**As
      filed with the Securities and Exchange Commission on June 6,
      2006**





**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, 2005




**0-29374**


(Commission
      file number)




**EDAP
      TMS S.A.**


(Exact
      name of registrant as specified in its charter)




**France**


(Jurisdiction
      of incorporation or organization)




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


**4/6,
      rue du Dauphine**


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


(Address
      of principal executive offices)




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


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




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




**American
      Depositary Shares, each**


**representing
      one Ordinary Share**


**Ordinary
      Shares, nominal value**


***€*** **0.13
      per share**




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




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




**7,782,731
      Ordinary Shares**




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




Yes
o No
x




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




Yes
o    
      No
      x




Indicate
      by check mark whether the registrant: (1) has filed all reports required to
      be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the preceding 12 months (or for such shorter period that the registrant was
      required to file such reports) and (2) has been subject to such filing
      requirements for the past 90 days.




Yes
x   
No
o




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




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




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




Item
      17 o     Item
      18x




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




Yes
o    
      No
      x































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      PAGE INTENTIONALLY LEFT BLANK]











**TABLE
      OF CONTENTS**





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




i























[THIS
      PAGE INTENTIONALLY LEFT BLANK]

















**PRESENTATION
      OF FINANCIAL AND OTHER INFORMATION**




Unless
      the context otherwise requires, references herein to ‘‘the Company,’’ ‘‘the
      Group’’ or ‘‘EDAP TMS’’ are to EDAP TMS S.A. and its consolidated subsidiaries
      and references herein to ‘‘this Annual Report’’ are to the Company’s Annual
      Report on Form 20-F for the year ended December 31, 2005.




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




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




**FORWARD-LOOKING
      INFORMATION**





This
      Annual Report includes certain forward-looking statements, usually containing
      words such as ‘‘believe,’’ ‘‘plan,’’ ‘‘intend,’’ ‘‘estimate,’’ ‘‘expect’’ and
‘‘anticipate’’ or similar expressions, which reflect the Company’s 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 the Company’s control. These factors
      include, without limitation:





-
            the
                effects on the Company of the intense competition existing in the
                markets
                in which it operates;


-
            the
                uncertainty of market acceptance for the Company’s HIFU devices;


-
            the
                uncertainty of reimbursement status;


-
            the
                clinical status of the Company’s HIFU devices;


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


-
            dependence
                on the Company’s strategic partners;


-
            reliance
                on patents, licenses and key proprietary technologies;


-
            product
                liability risk;


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


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





Readers
      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 the Company’s periodic filings with the
      Securities and Exchange Commission (including the Company’s reports on Form
      6-K), for further discussion of the risks and uncertainties that may cause
      such
      differences to occur.





1


**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 and is qualified by reference to, and should be read in conjunction
      with, the Consolidated Financial Statements and the Notes thereto appearing
      elsewhere in this Annual Report (the ‘‘Consolidated Financial Statements’’) and
      Item 5, ‘‘Operating and Financial Review and Prospects.’’ The balance sheet data
      as of December 31, 2003, 2004 and 2005 and the income statement data for the
      years ended December 31, 2003, 2004 and 2005 set forth below have been derived
      from the Consolidated Financial Statements. The balance sheet data as of
      December 31, 2001 and 2002 and the income statement data for the year ended
      December 31, 2001 and 2002 have been derived from the Company’s audited
      consolidated financial statements. The Consolidated Financial Statements were
      prepared in accordance with U.S. GAAP. To date, the Company has not been
      required, and presently is not required under French law, to prepare
      consolidated financial statements under French GAAP, nor has it prepared any
      consolidated financial statements under French GAAP.




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






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





2


**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 the ADSs on Nasdaq.




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





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




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




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





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




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




3


**RISK
      FACTORS**




***Dependence
      on HIFU Technology***




The
      Company is dependent on its High Intensity Focused Ultrasound (‘‘HIFU’’)
      technology for future growth in its revenues and net income. The Company’s
      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, the Company will be dependent on the successful development
      and
      commercialization of its other line of products, medical devices based on HIFU,
      particularly the Ablatherm, to generate significant additional revenues and
      achieve and sustain profitability in the future. The Ablatherm is in its
      commercialization phase in the European Union. The Ablatherm is not approved
      for
      commercial distribution in the United States and none of the Company’s other
      HIFU products (excluding Ablatherm) has obtained approval for commercial
      distribution anywhere in the world. In December 2001, the Company’s 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. In order to assist in
      the
      successful completion of clinical trials to obtain FDA approval, the Company
      has
      identified a U.S. partner to assist in the approval process for re-submission
      of
      an IDE to the FDA, with the execution of a Distribution Agreement with
      HealthTronics Surgical Services, Inc. (‘‘HealthTronics’’), in February 2004.
      Trials in the United States have started in May 2006 with several centers fully
      approved and currently enrolling patients. The identification of HealthTronics
      as the Company’s U.S. partner does not guarantee the successful completion of
      clinical trials nor does it guarantee that the FDA will grant approval to market
      a device if clinical trials are successfully completed. See ‘‘—Uncertainty
      Relating to Clinical Trials; Clinical Status of Certain Products Using HIFU
      Technology’’ and Item 4, ‘‘Information on the Company—High Intensity Focused
      Ultrasound Division—HIFU Division Clinical and Regulatory Status.’’




***Uncertainty
      Relating to Clinical Trials; Clinical Status of Certain Products Using HIFU
      Technology***




Before
      obtaining regulatory approvals for the commercial sale of any of its devices
      under development, the Company 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 the Company’s clinical trials will
      demonstrate the safety and effectiveness of any products or will result in
      marketable products. A number of companies have suffered significant setbacks
      in
      advanced clinical trials, even after promising results in earlier trials. The
      Company, the FDA or other regulatory authorities may suspend or terminate
      clinical trials at any time and regulating agencies such as the FDA may even
      refuse to grant exemptions to conduct clinical trials. The Company's US partner
      HealthTronics may decide to cease its cooperation with the Company under the
      Distribution Agreement. See Item 4, ‘‘Information on the Company—High Intensity
      Focused Ultrasound Division—HIFU Division Clinical and Regulatory
      Status.’’




The
      Company relies on scientific, technical and clinical data supplied by its
      academic collaborators in the evaluation and development of its related devices.
      There can be no assurance that there are or will be no errors or omissions
      in
      such data that would materially adversely affect the development of such
      products.




The
      process of applying for regulatory approval is unpredictable, often lengthy
      and
      requires the expenditure of substantial resources. There can be no assurance
      that the Company’s HIFU devices that have not received regulatory approval will
      prove to be effective or safe in clinical trials or will be approved by the
      appropriate regulatory authorities. The Company, through its U.S. partner
      HealthTronics, does not anticipate receiving FDA approval for any HIFU device,
      including the Ablatherm, for several years, if at all. If the Company’s HIFU
      devices do not prove to be effective and safe in clinical trials to the
      satisfaction of the relevant regulatory authorities, the Company’s business,
      financial condition and results of operations could be materially adversely
      affected.




4


***Uncertainty
      of Market Acceptance of Certain Products Using HIFU
      Technology***




The
      Company’s HIFU devices represent new therapies for the conditions that they are
      designed to treat. Notwithstanding any positive clinical results that the
      Company’s HIFU devices may have achieved or may achieve in the future in terms
      of safety and effectiveness, and any marketing approvals that the Company may
      have obtained or may obtain in the future with respect thereto, 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 the Company’s HIFU products
      in any country, except Italy, Germany and the UK where it is partially
      reimbursed, 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.




