) as each balance sheet date.
      We used a binomial pricing model to determine the fair value of the Investor
      Warrants: the binomial model was developed to capture the specific nature of
      this instrument, and in particular the possibility the holder may exercise
      the
      call option at any time from the inception date. 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, and the liquidity discount factor. A change in one
      or
      more of these assumptions could result in a material change to the estimated
      fair value of the vested warrants.




The
      warrants issued to the Placement Agent as partial consideration for placing
      the
      convertible debentures recorded as a liability, with changes in fair value
      at
      each balance sheet date reflected in financial income. We used the Black-Scholes
      option-pricing model to determine the fair value of the Placement Agent
      Warrants. The application of the model to the warrants at inception date
      therefore required the use of subjective assumptions, including historical
      share
      price volatility, the expected life of the warrants and our risk-free interest
      rate.




86




**EDAP
      TMS S.A. AND SUBSIDIARIES**




**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


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




Convertible
      Debentures




On
      October 29, 2007 the Company raised $20 million in non-secured, convertible
      debentures with detachable warrants. See Note 14 for further discussion. At
      the
      inception date, the Company elected to measure the instrument and its embedded
      derivatives in its entirety at fair value, with changes in fair value reported
      in the income statement under financial income, pursuant to §16 of SFAS 133, as
      amended by SFAS 155. Thus, the convertible debentures together with their
      embedded derivatives are recorded as a liability, with subsequent changes in
      fair value recorded in financial income and expenses. The Company used a
      binomial valuation model to measure the fair value of the Investor Warrants
      and
      a binomial valuation model with a Company specific credit spread to measure
      the
      fair value of the convertible debentures.




***1-23
      Leases and Sales and leaseback transactions***




In accordance with SFAS 13, Accounting for Leases, we classify all leases at the inception date as either a capital lease or an operating lease. A lease is a capital lease if it meets any one of the following criteria; otherwise, it is an operating lease:  -
          Ownership is transferred to the lessee by the end of the lease term; -
          The lease contains a bargain purchase option; -
          The lease term is at least 75% of the property's estimated remaining economic life; -
          The present value of the minimum lease payments at the beginning of the lease term is 90% or more of the fair value of the leased property to the lessor at the inception date.  We enter into sale and leaseback transactions from time to time. In accordance with SFAS 13 and EITF 93-8, any profit or loss on the sale is deferred and amortized prospectively over the term of the lease, in proportion to the leased asset if a capital lease, or in proportion to the related gross rental charged to expense over the lease term, if an operating lease.
 ***1-24
      New accounting pronouncements***
  On
      September 15, 2006, the FASB issued Statement of Financial Accounting Standards
      No. 157 “Fair Value Measurements” ("SFAS 157"). SFAS No. 157 defines fair value,
      establishes a framework for measuring fair value and expands disclosures about
      fair value measurements. SFAS 157 is effective as of the beginning of the first
      fiscal year beginning after November 15, 2007. The Company is still evaluating the potential impact on its financial condition and results of operations of the adoption of SFAS 157.
  On
      February 15, 2007, the FASB issued Statement of Financial Accounting Standards
      No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities:
      Including an amendment of FASB Statement No. 115” (“SFAS 159”). SFAS No. 159
      permits all entities to elect to measure many financial instruments and certain
      other items at fair value with changes in fair value reported in earnings.
      SFAS
      159 is effective as of the beginning of the first fiscal year that begins after
      November 15, 2007, with earlier adoption permitted. The Company does not
      anticipate that the adoption of this statement will have a material effect
      on
      its financial condition and results of operations.
 
 In
      December 2007, the FASB issued FASB Statement No. 141 (Revised 2007) “Business
      Combinations” (“SFAS 141(R)”), which requires the Company to record fair value
      estimates of contingent consideration and certain other potential liabilities
      during the original purchase price allocation, expense acquisition costs as
      incurred and does not permit certain restructuring activities previously allowed
      under Emerging Issues Task Force Issue No. 95-3 to be recorded as a component
      of
      purchase accounting. SFAS 141(R) applies prospectively to business combinations
      for which the acquisition date is on or after the beginning of the first annual
      reporting period beginning on or after December 15, 2008, except for the
      presentation and disclosure requirements, which shall be applied
  87
 
 **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  retrospectively
      for all periods presented. The Company will adopt this standard at the beginning
      of the Company’s fiscal year ending November 30, 2009 for all prospective
      business acquisitions. The Company has not determined the effect that the
      adoption of SFAS No. 141(R) will have on the financial results of the Company.
  In
      December 2007, the FASB issued FASB Statement No. 160 “Non-controlling Interests
      in Consolidated Financial Statements - an amendment of ARB No. 51” (“SFAS 160”),
      which causes non controlling interests in subsidiaries to be included in the
      equity section of the balance sheet. SFAS 160 applies prospectively to business
      combinations for which the acquisition date is on or after the beginning of
      the
      first annual reporting period beginning on or after December 15, 2008, except
      for the presentation and disclosure requirements, which shall be applied
      retrospectively for all periods presented. The Company will adopt this standard
      at the beginning of the Company’s fiscal year ending November 30, 2009 for all
      prospective business acquisitions. The Company has not determined the effect
      that the adoption of SFAS 160 will have on the financial results of the
      Company
  **2—CASH
      EQUIVALENTS AND SHORT TERM INVESTMENTS**
  Cash
      and
      cash equivalents are comprised of the following:
  **December
                31,****2007**
            
            **2006**Total
                cash and cash equivalents
            
            
            17,523
            
            
            9,894Short
                term investment
            
            
            1,089
            
            
            1,031Total
                cash and cash equivalents, and short term investments
            
            
            18,611
            
            
            10,925
  **3—TRADE
      ACCOUNTS AND NOTES RECEIVABLE, NET**
  Trade
      accounts and notes receivable consist of the following:
  **December
                31,****2007**
            **2006**Trade
                accounts receivable
            11
                370
            10
                631Notes
                receivable
            242
            192Less:
                allowance for doubtful accounts
            (735)
            (681)Total
            10
                877
            10
                142
 
 Notes
        receivable usually represent commercial bills of exchange (drafts) with initial
        maturities of 90 days or less. Bad debt expenses recognized in operating expenses amount to 131 thousand, 86 thousand and 274 thousand, for the years ended December 31, 2007, 2006, and 2005.
 
 88
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
 
  **4—OTHER
      RECEIVABLES**
  Other
      receivables consist of the following:
  **December
                31,****2007**
            
            **2006**Value-added
                taxes receivable
            
            
            420
            
            
            420Research
                and development tax credit receivable from the French State
            
            
            222
            
            
            111Personnel
                advances
            
            
            353
            
            
            44Other
                receivables from the French State
            
            
            100
            
            
            52Others
            
            
            54
            
            
            105Total
            
            
            1
                149
            
            
            732
  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.
  At
      the
      end of 2007, Personnel advances include €300 thousand related to the severance
      package of a former senior executive.
  **5—INVENTORIES**
  Inventories
      consist of the following:
  **December
                31,****2007**
            
            **2006**Components,
                spare parts
            
            
            3,751
            
            
            3,678Work-in-progress
            
            
            688
            
            
            495Finished
                goods
            
            
            888
            
            
            521Total
                gross inventories
            
            
            5,327
            
            
            4,694Less:
                provision for slow-moving inventory
            
            
            (1,021
            )
            