***Uncertain
      and unpredictable liquidity and cash flow***




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




***History
      of Operating Losses; Uncertainty of Future
      Profitability***




The
      Company has incurred operating losses in each fiscal year since 1998 and may
      never achieve profitability. The Company expects that its marketing, selling
      and
      research and development expenses will increase as it attempts to develop and
      commercialize HIFU devices. The Company may not generate a sufficient level
      of
      revenue to offset these expenses and may not be able to adjust spending in
      a
      timely manner to respond to any unanticipated decline in revenue. In 2005 and
      2004, the Company had positive operating income in both operating divisions
      (HIFU division and UDS division), reflecting its efforts in restructuring the
      Company in late 2003 and in sustained cost control and an operating loss in
      its
      holding Company (holding expenses). There can be no assurance, however, that
      the
      Company will realize sufficient revenue to sustain or increase profitability
      in
      the future. See Item 5, ‘‘Operating and Financial Review and
      Prospects.’’




***Competition
      and Technological Advances***




In
      each
      of its principal businesses, the Company faces competition both directly from
      other manufacturers of medical devices that apply the same technologies as
      the
      Company, as well as indirectly from existing or emerging therapies for the
      treatment of urological disorders. Competition in the markets in which the
      Company operates is intense and is expected to increase in the
      future.




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




5


Many
      of
      the Company’s competitors have significantly greater financial, technical,
      research, marketing, sales, distribution and other resources than the Company
      and may have more experience in developing, manufacturing, marketing and
      supporting new medical devices. In addition, the Company’s future success will
      depend in large part on its ability to maintain a leading position in
      technological innovation, and there can be no assurance that the Company will
      be
      able to develop or enhance its products, or develop new products, to compete
      successfully with new or existing technologies. Rapid technological development
      by competitors may result in the Company’s products becoming obsolete before the
      Company recovers a significant portion of the research, development and
      commercialization expenses incurred with respect to those products.




The
      Company also faces competition for its maintenance and service contracts. Larger
      hospitals often utilize their in-house maintenance departments in lieu of
      contracting with equipment manufacturers such as the Company. In addition,
      third-party medical equipment maintenance companies increasingly compete against
      equipment manufacturers by offering broad repair and maintenance service
      contracts to hospitals and clinics. Increased competition by the Company’s
      current or future competitors for its medical devices or its maintenance and
      service contracts could have a material adverse effect on the Company’s
      business, financial condition and results of operations.




***Government
      Regulation***




Government
      regulation in countries in which the Company sells its products, particularly
      in
      the United States, is a significant factor in the development and marketing
      of
      the Company’s products and in the Company’s ongoing manufacturing and research
      and development activities. The Company is regulated in each of its major
      markets with respect to preclinical and clinical testing, manufacturing,
      labeling, distribution, sale, marketing, advertising and promotion of its
      products. In order to market and sell those of its products that are still
      in
      the clinical trial stage, the Company will be required to obtain marketing
      approval or clearance from the relevant regulatory agencies, including the
      FDA
      in the United States. Moreover, if regulatory approval to market a product
      is
      granted, such approval may entail limitations on the indicated uses for which
      it
      may be marketed. Failure to comply with applicable regulatory requirements
      can,
      among other things, 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 the Company’s products. Delays in receipt of, or failure to receive,
      regulatory approvals, or the loss of previously received approvals, would have
      a
      material adverse effect on the Company’s business, financial condition and
      results of operations. For more information on the regulation of the Company’s
      business, see Item 4, ‘‘Information on the Company—Government
      Regulation.’’




There
      can
      be no assurance that additional statutes or regulations applicable to the
      Company’s business
      will not be adopted, impose substantial additional costs or otherwise have
      a
      material adverse effect on
      the
      Company’s business, financial condition and results of operations.




***Uncertainty
      Relating to Third-Party Reimbursement***




The
      Company’s success is dependent upon, among other things, the extent to which
      satisfactory reimbursement for the procedures performed with its devices can
      be
      obtained from healthcare payers in the United States and elsewhere. In the
      United States, the Company is 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, and any such revision might affect
      reimbursement for the procedures performed using the Company’s 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, relevant approvals have to be sought
      in each Member State. Failure to establish sufficient reimbursement from
      healthcare payers or adverse changes in governmental and private healthcare
      payers’ policies could have a material adverse effect on the Company’s business,
      financial condition and results of operations.




6


Lithotripsy
      procedures are reimbursed in the European Union, in Japan and in the United
      States. However, there can be no assurance that a decision to modify
      reimbursement will not affect the Company’s business, financial conditions and
      results of operations. Procedures performed with the Company’s 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, and there is no assurance that such reimbursement will be obtained. If
      reimbursement for our products is unavailable or limited in scope or amount
      or
      if pricing is set at unsatisfactory levels, our business could be materially
      harmed.




***Manufacturing***




The
      Company’s 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 the European Union standards for quality assurance
      and
      manufacturing process control. Any failure by the Company to comply with such
      regulations may have a material adverse effect on the Company’s business,
      financial condition and results of operations.




Substantially
      all assembly of the Company’s production currently takes place in a single
      facility located in Vaulx-en-Velin, on the outskirts of Lyon, France. A
      significant interruption for any reason, including but not limited to failure
      to
      obtain regulatory approval for manufacturing processes or in the operations
      of
      the Company’s sole facility could have a material adverse effect on the
      Company’s business, financial condition and results of operations.




***Dependence
      Upon Key Suppliers***




The
      Company purchases the majority of the components used in its products from
      a
      number of suppliers but relies on a single source for several components of
      its
      products. In addition, the Company relies on single suppliers for certain
      services. If the supply of certain components or services were interrupted,
      the
      Company’s manufacturing, marketing and selling of the relevant products would be
      delayed. These delays could be extensive in situations where a component
      substitution would require regulatory approval. The Company expects to be
      dependent upon its 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 the Company’s business, financial condition and
      results of operations.




***Patents,
      Licenses and Proprietary Technologies***




The
      Company’s success depends in large part on its 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. The
      Company’s products, including its 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 the Company’s technical and
      management personnel. An adverse determination in any such litigation or
      proceeding to which the Company may become a party could subject the Company
      to
      significant liability to third parties, require the Company to seek licenses
      from third parties and to pay ongoing royalties, require the Company to redesign
      certain products or subject the Company to injunctions preventing the
      manufacture, use or sale of such products. In addition to being costly,
      protracted litigation to defend or prosecute intellectual property rights could
      result in the Company’s customers or potential customers deferring or limiting
      their purchase or use of the Company’s products until resolution of such
      litigation. 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.’’




7


The
      Company owns patents covering several of its technologies and has 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 the Company’s patent applications will result
      in patents being issued, or that the Company’s issued patents, or any patents
      which may be issued as a result of existing or future applications, will be
      sufficient to provide meaningful protection or commercial advantage to the
      Company. There can be no assurance that any of the Company’s patents or patent
      applications will not 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 adversely affect the
      Company’s business, financial condition or results of operations. Litigation may
      be necessary to enforce patents issued to the Company or to determine the
      enforceability, scope and validity of the proprietary rights of others. There
      can be no assurance that competitors, many of which have substantial resources
      and have made substantial investments in competing technologies, will not apply
      for or obtain patents that will prevent, limit or interfere with the Company’s
      ability to make, use or sell its products either in the United States or in
      foreign markets, including its HIFU devices.




The
      Company also relies on trade secrets and proprietary know-how, which it seeks
      to
      protect through non-disclosure agreements with employees, consultants and other
      parties. There can be no assurance that those non-disclosure agreements will
      not
      be breached, that the Company will have adequate remedies for any breach, or
      that the Company’s trade secrets will not otherwise become known to, or
      independently developed by, competitors. Litigation may be necessary to protect
      trade secrets or knowhow owned by the Company. In addition, effective copyright
      and trade secret protection may be unavailable or limited in certain
      countries.




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




***Product
      Liability Risk***




The
      Company faces a significant risk of exposure to product liability claims in
      the
      event that the use of its products results in personal injury or death, and
      there can be no assurance that material product liability claims will not be
      assessed against the Company in the future. To date, the Company is a party
      to
      two product liability actions in the United States by patients claiming to
      have
      been injured in the course of a Prostatron procedure, for which it has agreed
      to
      retain liability following the sale of the Prostatron business in October 2000.
      See Item 5, ‘‘Operating and Financial Review and Prospects—Critical Accounting
      Policies—Litigation’’ and Item 8, ‘‘Financial Information—Legal Proceedings’’
for more information about these actions. These product liability claims, if
      successful, could have a material adverse impact on the Company.




The
      Company maintains separate product liability insurance policies for the United
      States and the other markets in which it sells its 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, there can
      be
      no assurance that product liability claims will be covered by such insurance
      or
      will not exceed such insurance coverage limits. Also, in the event that any
      of
      the Company’s products proves to be defective, the Company may be required to
      recall or redesign such product. A product liability claim or series of claims
      brought against the Company with respect to uninsured liabilities or in excess
      of the Company’s insurance coverage, or any claim or product recall that results
      in significant cost to or adverse publicity against the Company, could have
      a
      material adverse effect on the Company’s business, financial condition and
      results of operations.




***Risk
      of Exchange Rate Fluctuations***




The
      Company sells its products in many parts of the world and, as a result, the
      Company’s business is affected by fluctuations in currency exchange rates. The
      Company is exposed to foreign currency exchange rate risk because the mix of
      currencies in which its costs are denominated is different from the mix of
      currencies in which it earns revenues. In 2005, approximately 76% of the
      Company’s selling and general and administrative expenses and approximately 93%
      of the Company’s research and development expenses were denominated in euro,
      while approximately 42% of the Company’s sales were denominated in currencies
      other than euro (primarily the U.S. dollar and the Japanese yen). 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.
      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 the Company’s revenues which
      may not be offset by an equal reduction in operating expenses and would
      therefore negatively impact operating profitability. The Company from time
      to
      time enters into foreign exchange forward sale contracts to hedge against
      fluctuations in the exchange rates of the principal foreign currencies in which
      its 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 the Company’s results of operations. As
      of December 31, 2005, the Company had three options to hedge against Japanese
      yen for a total nominal amount of JPY45 million (i.e. €331 thousand), an amount
      of JPY15 million each, expiring on March, June and September 2006 respectively
      and two options to hedge against US$ for a total nominal amount of US$200
      thousand (i.e. €160 thousand), an amount of US$100 thousand each, expiring on
      February and April 2006. As of March 31, 2006, the Company had three new foreign
      exchange sale contracts, one for the Japanese yen and two for U.S. dollars.
      In
      addition, since any dividends that may be declared by the Company will be
      denominated in euro, exchange rate fluctuations will affect the U.S. dollar
      equivalent of any dividends received by holders of ADSs.




8


***Potential
      Fluctuations in Results of Operations***




The
      Company’s 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 the Company’s products, changes in pricing policies by the Company or
      its competitors, new product announcements by the Company or its competitors,
      customer order deferrals in anticipation of new or enhanced products offered
      by
      the Company or its competitors, product quality problems and exchange rate
      fluctuations. Furthermore, because the Company’s main products have relatively
      high unit prices, the amount and timing of individual orders can have a
      substantial effect on the Company’s results of operations in any given
      quarter.







**Item
      4. Information on the Company**





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




**History
      and Development of the Company**




Founded
      in 1979, the Company originally specialized in the manufacturing and
      distribution of lithotripters (device which uses shockwaves to disintegrate
      urinary calculi) and produced the first piezo-electric lithotripter (using
      electric shocks produced by a piezo-component) in 1985. In 1994, the Company
      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 acquired by the
      Company 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, the Company sold its 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, the Company reorganized its management structure and created two separate
      operating divisions, the HIFU division and the UDS division. The implementation
      of the new corporate structure consolidated the management structure of the
      Company 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.




9


On
      February 25, 2004, the Company and HealthTronics finalized a distribution
      agreement based on the terms outlined in a letter of intent. On January 28,
      2005, conforming the distribution agreement and as per the approval of the
      January 29, 2004 extraordinary shareholders’ meeting, 1,000,000 warrants were
      allocated to HealthTronics. These warrants can be exercised upon the completion
      of certain milestones linked to the grant of the Ablatherm (PMA) and certain
      minimum sales of lithotripters in the United States.




On
      December 29, 2005, the Company and HealthTronics entered into an amendment
      to
      the distribution agreement, whereby HealthTronics decided to focus all its
      efforts on implementing Ablatherm clinical trials in the United States to gain
      FDA approval, and not to pursue distribution of the Company's lithotripters
      in
      the United States. The 200,000 warrants that had been issued to HealthTronics
      were then cancelled, as the conditions precedent to their exercise were directly
      linked to future purchases of lithotriptors manufactured by the
      Company.




The
      Company’s legal name is EDAP TMS S.A. and its 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. The Company’s principal executive offices are located at Parc
      d’Activités la Poudrette- Lamartine, 4/6, rue du Dauphiné, 69120 Vaulx-en-Velin,
      France and its telephone number is +33 (0) 4 72 15 31 50. On July 1, 2004,
      the
      Company closed its U.S. offices, but retained EDAP Technomed Inc as a Delaware
      registered company. Mr. Lee Sanderson, CPA, 945 Concord Street, Framingham,
      MA01701, USA is the Company's agent for service of process.




**Business
      Overview & Strategy**




The
      Company is engaged, through its HIFU and UDS divisions, in the development,
      production and marketing of minimally invasive medical devices, mainly for
      urological diseases. The Company believes that the creation of these two
      operating divisions has allowed it to expand its market share by optimizing
      worldwide distribution capabilities, all of which is coordinated through the
      Company’s subsidiaries. It also allows for cost synergies, mainly in
      manufacturing and administrative expenses.




EDAP
      TMS
      S.A. is a holding company and is responsible for providing common services
      to
      its subsidiaries, performing the consolidation of the financial statements,
      complying with 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 the Company.




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




**Organizational
      Structure**




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





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






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


(2)
            EDAP
                Technomed Inc is still registered in the Delaware and maintained
                as a
                dormant company.