            (928
            )Total
            
            
            4,306
            
            
            3,766
  The
      provision for slow moving inventory relates to components and spare parts.
      The
      allowance for slow moving inventory, the changes in which are classified within
      cost of sales, amounted to €288 thousand, €388 thousand and €386 thousand for
      the years ended December 31, 2007, 2006 and 2005, respectively.
  **6—OTHER
      ASSETS**
  Other
      assets consist of the following:
  **December
                31,****2007**
            
            **2006**Deferred
                financing costs , current portion
            
            
            470Other
                prepaid expenses, current portion
            
            
            465
            
            
            744Total
            
            
            935
            
            
            744
  **December
                31,****2007**
            
            **2006**Deferred
                financing costs , non-current
            
            
            1,800
  89
   **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  Deferred
      financing costs related to the debentures issued in the October 2007 private
      placement are being amortized over five years, the duration of the debt. The
      amortization of deferred financing costs, which is classified as financial
      expense, net, amounted to €78 thousand, for the year ended December 31,
      2007.
  **7—PROPERTY
      AND EQUIPMENT, NET**
  Property
      and equipment consist of the following:
 **December
                31,****2007**
            
            **2006**Equipment
            
            
            8,222
            
            
            6,690Furniture,
                fixture, and fittings and other
            
            
            2,541
            
            
            2,341Total
                gross value
            
            
            10,763
            
            
            9,031Less:
                accumulated depreciation and amortization
            
            
            (6,583
            )
            
            (5,820
            )Total
            
            
            4,180
            
            
            3,211
  Depreciation
      and amortization expense related to property and equipment amounted to €1,180
      thousand, €1,200 thousand and €1,145 thousand for the years ended December 31,
      2007, 2006 and 2005, respectively.
  Capitalized
      costs on equipment held under capital leases of €2,517 thousand and €1,557
      thousand and are included in property and equipment at December 31, 2007 and
      2006, respectively. Accumulated amortization of these assets leased to third
      parties was €1,159 thousand and €828 thousand, at December 31, 2007 and 2006,
      respectively. Amortization expense on assets held under capital leases is
      included in total amortization expense and amounted to €374 thousand, €277
      thousand and €267 thousand for the years ended December 31, 2007, 2006 and 2005,
      respectively.
  **8—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,
      2007.
  The
      Company completed the required annual impairment test in the fourth quarter
      of
      2007. 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 14%, (iii) a residual value 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.
  90
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  Intangible
      assets consist of the following:
  **December
                31,****2007**
            
            **2006**Licenses
            
            
            532
            
            
            486Trade
                name and trademark
            
            
            539
            
            
            540Patents
            
            
            412
            
            
            412Organization
                costs
            
            
            363
            
            
            363Total
                gross value
            
            
            1
                846
            
            
            1
                801Less:
                accumulated amortization
            
            
            (1
                767
            )
            
            (1
                730
            )Total
            
            
            79
            
            
            71
  Amortization
      expenses related to intangible assets amounted to €37 thousand, €57 thousand and
€57 thousand, for the years ended December 31, 2007, 2006 and 2005,
      respectively.
  For
      the
      two coming years, the annual estimated amortization expense for intangible
      assets will be approximately €60 thousand.
  **9—TRADE
      ACCOUNTS AND NOTES PAYABLE**
  Trade
      accounts and notes payable consist of the following:
  **December
                31,****2007**
            
            **2006**Trade
                accounts payable
            
            
            5
                066
            
            
            3
                987Notes
                payable
            
            
            595
            
            
            731Total
            
            
            5
                661
            
            
            4
                718
 
 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.
  **10—DEFERRED
      REVENUES**
  Deferred
      revenues consist of the following:
  **December
                31,****2007**
            
            **2006**Deferred
                revenues on maintenance contracts
            
            
            217
            
            
            447Deferred
                revenue on RPP
            
            
            11
            
            
            67Deferred
                revenue on sale of devices
            
            
            618
            
            
            627Deferral
                of the gain on sale-lease-back transactions
            
            
            314
            
            
            141Total
            
            
            1
                160
            
            
            1
                282Less
                long term portion
            
            
            708
            
            
            613Current
                portion
            
            
            452
            
            
            669
   91
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  **11—OTHER
      ACCRUED LIABILITIES**
  Other
      accrued liabilities consist of the following:
  **December
                31,****2007**
            
            **2006**Provision
                for warranty costs
            
            
            874
            
            
            700Value
                added tax payable
            
            
            467
            
            
            580Accruals
                for social expenses
            
            
            864
            
            
            344Conditional
                government subsidies
            
            
            788
            
            
            588Advance
                from debtors
            
            
            77
            
            
            11Retirement
                indemnities
            
            
            17
            
            
            20Others
            
            
            206
            
            
            215Total
            
            
            3
                293
            
            
            2
                458
  At
      the
      end of 2007, Accruals for social expenses include €422 thousand related to the
      severance package of a former senior executive.
  Changes
      in the provision for warranty costs are as follows:
  **December
                31,****2007**
            
            **2006**Beginning
                of year
            
            
            700
            
            
            700Amount
                used during the year (payments)
            
            
            (471
            )
            
            (483
            )New
                warranty expenses
            
            
            645
            
            
            483End
                of year
            
            
            874
            
            
            700
  **12—LEASE
      OBLIGATIONS**
  ***12-1
      Capital leases***
  The
      Company leases certain of its equipment under capital leases. At December 31,
      2007, this equipment consists of medical devices for an amount of €1,526
      thousand and vehicles for an amount of €30 thousand. Future minimum lease
      payments under capital leases for the years ending December 31, 2007 are as
      follows:
  **December
                31,**
              **2007**2008
            
            
            5992009
            
            
            5132010
            
            
            3992011
            
            
            190Thereafter
            
            
            22Total
                minimum lease payments
            
            
            1
                723Less:
                amount representing interest
            
            
            (166
            )Present
                value of minimum lease payments
            
            
            1
                557Less:
                current portion
            
            
            522Long-term
                portion
            
            
            1
                035
  Interest
      paid under capital lease obligations was €64 thousand, €48 thousand, and €28
      thousand for the years ended December 31, 2007, 2006, and 2005, respectively.
  92
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  ***12-2
      Operating leases***
  As
      of
      December 31, 2007, 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**
            
            
            **Japan**2008
            
            
            267
            
            
            1232009
            
            
            -
            
            
            4Total
            
            
            267
            
            
            127
  Total
      rent expense under operating leases amounted to €688 thousand, €689 thousand and
€703 thousand for the years ended December 31, 2007, 2006 and 2005,
      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.
  **13—SHORT-TERM
      BORROWINGS**
  As
      of
      December 31, 2007, short-term borrowings consist of €593 thousand of account
      receivables factored and for which the Company is supporting the risk of
      uncollectibility and loans in euros amounting to €1,000 thousand with the
      following conditions:
 
 **Amount**
            
            **Maturation**
            
            **Interest
                rate**TMS
                SA
            
            
            225
            
            
            December
                22, 2008
            
            
            Euribor
                + 0,5
            %EDAP
                SA
            
            
            258
            
            
            December
                22, 2008
            
            
            Euribor
                + 0,5
            %EDAP
                SA
            
            
            207
            
            
            December
                22, 2008
            
            
            Euribor
                + 0,5
            %EDAP
                SA
            
            
            310
            
            
            December
                22, 2008
            
            
            Euribor
                + 0,5
            %Total
            
            
            1
                000
  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
                rate**TMS
                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
   93
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  **14—LONG-TERM
      DEBT**
  Long-term
      debt consists of the following:
  **December
                31,****2007**
            
            
            **2006**Japanese
                yen term loan
            
            
            
            
            
            49Convertible
                debentures carried at fair value
            
            
            11,691Investor
                Warrants
            
            
            3,141Placement
                Agent Warrants
            
            
            343Financial Instruments carried at fair value
            
            
            3,484Italy
            
            
            58
            
            
            132Total
            
            
            15,232
            
            
            181Less
                current portion
            
            
            (58
            )
            
            (123
            )Total
                long-term portion
            
            
            15,174
            
            
            58
  Long-term
      debt at December 31, 2007 matures as follows:
  2008
            
            
            582009201020112012
            
            
            12,0332013
            
            
            3,141Total
            
            
            15,232
  As
      of
      December 31, 2007, long-term debt in Italy consists of 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.
  As
      of
      December 31, 2007, long-term in USD consists of a $20 million convertible debt
      with warrants, raised on October 29, 2007 through a Private Investment in Public
      Equity deal with selected investors - see Note 1-21 on the accounting treatment
      of the convertible debentures and the detachable warrants.
  At
      inception date, the fair value of the convertible debentures and detachable
      warrants was $20 million. The Company has allocated the proceeds to the fair
      value of the debt host and the warrants.
  The
      $20
      million convertible debt is in the form of 20,000 debentures with a face value
      of $1,000 and each bond is convertible into 152 shares of common stock at any
      time at the election of the holder, using a conversion price of $6.57, subject
      to standard anti-dilution adjustments.
  The
      debentures mature in five years (October 28, 2012) and bear an annual interest
      rate of 9% payable on a quarterly basis in cash or in common stock, at the
      option of the company (decision made every quarter) with a 10% discount price
      over the average market price of common stock.
  Investors
      in the convertible debentures also received an aggregate number of 1,680,000
      detachable warrants to purchase one share of common stock for each warrant.
      The
      warrants have a six-year term and an exercise price of $6.87, subject to
      standard anti-dilutive adjustments.
  The
      company also granted to the bank acting as placement agent in the transaction
      warrants to purchase 188,965 shares of common stock, with a five-year term
      and
      the following exercise prices: 121,765 shares at $6.57 and 67,200 shares at
      $6.87.
  94
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
 
 Fair
      Value of Investor Warrants:
 
 The
      valuation model of Investor Warrants uses a binomial valuation model to capture
      the complexity of the instruments, and notably the possibility to exercise
      the
      call option at any time from the inception date.
 
 As
      of
      October 29, 2007, the binomial model uses the following main assumptions and
      parameters:
 
 ·
            Share
                price at inception date: $5.95
 ·
            Strike
                price of warrants: $6.87
 ·
            Risk
                free interest rate at 6 years:
                4.11%
 ·
            Monthly
                volatility: 45%
 ·
            Liquidity
                Discount Factor: 26.91%
 
 
 As
      of
      December 31, 2007, the binomial model uses the following main assumptions and
      parameters:
 
 ·
            Share
                price at closing date: $4.80
 ·
            Strike
                price of warrants: $6.87
 ·
            Risk
                free interest rate at 6 years:
                3,55%
 ·
            Monthly
                volatility: 75%
 ·
            Liquidity
                Discount Factor: 26.91%
  On
      that
      basis, the unit fair value of Investor Warrants was $2.32 per warrant at
      inception date and $2.75 per warrant as of December 31, 2007. The total fair
      value for the 1,680,000 issued warrants was $3.890 million at inception date
      and
      $4.624 million at December 31, 2007.
 
 Fair
      Value of the Convertible Debt:
 
 At
      inception date, the Company elected to measure the entire convertible debt
      (i.e.
      the debt host with all embedded derivative features) at fair value (with changes
      in fair value reported in income statement), pursuant to §16 of SFAS 133, as
      amended by SFAS 155. The total fair value of the convertible debt is the
      aggregate of the fair value of the underlying debt host instrument and the
      fair
      value of the embedded derivatives.
 
 The
      estimate of the fair value of the underlying debt component is obtained by
      using
      the actual interest spread the Company would have had to pay if a straight,
      unsecured, debt had been raised, with no additional remuneration to lenders
      in
      the form of conversion options or warrants. Before and at inception date, the
      Company conducted an analysis of the terms available on a non-convertible,
      unsecured, conventional debt. Based on this analysis, a rate of 30% has been
      used as in conducting the fair value of the debt host which represents an
      interest spread of 26% over the risk-free interest rate at inception date.
      The
      present value of the debt host using an effective interest rate of 30% is
      $10.330 million. At December 31, 2007 the fair value has been measured again
      considering any changes required in underlying assumptions, and mostly the
      risk
      free interest rate and the Company specific credit spread of 26%. The spread,
      which depends on the Company’s specific risk profile is unchanged at December
      31, 2007 as no significant changes occurred in the risk profile of the Company.
      The present value of the debt host at December 31, 2007 is $10.533
      million.
  95
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
 
 The
      valuation model of the conversion option uses a binomial valuation model to
      capture the complexity of the instrument, and notably the continuous possibility
      of an arbitrage between holding common shares versus interest bearing
      bonds.
 
 As
      of
      October 29, 2007, the binomial model uses the following main assumptions and
      parameters:
 
 ·
            Share
                price at inception date: $5.95
 ·
            Strike
                price of convertible debentures: $6.87
 ·
            Risk
                free interest rate at 5 years: 4.04%
 ·
            Monthly
                volatility: 45%
 ·
            Liquidity
                Discount Factor: 26.91%
 
 As
      of
      December 31, 2007, the Binomial model uses the following main assumptions and
      parameters:
  ·
            Share
                price at closing date: $4.80
 ·
            Strike
                price of warrants: $6.57
 ·
            Risk
                free interest rate at 5 years:
                3,43%
 ·
            Monthly
                volatility: 75%
 ·
            Liquidity
                Discount Factor: 26.91%
 
 On
      that
      basis, the fair value of the conversion option was $5.780 million ($7.909
      million before liquidity discount) at inception date and $6.677 million ($9.135
      million before liquidity discount) as of December 31, 2007.
 
 Placement
      Agent Warrants :
  As
      part
      of the transaction costs, the Company granted to the bank acting as placement
      agent in the transaction warrants to purchase 188,965 shares of common stock,
      with a five year term and the following exercise prices: 121,765 shares at
      $6.57
      per share and 67,200 shares at $6.87 per share. The fair value of the Placement
      Agent Warrants has been valued using the Black-Scholes option valuation method,
      using a 4.04% risk free interest rate and a 75% volatility at inception date,
      and a 3.43% risk free interest rate and a 75% stock volatility at December
      31,
      2007.
 