10


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




The
      Company’s HIFU division consists of two wholly owned and fully consolidated
      subsidiaries: EDAP S.A. (‘‘EDAP’’), a French Corporation, and EDAP Technomed
      Srl, an Italian Corporation. The HIFU division also has branch offices in
      Germany and Russia. The HIFU division is engaged in the development and
      marketing of medical devices based on HIFU technology for the minimally invasive
      treatment of urological and other clinical indications. The HIFU division had
      total revenues of €7.9 million during the fiscal year ended December 31,
      2005




***HIFU
      Division Business Overview***




The
      HIFU
      division currently develops and markets devices for the minimally invasive
      destruction of certain types of localized tumors using HIFU technology. HIFU
      technology uses a high-intensity convergent ultrasound beam generated by high
      power transducers to produce heat. HIFU technology is intended to allow the
      surgeon to destroy a well-defined area of diseased tissue without damaging
      surrounding tissue and organs, thereby eliminating the need for incisions,
      transfusions and general anaesthesia and associated complications. The
      Ablatherm, a HIFU-based device developed and marketed by the HIFU division
      for
      the treatment of organ-confined prostate cancer, referred to as T1-T2 stage.
      Ablatherm can be used for patients who are not candidates for surgery or who
      have failed a radiotherapy treatment. Ablatherm is approved for commercial
      distribution in the European Union, Canada, South Korea and Russia, and clinical
      trials in the United States have started, with the assistance of the Company’s
      U.S. partner, HealthTronics. The HIFU division had a fixed installed base of
      49
      Ablatherm machines worldwide and 106 clinical sites were using this technology
      as of March 31, 2006.




In
      addition to developing and marketing HIFU devices, the HIFU division also
      generates revenues from the leasing of this equipment, as well as from the
      sale
      of disposables, spare parts and maintenance services. The Company is developing
      a HIFU mobile treatment activity which enables to provide access to the HIFU
      technology without an initial investment. Hospitals and clinics perform
      treatments using the devices and remunerate the Company 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 will become
      more
      attractive, leading to the sale of the device in some of the larger
      locations.




***HIFU
      Division Business Strategy***




The
      HIFU
      division’s business strategy is to capitalize on its expertise in HIFU and its
      position in urology to achieve long-term growth as a leader in the development,
      marketing and distribution of minimally invasive medical devices for urological
      and other indications, using HIFU technology, while preserving patient quality
      of life. The HIFU division believes that minimally invasive treatments using
      HIFU could provide an alternative to current invasive therapies on the basis
      of
      reduced cost and reduced morbidity for a number of different indications. The
      key elements of the HIFU division’s strategy to achieve that objective
      are:




·
            *Provide
                Minimally Invasive Solutions to Prostate Cancer using
                HIFU*.
                Building upon the Company’s established position in the ESWL market of the
                UDS division, the HIFU division is striving to become the leading
                provider
                of this minimally invasive treatment option for prostate cancer.
                It
                believes 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. The HIFU division believes
                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 achieves this through a direct sales network in
                key
                European countries and through selected distributors in other European
                countries, through the distribution platform of the UDS division
                in Asia,
                and in partnership with HealthTronics in the United States. The HIFU
                division has built a strong clinical credibility based on clinical
                articles published in peer reviewed journals. The Company ensures
                effective patient and physician education through a focused communication
                program.




·
            *Achieve
                Long-Term Growth by Expanding HIFU Applications Beyond Prostate
                Cancer*.
                The HIFU division’s long-term growth strategy is to apply its HIFU
                technology toward the minimally invasive treatment of indications
                beyond
                prostate cancer. The HIFU division believes 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.’’ However, the HIFU division
                increased spending on research and development (‘‘R&D’’) projects in
                2005 to develop HIFU applications beyond prostate cancer The division
                is
                considering pursuing increasing R&D spending in 2006 and onwards to
                strengthen its technological leadership in HIFU and expand it beyond
                urology.




11


***HIFU
      Products***




Currently,
      the only commercial product produced by the HIFU division utilizing HIFU
      technology is the Ablatherm. The Ablatherm treats organ-confined prostate cancer
      and is cleared for distribution in the European Union, South Korea, Canada,
      Australia, New Zeland and Russia. Clinical trials are underway in the United
      States, in partnership with HealthTronics. The Company has developed the
      Ablatherm, an ultrasound guided HIFU device for the treatment of organ-confined
      prostate cancer. The Ablatherm consists of a treatment module, a control table
      with a computer and a computer screen, and a diagnostic ultrasound device
      connected to the treatment module. After insertion of an endorectal probe,
      the
      physician visualizes the prostate and defines the area to be treated. The
      computer automatically calculates the optimum treatment distribution of lesions.
      During the treatment, the transducer automatically moves and fires at each
      predefined lesion until the entire volume has been treated, while controlling
      and imaging the treatment in real time thanks to its integrated imaging system.
      Cell destruction by HIFU is accomplished by a combination of thermal and
      cavitation effects caused by focused application of piezoelectric-generated
      high-intensity ultrasound. The procedure is generally performed under spinal
      anaesthesia.




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




As
      of
      March 31, 2006, the HIFU division’s patent portfolio contained 56 patents
      (consisting of 26 in the United States, 23 in the European Union and Japan
      and 7
      in Israel) covering key technologies relating to HIFU systems and associated
      software.




During
      2005 one patent covering obsolete technology has been abandoned in the United
      States. Two new patents, one covering the HIFU dedicated coupling liquid and
      the
      other one covering a new probe design for extracorporeal use, have been obtained
      in Europe. An additional patent covering transducer design has been granted
      in
      Israel. Finally a new patent covering the combination of thermal and cavitation
      effect for tissue necrosis has been granted in Japan.




Additional
      patents covering certain other aspects of the Company’s HIFU technology in the
      European Union, the United States and Japan are still in the examination
      process. Among these patents, some of them are dedicated to the development
      of
      small transducers for High Intensity Contact Ultrasound (HICU).




Although
      the HIFU division believes that its HIFU patents are valid and should be
      enforceable against third parties and that its patent applications should,
      if
      successfully pursued, result in the issuance of additional enforceable patents,
      there can be no assurance that any or all of these patents or patent
      applications will provide effective protection for the HIFU division’s
      proprietary rights in such technology. The HIFU division’s HIFU devices, as they
      are currently or may in the future be designed, may also be subject to claims
      of
      infringement of patents owned by third parties, which could result in an adverse
      effect on the HIFU division’s ability to market HIFU systems.




As
      part
      of the reorganization of the Company into two separate operating units, the
      Company transferred the assets and related intellectual property of the HIFU
      research program to the HIFU division.




In
      August
      2004, the Company licensed its HIFU technology for the specific treatment of
      the
‘‘cervicofacial’’ lesions, including the thyroid, to Theraclion, a French
      company created by the former R&D Director of the Company. This license
      agreement allows for the payment of certain royalties calculated on the basis
      of
      Theraclion’s future sales of devices. The Company determined that it could not
      invest in these specific applications for the time being, and this license
      agreement therefore allows Theraclion to pursue the development of HIFU for
      this
      application. The Company owns no interest in Theraclion.




12


***HIFU
      Division Clinical and Regulatory Status***




The
      HIFU
      division has conducted an extensive clinical trial for the Ablatherm in the
      European Union. This trial, the European Multicentric Study, involved a total
      of
      652 patients suffering from localized prostate cancer and included six sites
      in
      France, Germany and The Netherlands. The primary goals of the trial were to
      assess the safety and effectiveness of the Ablatherm.




There
      are
      primarily two methods to evaluate the presence of cancerous tissue in the
      prostate. The first method is based on biopsies. A sextant biopsy is performed
      inside the prostate to reveal the presence of a tumor. The second method is
      based on a blood test for the Prostate Specific Antigen (‘‘PSA’’), which,
      although not specific to cancer tumors, measures the proliferation of cells
      inside the prostate.