 The
      following table summarizes the fair value of the entire indebtedness related
      to
      the convertible debentures, Investor Warrants and Placement Agent
      Warrants:
 
 **In
                ‘000 US Dollars**
            
            Total
                Fair Value
              At
                inception date
            
            Total
                Fair Value
              At
                December 31, 2007
            
            Change
                in Fair Value in USDConvertible
                debt
            
            
            16,110
            
            
            17,210
            
            
            1,100Investor
                Warrants
            
            
            3,890
            
            
            4,624
            
            
            734Total
            
            
            20,000
            
            
            21,834
            
            
            1,834Placement
                Agent Warrants at $6.57
            
            
            448
            
            
            327
            
            
            (121
            )Placement
                Agent Warrants at $6.87
            
            
            244
            
            
            177
            
            
            (67
            )Total
            
            
            20,692
            
            
            22,338
            
            
            1,646
  96
  The
      following table reflects the impact after translation in euros:
 
 **In
                ‘000 Euros**
            
            Total
                Fair Value
              At
                inception date
            
            Total
                Fair Value
              At
                December 31, 2007
            
            Change
                in Fair Value in EUR
              (reflected
                in Financial income - See Note 20)
            
            Exchange
                Rate ImpactExchange
                Rate (USD/EUR)
            
            
            1.4548
            
            
            1.4721
            
            
            1.4721Convertible
                debt
            
            
            11,074
            
            
            11,691
            
            
            747
            
            
            (131
            )Investor
                Warrants
            
            
            2,674
            
            
            3,141
            
            
            498
            
            
            (31
            )Total
            
            
            13,748
            
            
            14,832
            
            
            1,246
            
            
            (162
            )Placement
                Agent Warrants
            
            
            476
            
            
            343
            
            
            (127
            )
            
            (6
            )Total
            
            
            14,224
            
            
            15,174
            
            
            1,118
            
            
            (168
            )
  97
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  **15—OTHER
      LONG-TERM LIABILITIES**
  Other
      long-term liabilities consist of the following:
  **December
                31,****2007**
            
            **2006**Provision
                for retirement indemnities
            
            
            652
            
            
            577Other
            
            
            51
            
            
            303Total
            
            
            703
            
            
            880
  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, 2007 represents an accrual for lump-sum
      retirement indemnity payments to be paid at the time an employee retires. The
      largest part of this liability relates to employees in France. This provision
      has been calculated taking into account the estimated payment at retirement
      (discounted to the current date), turnover and salary increases. Calculations
      have been performed by an actuary consultant.
  The
      actuarial assumptions as of year-end are as follows:
  **Pension
                Benefits - France****2007**
            
            **2006**
            
            **2005**Weighted
                average assumptions:Discount
                rate
            
            
            5.50
            %
            
            4.50
            %
            
            4.00
            %Salary
                increase
            
            
            2.50
            %
            
            2.00
            %
            
            2.00
            %Retirement
                age
            
            
            65
            
            
            65
            
            
            65Average
                retirement remaining service period
            
            
            27
            
            
            26
            
            
            27
  
 **Pension
                Benefits - Japan****2007**
            
            **2006**
            
            **2005**Weighted
                average assumptions:Discount
                rate
            
            
            1.50
            %
            
            1.75
            %
            
            1.50
            %Salary
                increase
            
            
            1.80
            %
            
            1.80
            %
            
            1.80
            %
   98
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  The
      reconciliation between projected benefit obligations and the accumulated benefit
      obligations is as follows as of December 31, 2007 (in thousands of euros):
  
 **France**
            
            **Japan**Projected
                benefit obligation
            
            
            240
            
            
            278Normal
                cost
            
            
            22
            
            
            33Accumulated
                benefit obligation
            
            
            157
            
            
            243
 
 Provision
      presentation according to FAS 158:
  **France**
            
            **Japan**Non
                current liabilities
            
            
            239
                972
            
            
            260
                314Current
                liabilities
            
            
            −
            
            
            17
                464Non
                current asset
            
            
            −
            
            
            −Accumulated
                other comprehensive income
            
            
            24
                186
            
            
            (103
                380
            )Total
            
            
            264
                158
            
            
            174
                398
  Detailed
      reconciliation of pension cost components (in thousands of euros) during fiscal
      year ending December 31, 2007:
 
 **France**
            
            **2007**
            
            **2006**
            
            **2005****Change
                in benefit obligations**Benefit
                obligations at beginning of year
            
            
            218
            
            
            229
            
            
            132Service
                cost
            
            
            22
            
            
            23
            
            
            17Interest
                cost
            
            
            10
            
            
            9
            
            
            6Plan
                amendments
            
            
            -
            
            
            -
            
            
            -(gain)
                / loss
            
            
            (7
            )
            
            (44
            )
            
            74Benefits
                paid
            
            
            (3
            )
            
            -
            
            
            -**Benefit
                obligations at end of year**
            
            
            **240**
            
            
            **218**
            
            
            **229****Change
                in plan assets**Fair
                value of plan assets at beginning of year
            
            
            -
            
            
            -
            
            
            -Employer
                contribution
            
            
            3
            
            
            -
            
            
            -Return
                on plan assets
            
            
            -
            
            
            -
            
            
            -Benefits
                paid
            
            
            (3
            )
            
            -
            
            
            -**Fair
                value of plan assets at end of year**Unrecognized
                actuarial (gain) loss
            
            
            (24
            )
            
            (17
            )
            
            27Unrecognized
                prior service cost
            
            
            -
            
            
            -
            
            
            -**Accrued
                pension cost**
            
            
            **264**
            
            
            **235**
            
            
            **202**
  99
 
 **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
 
 **JAPAN**
            
            **2007**
            
            **2006**
            
            **2005****Change
                in benefit obligations**Benefit
                obligations at beginning of year
            
            
            239
            
            
            262
            
            
            217Service
                cost
            
            
            31
            
            
            32
            
            
            35Interest
                cost
            
            
            4
            
            
            3
            
            
            3Plan
                amendments
            
            
            -
            
            
            -
            
            
            -Termination
                benefits
            
            
            -
            
            
            -
            
            
            -(gain)
                / loss
            
            
            (16
            )
            
            (3
            )
            
            7Benefits
                paid
            
            
            
            
            
            (25
            )
            
            -Exchange
                rate impact
            
            
            20
            
            
            (30
            )**Benefit
                obligations at end of year**
            
            
            **278**
            
            
            **239**
            
            
            **262****Change
                in plan assets**Fair
                value of plan assets at beginning of year
            
            
            -
            
            
            -
            
            
            -Employer
                contribution
            
            
            -
            
            
            -
            
            
            -Return
                on plan assets
            
            
            -
            
            
            -
            
            
            -Benefits
                paid
            
            
            -
            
            
            -
            
            
            -**Fair
                value of plan assets at end of year**
            
            
            -
            
            
            -
            
            
            -Unrecognized
                actuarial (gain) loss
            
            
            104
            
            
            101
            
            
            130Unrecognized
                prior service cost
            
            
            -
            
            
            -
            
            
            -**Accrued
                pension cost**
            
            
            **174**
            
            
            **138**
            
            
            **132**
 
  100
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  **16—SHAREHOLDERS’
      EQUITY**
  ***16-1
      Common stock***
  As
      of
      December 31, 2007, EDAP TMS S.A.’s common stock consisted of 9,624,497 issued
      shares, fully paid, and with a par value of €0.13 each. 9,200,757 of the shares
      were outstanding.
  ***16-2
      Pre-emptive subscription rights***
  Shareholders
      have preemptive rights to subscribe on a *pro
      rata* basis
      for additional shares issued by the Company for cash. Shareholders may waive
      such preemptive subscription rights at an extraordinary general meeting of
      shareholders under certain circumstances. Preemptive subscription rights, if
      not
      previously waived, are transferable during the subscription period relating
      to a
      particular offer of shares.
  ***16-3
      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 €25,396 thousand and €26,438 thousand at December 31, 2007
      and 2006, respectively. Dividend distributions, if any, will be made in euros.
      The Company has no plans to distribute dividends in the foreseeable
      future.
  ***16-4
      Treasury stock***
  As
      of
      December 31, 2007, the 423,740 shares of treasury stock consisted of (i) 21,400
      shares acquired on December 2, 1996 for €85 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 423,740 shares of
      treasury stock have been acquired to cover outstanding stock options (see Note
      15-5).
  ***16-5
      Stock-option plans***
  As
      of
      December 31, 2007, EDAP TMS S.A. sponsored five 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. This stock purchase plan is no longer valid as the related
      stock options contracts have expired.
  101
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  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.
  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.
  102
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  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.
  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
      to 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.
  103
 **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  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 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). On March 8, 2007, a revised business model was approved by the Board
      of
      Directors for years 2007 and 2008. On that date, 47,100 rights to subscribe
      to
      new shares were granted to new entrants, subject to the achievement of certain
      milestones based on the revised 2007-2008 business model. As of December 31,
      2007 none of the milestones for the year 2007, fixed by the January 6, 2006
      Board of Directors, have been reached, and only one milestone fixed by the
      March
      8, 2007 Board of Directors, has been reached, thus triggering allocation of
      7,065 new shares to some employees. As per the Performance Stock Plan approved
      on March 8, 2007, these shares will only be issued on July 2009. As of December
      31, 2007, 211,435 rights to subscribe to new shares, based on these fixed
      performance criteria for the year 2007 were then cancelled and these shares
      will
      then never be subscribed and issued. As of December 31, 2007, only 18,840 rights
      out of the 625,000 initially granted were still in force, based on 2008
      milestones.
  On
      May
      22, 2007, the shareholders of EDAP TMS S.A. authorized the Board of Directors
      to
      grant up to 600,000 options to subscribe to 600,000 new Shares and up to 105,328
      options to purchase pre-existing Shares at a fixed price to be set by the Board
      of Directors. All of the 105,328 Shares that may be purchased through the
      exercise of stock options are currently held as treasury stock.
  Conforming
      to this stock option plan, on October 29, 2007, the Board of Directors granted
      504,088 options to subscribe to new Shares to certain employees of EDAP TMS.
      The
      exercise price was fixed at €3.99 per share. Options were to begin vesting one
      year after the date of grant and will be fully vested as of October 29, 2011
      (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 October 29, 2017 (i.e., ten years after the date of grant) or when
      employment with the Company ceases, whichever occurs earlier. At December 31,
      2007 the total fair value of the options granted under this plan was €1,731
      thousand. This non-cash financial charge will be recognized in the Company’s
      operating expenses over a period of 48 months; the impact on 2007 Operating
      Income was €156 thousand.
 
 104
  **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, 2007, a summary of stock option activity to purchase or to
      subscribe to Shares under these plans is as follows:
 
 2007
            
            2006
            
            2005Options
            
            Weighted
                average exercise price
              (€)
            
            Options
            
            Weighted
                average exercise price
              (€)
            
            Options
            
            Weighted
                average exercise price
              (€)Outstanding
                on January 1,
            
            
            502,162
            
            
            2.36
            
            
            593,262
            
            
            2.50
            
            
            580,262
            
            
            2.49Granted
            
            
            504,088
            
            
            3.99
            
            
            
            
            
            
            
            
            15,000
            
            
            2.78Exercised
            
            
            (183,750
            )
            
            2.03
            
            
            (72,600
            )
            
            3,20
            
            
            (1,000
            )
            
            1.62Forfeited
            
            
            (7,250
            )
            
            2,60
            
            
            (18,500
            )
            
            2,60
            
            
            (1,000
            )
            
            3.81Expired
            
            
            (33,625
            )
            
            3.81
            
            
            -
            
            
            -
            
            
            -
            
            
            -Outstanding
                on December 31,
            
            
            781,625
            
            
            3.42
            
            
            502,162
            
            
            2.38
            
            
            593,262
            
            
            2.50Exercisable
                on December 31,
            
            
            234,787
            
            
            2,63
            
            
            405,162
            
            
            2,73
            
            
            409,652
            
            
            2.45Shares
                purchase options available for grant on December 31
            
            
            105,328
            
            
            -
            
            
            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, 2007:
 
 Outstanding
                options
            
            Exercisable
                optionsExercise
                price (€)
            
            Options
            
            Weighted
                average remaining contractual life
            
            Weighted
                average exercise price
              (€)
            
            Options
            
            Weighted
                average exercise price
              (€)3.99
            
            
            504,088
            
            
            10
            
            
            3.99
            
            
            -
            
            
            -3.81
            
            
            37,900
            
            
            1
            
            
            3.81
            
            
            37,900
            
            
            3.812.60
            
            
            171,00
            
            
            6.2
            
            
            2.60
            
            
            128,250
            
            
            2.602.08(1)
            
            
            52,000
            
            
            4.0
            
            
            2.08
            
            
            52,000
            
            
            2.082.02(2)
            
            
            6,425
            
            
            4.5
            
            
            2.02
            
            
            6,425
            
            
            2.021.83
            
            
            10,212
            
            
            1.5
            
            
            1.83
            
            
            10,212
            
            
            1.831.83
                to 3.99
            
            
            781,625
            
            
            3.9
            
            
            3.51
            
            
            234,787
            
            
            2.63
  (1)
            All
                the52,000 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 6,425 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).
  105
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  ***16-6
      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.
      On June 22, 2007, the beneficiary of the remaining warrants officially renounced
      to his allocated warrants.
  **17—NET
      SALES**
 
 Net
      sales
      consist of the following:
 
 **2007**
            
            **2006**
            
            **2005**Sales
                of goods
            
            
            11,752
            
            
            10,849
            
            
            12,198Sales
                of RPPs & Leases
            
            
            4,814
            
            
            3,805
            
            
            3,146Sales
                of spare parts & services
            
            
            5,647
            
            
            5,520
            
            
            5,606Total
                sales
            
            
            22,213
            
            
            20,174
            
            
            20,952Warrants
                granted
            
            
            -
            
            
            -
            
            
            (235
            )Total
                net sales
            
            
            22,213
            
            
            20,174
            
            
            20,717
  ***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 1,000,000 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.
  106
  **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 accounted 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, was then recorded as a reduction of revenue. On December 29,
      2005, the Distribution Agreement was amended after HealthTronics decided to
      focus all of its efforts on implementing Ablatherm clinical trials in the United
      States to gain FDA approval and to cease pursuing distribution of our
      lithotripters in the United States. In connection with this amendment, 200,000
      warrants that had been issued to HealthTronics were cancelled since their
      exercise was directly linked to future purchases of our
      lithotripters.
  The
      non-cash charge of €235 thousand recorded for 2005 related to a series of
      warrants is linked to HealthTronics' 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.
  On
      April
      3, 2007, both parties executed a Termination Agreement whereby HealthTronics
      agreed to transfer the Ablatherm FDA study to the Company. Under the Termination
      Agreement, HealthTronics exercised 200,000 warrants which had been granted
      under
      the Distribution Agreement to acquire 200,000 ordinary shares of the Company
      for
      an aggregate exercise price of $300,000. The 600,000 remaining warrants granted
      under the Distribution Agreement were cancelled.
 
 **18—OTHER
      REVENUES**
  Other
      revenues consists of the following:
  **2007**
            
            **2006**
            
            **2005**Royalties
            
            
            -
            
            
            -
            
            
            47Grants
                and others
            
            
            113
            
            
            91
            
            
            46Total
            
            
            113
            
            
            91
            
            
            93
  In
      2007,
      EDAP SA invoiced €43 thousand to China Medical Technologies for consulting
      services.
  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 from the French Ministry of
      Research and Development.
  **19—NON-RECURRING OPERATING
      EXPENSES**
    107
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  In
      2007,
      the Company recorded other non-recurring operating expenses of €0.2 million including €0.5
      million of employee termination expenses and €0.3 million of other income linked
      to the recovery of medical equipments from HealthTronics as part of the
      Termination Agreement.
  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.
 