An
      interim analysis performed on the first 559 patients included 402 patients
      treated with the Ablatherm device as a first-line therapy. Of these patients,
      81.4% had a normal PSA and 87.2% had negative biopsies at the last follow-up
      and
      were considered as cancer free. The trials also included 157 patients who
      underwent an Ablatherm treatment as a salvage therapy after a previous failed
      therapy (hormonotherapy, radiation or prostatectomy). Of these patients, 80.7%
      and 67.9% had negative biopsies and normal PSA after treatment,
      respectively.




Based
      on
      these results, the Company obtained, in May 1999, a CE Marking which allows
      the
      Company 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. The Company retrieved the
      application in 2005 in order to update it and review the process. The process
      of
      requesting approval to market the Ablatherm in Japan might be long and may
      never
      result in the approval to market the Ablatherm in Japan. See Item 3, ‘‘Key
      Information—Risk Factors—Dependence on HIFU Technology.’’




In
      2001,
      the French Urology Association (‘‘AFU’’) conducted an independent clinical trial
      in order 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
      enrolment was completed in an 11-month period with 117 patients included.
      Patient follow-up is ongoing, with intermediate assessment at one year. The
      two
      year follow-up results were presented at the AFU congress in November 2004.
      Follow-up with these patients will continue for the next two years to evaluate
      the long-term efficacy of the treatment.




In
      March
      2004, a new treatment protocol concerning the treatment of patients who failed
      radiotherapy was approved by French authorities. The Company obtained CE
      Marking, which currently allows it to market this new Ablatherm treatment
      option.




In
      February 2004, the Company entered into a distribution agreement with a
      subsidiary of HeathTronics Surgical Services, Inc. (‘‘HealthTronics’’). The
      terms of the distribution agreement grant HealthTronics the right to pursue
      market approval from the FDA for the Ablatherm. When and if HealthTronics
      receives market approval from the FDA, HealthTronics will be granted exclusive
      distribution rights for the Ablatherm in the United States. The company
      continues to work with its U.S. partner, HealthTronics, in pursuit of clinical
      trials for the Ablatherm device. HealthTronics
      has obtained FDA approval for starting a clinical trial of Ablatherm versus
      cryotherapy. The clinical trial will enroll 402 localized prostate cancer
      patients in 13 centers. The first patient was enrolled on May 4, 2006.





In
      2005,
      a clinical trial was started in France to validate the efficacy and safety
      of
      Ablatherm as rescue treatment in patients after brachytherapy failure. Results
      will be ready by December 2006.




***HIFU
      Division Manufacturing***




The
      HIFU
      division’s policy is to subcontract the manufacture of its devices and
      accessories, including disposables. The HIFU division purchases all of the
      devices and accessories, including disposables used in its marketing and sales
      functions, from a single supplier, Technomed, part of the UDS division of the
      Company. It is the HIFU division’s belief that, since its only supplier is also
      a subsidiary of the same parent, there is no significant risk associated with
      the use of a single supplier.




13


***HIFU
      Division Quality and Design Control***




The
      HIFU
      division has obtained the ISO 9001 (V:2000) and ISO 13485 (V:2003)
      certifications which indicate compliance with international standards for
      quality and design control.




The
      Ablatherm is available for commercial distribution in Canada, the European
      Union, South Korea, Russia, Australia and New Zeland.




***HIFU
      Division Market Potential***




Prostate
      cancer is currently the first or second most common form of cancer among men
      in
      many populations. In the United States, the American Cancer Society estimates
      that approximately 232,090 new cases of prostate cancer were diagnosed in 2005
      and that there will be approximately 234,460 new cases of prostate cancer
      diagnosed in 2006, out of which an estimated 70% diagnosed with localized
      prostate cancer. Additionally, the HIFU division believes, based on figures
      provided by the World Health Organization, that the worldwide incidence of
      localized prostate cancer is approximately twice this U.S. figure. A more
      effective diagnostic method for prostate cancer, the PSA test, has increased
      public awareness of the disease in developed countries since its introduction.
      The PSA test measures the blood level of a protein, the PSA, which is produced
      only by the prostate. PSA levels jump sharply when cancer is present. Prostate
      cancer is an age-related disease, and its incidence in developed countries
      is
      expected to increase as the population ages.




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, gynaecological, bladder, kidney, liver, brain, pancreatic
      and
      retroperitoneal tumors. However, the expansion of HIFU to other indications
      will
      require a significant investment in research and development by the Company,
      an
      investment which the Company will be undertaking gradually while focusing on
      the
      acceptance of HIFU as a treatment for localized prostate cancer.




***HIFU
      Competition***




The
      principal current therapies for prostate cancer carry side effects that can
      very
      seriously affect a patient’s quality of life. One of the current therapies is
      radical prostatectomy (surgery), which involves the ablation of the entire
      prostate gland. Radical prostatectomy requires several days of hospital stay
      and
      several weeks of recovery, usually with catheterization, and may result in
      partial and/or total urinary incontinence. In addition, it almost invariably
      renders patients impotent. A new surgical technique, nerve-sparing
      prostatectomy, has been developed to address that problem. However, the
      procedure can only be applied when the tumor is not located close to the surface
      of the prostate and requires a very skilled surgeon. Other therapies for
      localized prostate cancer include brachytherapy, a therapy that involves the
      implantation of radioisotopes into the prostate gland, external beam
      radiotherapy and cryotherapy.




The
      HIFU
      division’s devices compete with all current treatments for localized tumors,
      which include surgery, brachytherapy, radiotherapy, cryotherapy and
      hormonotherapy. The HIFU division believes 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, has developed a device using HIFU technology to treat uterine fibroids.
      St. Jude Medical has developed a device using HIFU to treat atrial fibrillation;
      Haifu, a Chinese company developing HIFU products addressing various cancers
      recently signed a development partnership agreement with Siemens Medical
      Solutions to offer a HIFU device coupled with IRM imaging system. Finally,
      Chinamed, a Chinese company is also developing HIFU products for various types
      of cancer tumors, but the company is only marketing its HIFU products in China.
      Certain existing and potential competitors of the HIFU division may have
      substantially greater financial, research and development, sales and marketing
      and personnel resources than the HIFU division or its parent and may have more
      experience in developing, manufacturing, marketing and supporting new products.
      The HIFU division believes 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.




14


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




The
      HIFU
      division markets and sells its products through its own direct marketing and
      sales organization as well as through third-party distributors and agents.
      The
      HIFU division established direct marketing and sales forces in France, Germany,
      Russia and Italy, which currently represent EDAP’s largest markets. The Company
      opened a direct representative office in Moscow to increase its penetration
      of
      this large, key market. Additionally, the HIFU division markets and sells its
      products through the Company’s UDS division’s distribution platform in South
      Korea and South East Asia and further markets its products through selected
      agents and third-party distributors in several countries. The Company finalized
      its partnership in the United States with HealthTronics in February 2004.
      HealthTronics is now responsible for U.S. clinical trials, and it has exclusive
      distribution rights in the United States for the Ablatherm, when and if it
      receives FDA approval.




The
      HIFU
      division’s customers are located worldwide and have historically been
      principally public and private hospitals and urology clinics. The HIFU division
      believes that as it increases its customer base it will gain further access
      to
      the urological community, which will enable it to monitor the urological market,
      introduce new products and conduct trials under satisfactory conditions. No
      single customer of the HIFU division represents a significant portion of the
      division’s installed base; however, if the partnership with HealthTronics is
      successful, HealthTronics could become a significant customer of the HIFU
      division in the future.