 **20—FINANCIAL
      INCOME, NET**
  Interest
      (expense) income, net consists of the following:
  **2007**
            
            **2006**
            
            **2005**Interest
                income
            
            
            331
            
            
            224
            
            
            187Interest
                expense
            
            
            (378
            )
            
            (71
            )
            
            (52
            )Depreciation
                of prepaid expenses on debt grant
            
            
            (78
            )
            
            −
            
            
            −Changes
                in fair value of the Convertible Debentures
            
            
            (747
            )
            
            −
            
            
            −Changes
                in fair value of the Investor Warrants
            
            
            (498
            )
            
            −
            
            
            −Changes
                in fair value of the Placement Agent Warrants
            
            
            127
            
            
            −
            
            
            −Total
            
            
            (1,243
            )
            
            153
            
            
            135
 
 Interest
      expense in 2007 comprises a €218 thousand expense for the payment of the 9%
      interest coupon on the convertible debentures from October 29,
      2007.
 
 See
      Note
      14 for discussion on the accounting for the convertible debentures, Investor
      Warrants, and Placement Agent Warrants.
  **21—OTHER
      INCOME (EXPENSE), NET**
  Other
      income (expense), consists of the following:
  **2007**
            
            **2006**
            
            **2005**Other
                income (expense), net
            
            
            16
            
            
            (5
            )
            
            9Total
            
            
            16
            
            
            (5
            )
            
            9
  **22—INCOME
      TAXES**
  ***22-1
      Loss before income taxes***
  Loss
                before income taxes is comprised of the following:
            
            **2007**
            
            **2006**
            
            **2005**France
            
            
            (5,055
            )
            
            (2,990
            )
            
            (755
            )Other
                countries
            
            
            (516
            )
            
            (385
            )
            
            (206
            )Total
            
            
            (5,571
            )
            
            (3,375
            )
            
            (961
            )
  108
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  ***22-2
      Income tax (expense)/ benefit***
 
 Income
                tax (expense)/benefit consists of the following:
            
            **2007**
            
            **2006**
            
            **2005***Current
                income tax expense:*France
            
            
            107
            
            
            4
            
            
            38Other
                countries
            
            
            (58
            )
            
            (69
            )
            
            (57
            )Sub-total
                current income tax expense
            
            
            49
            
            
            (65
            )
            
            (19
            )*Deferred
                income tax (expense) benefit:*France
            
            
            21
            
            
            72
            
            
            (90
            )Other
                countries
            
            
            70
            
            
            (63
            )
            
            5Sub-total
                deferred income tax (expense) benefit
            
            
            91
            
            
            9
            
            
            (85
            )Total
            
            
            140
            
            
            (56
            )
            
            (104
            )
  ***22-3
      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 effects of temporary
      differences which give rise to significant deferred tax assets (liabilities)
      are
      as follows:
  **December
                31,****2007**
            
            **2006**Elimination
                of intercompany profit in inventory
            
            
            139
            
            
            169Other
                items
            
            
            751
            
            
            540Net
                operating loss carryforwards
            
            
            7,799
            
            
            6,874Total
                deferred tax assets
            
            
            8,689
            
            
            7,583Capital
                leases treated as operating leases for tax
            
            
            (35
            )
            
            (38
            )Exit
                tax
            
            
            
            
            
            (81
            )Other
                items
            
            
            (161
            )
            
            (224
            )Total
                deferred tax liabilities
            
            
            (196
            )
            
            (343
            )Net
                deferred tax assets
            
            
            8,493
            
            
            7,240Valuation
                allowance for deferred tax assets
            
            
            (8,248
            )
            
            (7,156
            )Deferred
                tax assets (liabilities), net of allowance
            
            
            245
            
            
            84
  Net
      operating loss carryforwards of €1,746 thousand, €1,801 thousand, €1,910
      thousand, €817 thousand and €16,548 thousand as of December 31, 2007 are
      available at EDAP Technomed Inc., TMS S.A., EDAP S.A., Edap Technomed Co Ltd
      Japan and EDAP TMS S.A., respectively. These net operating losses generate
      deferred tax assets of €7,799 thousand. Realization of these assets is
      contingent on future taxable earnings in the applicable tax jurisdictions.
      As of
      December 31, 2007, €7,465 thousand out of these €7,799 thousand net operating
      loss carry-forwards have no expiration date. The remaining tax loss
      carry-forwards expire in years 2011 through 2014. In accordance with SFAS No.
      109, a valuation allowance is recorded as realization of those amounts are
      not
      considered probable.
  109
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  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
      2007,
      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.
  ***22-4
      Effective tax rate***
  A
      reconciliation of differences between the statutory French income tax rate
      and
      the Company’s effective tax rate is as follows:
  **2007**
            
            **2006**
            
            **2005**French
                statutory rate
            
            
            33.8
            %
            
            33.8
            %
            
            33.8
            %Research
                and development tax credit
            
            
            2.0
            
            
            1.4
            %
            
            7.6
            %Income
                of foreign subsidiaries taxed at different tax rates
            
            
            0.5
            %
            
            1.3
            %
            
            1.5
            %Effect
                of net operating loss carryforwards and valuationAllowances
            
            
            (19.1
            %)
            
            (27.6
            %)
            
            (22.5
            %)Non
                deductible entertainment expenses
            
            
            (0.9
            %)
            
            (1.4
            %)
            
            (4.9
            %)Other
            
            
            (13.8
            %)
            
            (9.1
            %)
            
            (27.7
            %)Effective
                tax rate
            
            
            2.5
            %
            
            (1.6
            %)
            
            (12.2
            %)
  ***22-5
      Uncertainty in Income Taxes***
  Through
      the adoption of FIN No 48, the Company reviewed the tax positions of each
      subsidiary. On December 31, 2007 there is no uncertainty in the Company’s tax
      positions. As a result, there is no effect on the retained earnings
 
 Unrecognized
                tax benefitsBalance
                as of January 1st,
                2007
            
            
            -Impact
                of tax positions taken during a prior period
            
            
            -Impact
                of tax positions taken during the current period
            
            
            -Impact
                of settlements with taxing authorities
            
            
            -Impact
                of a lapse of the applicable statute of limitations
            
            
            -Balance
                as of December 31st,
                2007
            
            
            -
  In
      2007,
      the Company did not record any interest and penalties. In case of interest
      and
      penalties, they would be recognized as non-recurring operating
      expenses
  The
      tax
      years that remain subject to examination by major tax jurisdictions are 2005,
      2006 and 2007.
  110
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  **23—EARNINGS
      (LOSS) PER SHARE**
  A
      reconciliation of the numerators and denominators of the basic and diluted
      EPS
      calculations for the years ended December 31, 2007, 2006 and 2005 is as
      follows:
 
 **For
                the year ended Dec. 31, 2007**
            
            **For
                the year ended Dec. 31, 2006**
            
            **For
                the year ended Dec. 31, 2005****Loss
                in euro (Numerator)**
            
            **Shares
                (Denomin-ator)**
            
            **Per-Share
                Amount**
            
            **Loss
                in euro (Numerator)**
            
            **Shares
                (Denomin-ator)**
            
            **Per-Share
                Amount**
            
            **Loss
                in euro (Numerator)**
            
            **Shares
                (Denomin-ator)**
            
            **Per-Share
                Amount****Basic
                EPS**Loss
                available tocommon
                Shareholders
            
            
            (5,
                430,460
            )
            
            9,200,757
            
            
            (0,59
            )
            
            (3,430,985
            )
            
            8,817,007
            
            
            (0.39
            )
            
            (1,065,375
            )
            
            7,782,731
            
            
            (0.14
            )Effect
                of dilutive securities:Stock
                options
            
            
            
            
            
            516,730
            
            
            
            
            
            
            
            
            740,526
            
            
            
            
            
            
            