The
      HIFU
      division’s marketing efforts include the organization of training programs for
      urologists worldwide and education of patients on the availability of HIFU
      technology to treat localized prostate cancer, through a comprehensive media
      and
      web program.




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




The
      UDS
      division consists of four wholly owned and fully consolidated subsidiaries
      of
      the Company: TechnomedMedical Systems S.A. (‘‘TMS’’), a French corporation, EDAP
      Technomed Co. Ltd, a Japanese corporation, EDAP Technomed Sdn Bhd, a Malaysian
      corporation and EDAP Technomed Inc., a U.S. corporation. The UDS division also
      includes a South Korean branch office, Technomed Korea. The UDS division is
      engaged in the development, marketing, manufacturing and servicing of medical
      devices for the minimally invasive diagnosis or treatment of urological and
      other clinical indications. The UDS division had total revenues of €16.2 million
      during the fiscal year ended December 31, 2005.




***UDS
      Division Business Overview***




The
      UDS
      division’s primary business is producing and marketing devices, known as
      lithotripters, for the treatment of urinary tract stones by means of ESWL
      technology. ESWL uses extracorporeal shockwaves, which can be focused at urinary
      stones within the human body, to fragment urinary stones, thereby permitting
      their natural elimination and preventing the need for incisions, transfusions,
      general anaesthesia, and the resulting complications. The UDS division currently
      manufactures two models of lithotripters: the Sonolith Praktis, which is
      available for commercial distribution in the European Union, Japan, Canada
      and
      the United States, and the Sonolith Vision, which is available for commercial
      distribution in the European Union, Japan and Canada only. The UDS division
      had
      an installed base of 424 ESWL lithotripters worldwide as of March 31,
      2006.




In
      addition to its manufacturing and selling of lithotripters, the UDS division
      also generates revenues from the leasing of lithotripters, as well as from
      the
      sale of disposables, spare parts and maintenance services, including the
      maintenance and services business of HIFU-related devices and accessories on
      behalf of the HIFU division. The UDS division, as an additional part of its
      contract manufacturing business, manufactures HIFU related devices and
      accessories, including disposables, on behalf of the HIFU division. It also
      derives revenues from the distribution of Prostatron parts and related services,
      in Japan and Italy under the Distribution Agreement entered into with Urologix
      in October 2000.




Under
      the
      Supply Agreement entered into with Urologix in connection with the sale of
      the
      Company’s Prostatron business in October 2000, the UDS division previously
      manufactured certain components of the Prostatron. Although the Supply Agreement
      expired in October 2003, the UDS division continued to manufacture machines
      on
      behalf of Urologix in 2004 to produce the machines that had been ordered prior
      to the expiration of the Agreement. In 2005, no more machines were manufactured
      and the UDS division does not expect to generate any additional revenues from
      the supply of machines to Urologix. The UDS division expects to derive only
      a
      small amount of revenues related to the sales of Prostatron parts.




15


***UDS
      Division Business Strategy***




The
      UDS
      division’s business strategy is to capitalize on its expertise in ESWL and its
      position in urology to achieve long-term growth as a leader in the development,
      production, marketing and distribution of minimally invasive medical devices
      for
      urological and other clinical indications. To achieve this strategic goal,
      the
      UDS division intends to capitalize and expand on its expertise as the
      manufacturer of minimally invasive devices such as its ESWL lithotripters and
      HIFU devices. The UDS division manufactures the Ablatherm and the disposable
      Ablapack on behalf of the HIFU division. All the costs related to the
      manufacturing of these machines are supported by the UDS division, which
      invoices the HIFU division at cost plus a margin and records the sales of the
      devices as revenues. The key elements of the UDS division’s strategy
      are:




·
            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. The
                UDS
                division believes that a combination of continued investment in lowering
                end-user costs and offering units that are easily adaptable to various
                treatment environments, and a commitment to quality and service will
                allow
                the UDS division to achieve this goal. See ‘‘—UDS Division
                Products’’




·
            Capitalize
                on an Established Distribution Platform in Urology by Expanding
                Distribution Possibilities. The UDS division believes that it can
                achieve
                additional long-term growth by offering its established distribution
                platform in urology to other developers of medical technologies and
                acting
                as a distributor for their devices. The UDS division’s distribution
                platform in urology consists of a series of well-established subsidiaries
                in Europe and Asia as well as a network of third-party distributors
                worldwide.




·
            Provide
                Manufacturing Solutions to Other Developers of Medical Technologies.
                Building upon its established position in the high-tech medical devices
                market, the UDS division believes that it 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. The UDS division believes that its FDA-inspected and
                ISO 9001
                (V:2000) and ISO 13485 (V:2003) certified facilities allow it to
                offer
                manufacturing services to a wide range of potential medical equipment
                developers.




***UDS
      Division Products***




The
      UDS
      division offers the Sonolith Praktis to small and mid-size hospitals, while
      the
      Sonolith Vision is offered to large hospitals which 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.




16
 
 **Product**
                **Procedure**
                **Development
                    Stage**
                **Clinical
                    and Regulatory Status**Sonolith
                Electroconductive
                Commercial
                Approved
                    for distribution:Praktis
                treatment
                    of
                Production
                European
                    Unioncompact
                    lithotripter
                urinary
                    stones
                
                JapanUnited
                    StatesCanadaRussiaSouth
                    KoreaAustraliaNew
                    ZelandSonolith
                    Vision
                Electroconductive
                Commercial
                Approved
                    for distribution:treatment
                    of
                Production
                European
                    Unionurinary
                    stones
                
                JapanCanadaSouth
                    KoreaAustraliaNew
                    Zeland




The
      Sonolith Praktis and the Sonolith Vision rely on an electroconductive technology
      for shockwave generation. The electroconductive technology, which is derived
      from the electrohydraulic technology on which the first ESWL lithotripters
      were
      based, permits improved focusing of the shockwave, reduces the variability
      in
      the shockwave pressure and allows a better transfer of energy to the calculus,
      resulting 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. In
      order
      to increase its penetration of the market segment of smaller hospitals and
      outpatient clinics, the UDS division developed the Sonolith Praktis, an
      electroconductive lithotripter designed for smaller clinics which is more
      compact than the Sonolith Vision, a fully dedicated and integrated
      electroconductive lithotripter for larger hospitals.




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




As
      of
      March 31, 2006, the UDS division’s patent portfolio contained 16 patents
      (consisting of 6 in the United States, 8 in the European Union and Japan and
      2
      in Israel) covering key technologies relating to ESWL systems and associated
      software capabilities.




During
      2005, one patent covering obsolete technology has been abandoned in the United
      States.




Additional
      patents covering certain other aspects of the Company’s ESWL electroconductive
      and piezoelectric technologies in the European Union, the United States and
      Japan are still in the examination process.




The
      UDS
      division’s patents in ESWL cover certain technologies relating to the
      association of a piezoelectric treatment head with an ultrasound imaging probe,
      as well as the electrodes for the Sonolith line. Following the settlement in
      1989 of patent infringement actions against Richard Wolf GmbH and Diasonics
      Inc., TMS granted both companies a non-exclusive license to use its patented
      technology. The related patent expired in 2004, and thus the corresponding
      license is no longer valid. The UDS division’s ongoing research and development
      objectives in ESWL are to further increase the cost-effectiveness and clinical
      efficacy of its products.