            
            590,843**Diluted
                EPS**Loss
                available tocommon
                shareholders,Including
                assumedConversions
            
            
            (5,430,460
            )
            
            9,717,487
            
            
            (0,59
            )
            
            (3,430,985
            )
            
            9,557,533
            
            
            (0.39
            )
            
            (1,065,375
            )
            
            8,373,574
            
            
            (0.14
            )
  **24—COMMITMENTS
      AND CONTINGENCIES**
  ***24-1
      Commitments***
  The
        Company currently has commitments regarding its operating leases as described
        in
        Note 12- 2. The Company also has commitments regarding its convertible debentures and warrants. Under the terms of the registration rights agreement the Company entered into in connection with the October 2007 private placement, the Company agreed to secure the registration of a portion of the securities deliverable upon conversion of the debentures and in payment of interest under the debentures by certain dates, and the Company agreed to secure the registration of the remaining securities deliverable on conversion of the debentures and all of the securities deliverable upon exercise of the warrants by certain dates, with penalties, including payment of liquidated damages in case of a default of these commitments. Also, the Company committed to a certain number of covenants regarding its convertible debentures and warrants, and any event of default on these covenants could require the early repayment of the debentures at the mandatory default amount, including all other amounts of interest, costs, expenses
 and liquated damages due in respect of the defaulted debentures.
  ***24-2
      Litigation***
  To
      date,
      the Company is a party to one product liability action 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 this case following the sale
      of
      the Prostatron business in October 2000. 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 claim and suit would
      not
      have a material adverse effect on the results of its operations, cash flows,
      or
      financial position as of December 31, 2007, and for the year then
      ended.
  111
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  **25—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, 2007
      and
      2006.
 
 **December
                31,**
            
            **December
                31,****2007**
              **Recorded
                Value**
            
            **2007
                Estimated Fair Value**
            
            **2006
                Recorded Value**
            
            **2006
                Estimated Fair Value**Assets:Cash
                and cash equivalents
            
            
            17,523
            
            
            17,523
            
            
            9,894
            
            
            9,894Trade
                accounts and notes receivable, net
            
            
            10,877
            
            
            10,877
            
            
            10,142
            
            
            10,142Short
                term investment
            
            
            1,089
            
            
            1,089
            
            
            1,031
            
            
            1,031Liabilities:Short-term
                borrowings
            
            
            1,593
            
            
            1,593
            
            
            1,308
            
            
            1,308Trade
                accounts payable
            
            
            5,067
            
            
            5,067
            
            
            3,987
            
            
            3,987Notes
                payable
            
            
            595
            
            
            595
            
            
            731
            
            
            731Convertible
                Debentures and other Long Term Debt
            
            
            11,691
            
            
            11,691
            
            
            58
            
            
            54Investor
                Warrants
            
            
            3,141
            
            
            3,141Placement
                Agent Warrants
            
            
            343
            
            
            343
  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.
  The
      long-term debt is recorded at fair value.
  **26—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, 2007 and 2006. Ultimate losses may vary from the
      current estimates, and any adjustments are reported in earnings in the periods
      in which they become known.
  In
      2007
      and 2006, the Company did not generate significant revenue with a single
      customer.
  112
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
 
 **27—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, 2007,
      there were no outstanding hedging instruments.
 
 **28—SEGMENT
      INFORMATION**
  In
      July
      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. Then, in 2007, the Company created
      a
      new reporting segment dedicated to the FDA approval for Ablatherm-HIFU activity.
      The following tables set forth the key income statement figures, by segment
      for
      fiscal years 2007, 2006 and 2005 and the key balance sheet figures, by segment,
      for fiscal years 2007, 2006 and 2005.
  As
      from
      the first quarter of 2007, the Company elected to report our segment information
      on a “net contribution” basis, so that each segment’s results comprise the
      elimination of our intra-group revenues and expenses and thus reflect the true
      contribution to consolidated results of the segment. The Company has
      reclassified its 2006 results using this method for comparative purposes with
      its 2007 results, but has retained the former presentation of the 2006 segment
      results for comparative purposes with its 2005 results.
  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.
  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:
 
 **2007**
            
            **2006**
            
            **2005**Segment
                operating loss
            
            
            (4,089
            )
            
            (3,094
            )
            
            (1,323
            )Financial
                income, net
            
            
            (1,243
            )
            
            153
            
            
            135Foreign
                Currency exchange (losses) gains, net
            
            
            (254
            )
            
            (430
            )
            
            218Other
                income, net
            
            
            16
            
            
            (5
            )
            
            9Income
                tax (expense) credit
            
            
            140
            
            
            (56
            )
            
            (104
            )Consolidated
                net loss
            
            
            (5,430
            )
            
            (3,431
            )
            
            (1,065
            )
  113
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  A
      summary
      of the Company’s operations by business unit is presented below for years ending
      December 31, 2007, 2006 and 2005:
 **HIFU
                Division**
            
            **UDS
                Division**
            
            **EDAP
                TMS**
              **(Corporate)**
            
            **FDA**
            
            **Total
                consolidated****2007
                (Net contribution approach)**External
                sales of medical devices
            
            
            2,661
            
            
            6,496
            
            
            
            
            
            
            
            
            9,157External
                sales of spares parts,Supplies
                & services
            
            
            6,610
            
            
            6,447
            
            
            
            
            
            
            
            
            13,057Total
                sales
            
            
            9,271
            
            
            12,943
            
            
            
            
            
            
            
            
            22,213Warrants
                grantedTotal
                net sales
            
            
            9,271
            
            
            12,943
            
            
            
            
            
            
            
            
            22,213External
                other revenues
            
            
            60
            
            
            53
            
            
            
            
            
            
            
            
            113Total
                revenues
            
            
            9,331
            
            
            12,996
            
            
            
            
            
            
            
            
            22,327Total
                COS
            
            
            (3,940
            )
            
            (9,208
            )
            
            
            
            
            
            
            
            (13,148
            )Gross
                margin
            
            
            5,391
            
            
            3,788
            
            
            
            
            
            
            
            
            9,179R&D
            
            
            (1,216
            )
            
            (1,060
            )
            
            
            
            
            (918
            )
            
            (3,194
            )Selling
                expenses
            
            
            (2,986
            )
            
            (2,408
            )
            
            
            
            
            (81
            )
            
            (5,476
            )G&A
            
            
            (985
            )
            
            (944
            )
            
            (1,786
            )
            
            (659
            )
            
            (4,374
            )Non
                recurring operating expenses
            
            
            
            
            
            (7
            )
            
            (512
            )
            
            295
            
            
            (224
            )Total
                expenses
            
            
            (5,187
            )
            
            (4,419
            )
            
            (2,298
            )
            
            (1,363
            )
            
            (13,267
            )Operating
                income (loss)
            
            
            204
            
            
            (631
            )
            
            (2,298
            )
            
            (1,363
            )
            
            (4,089
            )Total
                Assets
            
            
            9,876
            
            
            18,578
            
            
            3,696
            
            
            12,851
            
            
            45,003Capital
                expenditures
            
            
            1,109
            
            
            1,354
            
            
            44
            
            
            
            
            
            2,507Long-lived
                assets
            
            
            3,029
            
            
            4,059
            
            
            82
            
            
            217
            
            
            7,387Goodwill
            
            
            645
            
            
            1,767
            
            
            
            
            
            
            
            
            2,412
 
  114
  **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)**
            
            **FDA**
            
            **Total
                consolidated****2006
                (Net contribution approach)**External
                sales of medical devices
            
            
            2,611
            
            
            5,998
            
            
            
            
            
            
            
            
            8,608External
                sales of spares parts,Supplies
                & services
            
            
            4,989
            
            
            6,576
            
            
            
            
            
            
            
            
            11,566Total
                sales
            
            
            7,600
            
            
            12,574
            
            
            
            
            
            
            
            
            20,174Warrants
                grantedTotal
                net sales
            
            
            7,600
            
            
            12,574
            
            
            
            
            
            
            
            
            20,174External
                other revenues
            
            
            65
            
            
            26
            
            
            
            
            
            
            
            
            91Total
                revenues
            
            
            7,666
            
            
            12,599
            
            
            
            
            
            
            
            
            20,265Total
                COS
            
            
            (3,169
            )
            
            (8,776
            )
            
            
            
            
            
            
            
            (11,946
            )Gross
                margin
            
            
            4,497
            
            
            3,822
            
            
            
            
            
            
            
            
            8,319R&D
            
            
            (1,423
            )
            
            (1,019
            )
            
            
            
            
            
            
            
            (2,442
            )Selling
                expenses
            
            
            (2,475
            )
            
            (2,146
            )
            
            
            
            
            
            
            
            (4,621
            )G&A
            
            
            (696
            )
            
            (1,748
            )
            
            (1,638
            )
            
            
            
            
            (4,083
            )Non
                recurring operating expenses
            
            
            
            
            
            
            
            
            (267
            )
            
            
            
            
            (267
            )Total
                expenses
            
            
            (4,595
            )
            
            (4,913
            )
            
            (1,905
            )
            
            
            
            
            (11,413
            )Operating
                income (loss)
            
            
            (98
            )
            
            (1,091
            )
            
            (1,905
            )
            
            
            
            
            (3,094
            )Total
                Assets
            
            
            12,544
            
            
            16,816
            
            
            3,112
            
            
            
            
            
            32,473Capital
                expenditures
            
            
            1,050
            
            
            515
            
            
            
            
            
            
            
            
            1,565Long-lived
                assets
            
            
            2,384
            
            
            3,650
            
            
            46
            
            
            
            
            
            6,080Goodwill
            
            
            645
            
            
            1,767
            
            
            
            
            
            
            
            
            2,412
 
 **HIFU
                Division**
            
            **UDS
                Division**
            
            **EDAP
                TMS**
              **(Corporate)**
            
            **Consolidation**
            
            **Total
                consolidated****2006
                (Previous approach)**External
                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
  115
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
 
 **HIFU
                Division**
            
            **UDS
                Division**
            
            **EDAP
                TMS**
              **(Corporate)**
            
            **Consolidation**
            
            **Total
                consolidated****2005**External
                sales of medical devices
            
            
            4,260
            
            
            5,982
            
            
            
            
            
            
            
            
            10,242External
                sales of spares parts,Supplies
                & services
            
            
            3,685
            
            
            7,025
            
            
            
            
            
            
            
            
            10,710Internal
                segment revenues
            
            
            3
            
            
            3,185
            
            
            
            
            
            (3,188
            )Total
                sales
            
            
            7,948
            
            
            16,192
            
            
            
            
            
            (3,188
            )
            
            20,952Warrants
                granted
            
            
            (118
            )
            
            (117
            )
            
            
            
            
            
            
            
            (235
            )Total
                net sales
            
            
            7,830
            
            
            16,075
            
            
            
            
            
            (3,188
            )
            
            20,717External
                other revenues
            
            
            14
            
            
            79
            
            
            
            
            
            
            
            
            93Internal
                other revenues
            
            
            105
            
            
            -
            
            
            
            
            
            (105
            )
            
            -Total
                revenues
            
            
            7,949
            
            
            16,154
            
            
            
            
            
            (3,293
            )
            
            20,810Total
                COS
            
            
            (3,998
            )
            
            (11,457
            )
            
            
            
            
            3,142
            
            
            (12,313
            )Gross
                margin
            
            
            3,951
            
            
            4,697
            
            
            
            
            
            (151
            )
            
            8,497R&D
            
            
            (1,042
            )
            
            (742
            )
            
            
            
            
            
            
            
            (1,784
            )Selling
                expenses
            
            
            (1,983
            )
            
            (1,775
            )
            
            
            
            
            
            
            
            (3,758
            )G&A
            
            
            (791
            )
            
            (1,937
            )
            
            (1,550
            )
            
            
            
            
            (4,278
            )Total
                expenses
            
            
            (3,816
            )
            
            (4,454
            )
            
            (1,550
            )
            
            
            
            
            (9,820
            )Operating
                income (loss)
            
            
            135
            
            
            243
            
            
            (1,550
            )
            
            (151
            )
            
            (1,323
            )Total
                Assets
            
            
            9,177
            
            
            22,163
            
            
            5,620
            
            
            (8,164
            )
            
            28,796Capital
                expenditures
            
            
            696
            
            
            645
            
            
            
            
            
            
            
            
            1,341Long-lived
                assets
            
            
            2,172
            
            
            3,787
            
            
            59
            
            
            
            
            
            6,018Goodwill
            
            
            645
            
            
            1,767
            
            
            
            
            
            
            
            
            2,412
  116
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
  **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  **29—VALUATION
      ACCOUNTS**
  **Allowance
                for doubtful accounts**
            
            **Slow-moving
                inventory**Restated
                balance as of January 1, 2005
            
            
            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
            
            
            928Charges
                to costs and expenses
            
            
            131
            
            
            288Deductions:
                write-off provided in prior periods
            
            
            (77
            )
            
            (195
            )Restated
                balance as of December 31, 2007
            
            
            735
            
            
            1021
  **30—SUPPLEMENTAL
      DISCLOSURES OF CASH FLOW INFORMATION**
  Interest
      and income taxes paid are as follows:
  **2007**
            
            **2006**
            
            **2005**Income
                taxes paid (refunds received)
            
            
            142
            
            
            204
            
            
            (66
            )Interest
                paid
            
            
            291
            
            
            22
            
            
            7Interest
                received
            
            
            284
            
            
            150
            
            
            119Non-cash
                transactions:
            
            
            **2007**
            
            
            **2006**
            
            
            **2005**Capital
                lease obligations incurred
            
            
            1,557
            
            
            1,132
            
            
            859
  **31—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 our medical devices installed in Korea. The
      amounts payable under this contract were €71 thousand, €61 thousand and €136
      thousand, for 2007, 2006 and 2005 respectively. Dae You also acts as an agent
      to
      promote our medical devices in South Korea, and receives commissions on sales.
      Dae You has purchased medical devices from us, which it operates in partnership
      with hospitals or clinics. These purchases amounted to €558 thousand, €588
      thousand and €396 thousand in 2007, 2006 and 2005 respectively. As of December
      31, 2007, receivables from Dae You amounted to €52 thousand and our payables to
      them amounted to €28 thousand. As of December 31, 2006, receivables amounted to
€73 thousand and payables to €24 thousand.
  The
      Company purchases certain technological elements from Siemens AG, an affiliate
      of its shareholder, Siemens France Holding. Total purchases amounted to €183
      thousand in 2007, €444 thousand in 2006 and €547 thousand in 2005. As of
      December 31, 2007, payables due to Siemens AG amounted to €1 thousand and as of
      December 31, 2006, payables due to Siemens AG amounted to €18 thousand.
  117
  **EDAP
      TMS S.A. AND SUBSIDIARIES**
 **NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
      thousands of euros unless otherwise noted, except per share
      data)**
  The
      Company signed an exit agreement, including a severance package, with a former
      senior executive which provides compensation of approximately €512 thousand,
      including social charges.
  118