***UDS
      Division Regulatory Status***




The
      Sonolith Praktis is available for commercial distribution in the United States,
      Canada, the European Union, South Korea, Australia, New Zeland and Japan. The
      Sonolith Vision is available for commercial distribution in the European Union,
      Canada, South Korea, Australia, New Zeland and Japan. The UDS division continues
      to provide disposables, replacement parts and services for the current installed
      base of LT02 machines, even though the Company has discontinued the manufacture
      of these machines.




***UDS
      Division Market Potential***




The
      Company estimates 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.




17


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. The UDS
      division believes 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. The UDS division believes 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.




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




***UDS
      Division Competition***




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




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




The
      UDS
      division markets, sells and services its products through its own direct sales
      and  service
      organization as well as through third-party distributors and agents. The UDS
      division has an established direct sales and service platform in France, Italy,
      Japan, South Korea and Malaysia and markets its products through agents and
      third-party distributors in several countries. In December 2002, the UDS
      division closed its direct sales and service office in the United States. As
      of
      February 2004, HealthTronics has been appointed distributor in the United States
      for the Company’s Sonolith Praktis lithotripters. As part of the Company’s
      Agreement with HealthTronics related to their responsibility in obtaining the
      FDA approval for the Ablatherm device, HealthTronics has been entitled to
      exercise part of the warrants granted to them if they purchased a certain number
      of lithotripters per year. On December 29, 2005, HealthTronics decided to focus
      all its efforts on implementing Ablatherm clinical trials in the United States
      to gain FDA approval, and not to pursue distribution of the Company's
      lithotripters in the United States. The 200,000 warrants that had been issued
      to
      HealthTronics were then cancelled, as the conditions precedent to their exercise
      were directly linked to future purchases of lithotripters manufactured by the
      Company.




The
      UDS
      division’s customers are located worldwide and have historically been
      principally public and private hospitals and urology clinics. It believes that
      its customer base provides it with excellent access to the urological community
      and enables it to monitor the urological market, introduce new products and
      conduct trials under satisfactory conditions. No single customer of the UDS
      division represents a significant portion of the division’s installed base. The
      UDS division’s marketing efforts include the organization of training programs
      for urologists worldwide.




***UDS
      Division Manufacturing Services and Distribution***




The
      UDS
      division manufactures the Ablatherm on behalf of the HIFU division and
      Prostatron spare parts for Urologix. It believes that it can extend its
      outsourced services to provide device and disposable development and
      manufacturing services to a wide range of medical equipment development
      companies. The UDS division’s current operations consist of custom design,
      development and manufacture of medical products, in its manufacturing facility
      that is FDA-approved and certified under international standards ISO 9001 and
      ISO 13485.




The
      UDS
      division is also pursuing various distribution options that use its strong
      network of worldwide subsidiaries and agents. Currently, the UDS division
      distributes products on behalf of Urologix in Italy and Japan, on behalf of
      Andromeda in Japan, and on behalf of the HIFU division in Malaysia and South
      Korea. The UDS division believes that it 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.




18


***UDS
      Division Manufacturing***




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




In
      addition, the manufacturing operations of TMS (a French corporation that is
      the
      primary manufacturing organization of the UDS division) must comply with the
      GMP
      regulations enacted by the FDA, which establish requirements for assuring
      quality by controlling components, processes and document tractability and
      retention, among other things. TMS’s facilities are also subject to scheduled
      inspections by the FDA. TMS has obtained the ISO 9001 (V:2000) and ISO 13485
      (V:2003) certifications, which indicate compliance by TMS’s manufacturing
      facilities with international standards for quality assurance, design and
      manufacturing process control. TMS also complies with the applicable
      requirements that will allow it to affix the CE Marking to certain of its
      products. See ‘‘—Government Regulation—Healthcare Regulation in the United
      States’’ and ‘‘—Government Regulation—Healthcare Regulation in the European
      Union.’’




**Property
      and Equipment**




The
      Company has 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. The Company
      believes that the terms of the lease reflect commercial practice and market
      rates. The manufacturing facility, and principal offices, which the Company
      utilizes to manufacture and/or assemble all of its products, has ISO 9001 and
      ISO 13485 certifications. The Company is not aware of any environmental issues
      that could affect utilization of the facility.





In
      addition, the Company rents 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 the Company’s major markets, in particular the United States, the
      European Union and Japan, is a significant factor in the development and
      marketing of the Company’s products and in the Company’s ongoing research and
      development activities. The Company is principally subject to regulation of
      medical devices and of the healthcare system.




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




The
      Company and its products are regulated in the United States by the FDA under
      a
      number of statutes including the Federal Food, Drug and Cosmetic Act (‘‘FDC
      Act’’). Pursuant to the FDC Act, the FDA regulates the preclinical and clinical
      testing, manufacturing, labeling, distribution, sale, marketing, advertising
      and
      promotion of medical devices in the United States. Medical devices are
      classified in the United States into one of three classes, Class I, II or III,
      on the basis of the controls reasonably necessary to ensure their safety and
      effectiveness. Class I devices are those whose safety and effectiveness can
      be
      ensured through general controls, such as labeling, premarket 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 premarket 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 the Company’s
      products are classified as Class III products. Before a new Class III device
      may
      be introduced on the market, the manufacturer generally must obtain FDA approval
      of a PMA. The PMA process is expensive and often lengthy, typically requiring
      several years, and may never result in approval. The manufacturer or the
      distributor of the device must obtain an IDE from the FDA prior to commencing
      human clinical trials in the United States in support of the PMA.




19


Advertising
      and promotional activities in the United States are subject to regulation by
      the
      FDA and, in certain instances, by the Federal Trade Commission. The FDC Act
      also
      regulates the Company’s quality control and manufacturing procedures by
      requiring the Company to demonstrate and maintain compliance with current GMP
      regulations. The Company’s manufacturing facilities are in compliance with GMP
      regulations. No major deficiencies have been observed during inspections carried
      out by FDA auditors in the past few years.




***Healthcare
      Regulation in the European Union***




In
      the
      European Union, the Company has received the ISO 9001 (V:2000) and ISO 13485
      (V:2003) certifications, showing that the Company complies with standards for
      quality assurance and manufacturing and design process control. In the European
      Union, the Company’s products are also subject to legislation implementing the
      European Union Council Directive concerning medical devices (the ‘‘Medical
      Device Directive’’). The Medical Device Directive provides that medical devices
      that meet certain safety standards must bear a certification of conformity,
      the
‘‘CE Marking.’’ Except in limited circumstances, Member States may not prohibit
      or restrict the sale, free movement or use for its intended purpose of a medical
      device bearing the CE Marking. Medical devices marketed throughout the European
      Union must comply with the requirement of the Medical Device Directive to bear
      a
      CE Marking (subject to certain exceptions). All of the Company’s 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 which apply to medical
      devices in order 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 the Company are Class IIb devices.




***Healthcare
      Regulation in Japan***




The
      import and sales of medical devices in Japan is regulated by the Ministry of
      Health, Labour and Welfare (‘‘the MHLW’’) under the license "Marketing
      Authorization" for the importer. The Company’s Japanese subsidiary has obtained
      a general license and has also obtained a specific approvals to import those
      of
      the Company’s products that are approved in Japan. The MHLW also administers
      various national health insurance programs to which each Japanese citizen is
      required to subscribe. These programs cover, inter alia, 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.




20


**Item
      5. Operating and Financial Review and Prospects**




The
      following discussion of the results of operations and liquidity and capital
      resources of the Company with respect to the fiscal years ended December 31,
      2005, 2004 and 2003 is based on the Consolidated Financial Statements included
      elsewhere in this Annual Report and should be read in conjunction with the
      Consolidated Financial Statements. The Consolidated Financial Statements have
      been prepared in accordance with U.S. GAAP.




The
      following discussion contains certain forward-looking statements that involve
      risks and uncertainties. See ‘‘Forward-Looking Information’’ elsewhere in this
      Annual Report.




**Critical
      Accounting Policies**




The
      Company’s discussion and analysis of its 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 the
      Company 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, the Company evaluates its
      estimates, including those related to revenue recognition, accounts receivable,
      bad debts, inventories, warranty obligations, litigation and deferred tax
      assets. The Company bases its estimates on historical experience and on various
      other assumptions that are believed to be reasonable under the circumstances,
      the results of which 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.




The
      Company believes its 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***




The
      Company recognizes revenues from the sale of equipment at the point where no
      significant vendor obligation, payment contingent upon customer financing or
      acceptance criteria that can be subjectively interpreted or tied to the use
      of
      the equipment exist, and when title to the machine passes (depending on the
      terms of the contract, either upon shipment or delivery) to the customer who
      has
      the intent and ability to pay in accordance within the fixed and determinable
      contract terms. For sales that do not immediately meet all of the criteria
      for
      recognition at the time of shipment or delivery (as the contract terms dictate)
      revenue is recognized when the contingency is resolved.




Revenues
      related to service and maintenance contracts are recognized when services are
      rendered. Billings or cash receipts in advance of service due under maintenance
      contracts are recorded as deferred revenue and are recognized in equal monthly
      installments over the course of the contract.




Revenues
      related to the leasing of devices are recognized on a linear basis. Revenues
      related to the sale of Ablatherm treatments invoiced on a
      "revenue-per-procedure" (‘‘RPP’’) basis are recognized once the treatment has
      been completed.




***Warrants***




In
      accordance with EITF 96-18, the Company accounts for the warrants issued to
      HealthTronics under the distribution agreement based on their fair value
      measured at the date of milestone achievement. The related amount, which is
      a
      non-cash charge, is then recorded either as an operating expense (specifically,
      a clinical trial expense) for warrants that vest when HealthTronics achieves
      a
      milestone in the FDA approval process for the Ablatherm, or as a reduction
      of
      revenue if the warrants vest as a result of HealthTronics purchase of a
      specified number of lithotripters or Ablatherm.




The
      Company uses the Black-Scholes options pricing model to determine the fair
      value
      of the warrants that vest pursuant to the distribution agreement. The model
      was
      developed to estimate the fair value of traded options that have no vesting
      restrictions and are fully transferable. The application of the model to the
      warrants therefore requires the use of subjective assumptions, including
      historical share price volatility, the expected life of the warrants and the
      Company's risk-free interest rate. A change in one or more of these assumptions
      could result in a material change to the estimated fair value of the vested
      warrants.




21


***Warranty***




The
      Company provides 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 the Company engages in product quality
      programs and processes, its 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 the Company’s estimates, revisions to the provision
      for estimated warranty liability would be required.




***Accounts
      Receivable***




The
      Company generates a majority of its revenues and corresponding accounts
      receivable from sales of medical equipment, spare parts, maintenance and service
      to public and private hospitals and physicians worldwide. The Company performs
      initial credit evaluations of its customers and adjusts credit terms based
      upon
      customers’ creditworthiness as determined by such things as their payment
      history, credit ratings and the Company’s historical experiences.




***Allowance
      for Doubtful Accounts***




The
      Company evaluates the collectibility of its accounts receivable based on the
      individual circumstances of each customer on a quarterly basis. In circumstances
      where the Company is aware of a specific customer’s inability to meet its
      financial obligations to the Company (e.g., bankruptcy filings, substantial
      downgrading of credit scores), the Company records a specific reserve for bad
      debts against amounts due to reduce the net recognized receivable to the amount
      the Company reasonably believes it 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 the Company), the
      Company’s estimates of the recoverability of amounts due to it could be reduced
      by a material amount.




***Inventories***




On
      an
      annual basis, the Company analyses its inventories for obsolescence and upon
      identification of obsolete stock the Company records a full valuation reserve.
      Inventories are stated at the lower of costs, determined by the first-in,
      first-out (‘‘FIFO’’), or market. The Company’s inventory valuation policy is
      based on a review of forecasted demand compared with existing inventory levels.
      At December 31, 2003, the Company determined that it had certain inventories
      that were not appropriately valued and therefore reserved €0.6 million against
      these inventories. At December 31, 2004, the Company determined that it had
      certain inventories that were not appropriately valued and therefore reserved
      €0.3 million against these inventories. At December 31, 2005, the Company
      determined that it had certain inventories that were not appropriately valued
      and therefore reserved €0.4 million against these inventories.




***Litigation***




The
      Company is currently a defendant in two legal proceedings, both of which are
      associated with product liability matters. During 2004, the Company settled
      a
      claim alleging a patient was injured during a Prostatron treatment procedure.
      The cost for settling this claim, $0.5 million, was covered by the Company's
      product liability insurance. Additionally, in 2003, the Company settled one
      claim (at a cost that was not material to it) and was found ‘‘not guilty’’ on
      another claim alleging fraud related to the sale of medical equipment brought,
      separately, against two of its subsidiaries. The Company believes that the
      patients’ claims in the product liability matters against the Company are
      without merit. In addition, if the claims against the Company are successful,
      the Company believes any potential damages assessed against it would be covered
      by insurance and/or by a contribution obligation of the physicians and/or the
      organization which provided services with the product. However, these product
      liability claims could have a material adverse impact on the Company. It is
      possible, moreover, that future results of operations for any particular
      quarterly or annual period could be materially affected by changes in its
      assumptions related to these proceedings. It is the policy of the Company,
      in
      the case of product liability litigation, to recognize the full amount of the
      self-insurance portion of the Company’s product liability insurance, unless a
      separate indemnification is being sought.




22


***Deferred
      Tax***




As
      of
      December 31, 2005, the Company had approximately €7 thousand deferred tax
      liabilities principally related to the impact of temporary differences between
      the amounts of assets and liabilities reported for financial reporting purposes
      and such amounts as measured in accordance with tax laws.




The
      Company also has a history of operating loss carryforwards with various future
      expirations. However, it is the Company’s policy to recognize a full valuation
      reserve against these deferred tax assets because the Company cannot be assured
      of future operating profits sufficient to utilize these assets before their
      expiration.




**Operating
      Results**




**Overview**




Total
      revenues include sales of the Company’s medical devices and sales of
      disposables, spare parts, supplies and services, both net of commissions, as
      well as other revenues.




Net
      sales
      of medical devices have historically been comprised of net sales of Prostatrons,
      ESWL lithotripters and Ablatherms. With respect to lithotripter revenues, the
      Company booked in 2004 and 2005 a non-cash charge as a reduction of revenue
      as
      the warrants it granted to HealthTronics under the distribution agreement vested
      as a result of HealthTronics purchase of a certain number of lithotripters.
      On
      December 29, 2005, HealthTronics decided not to pursue the distribution of
      the
      Company's lithotripters in the US. Therefore net sales of lithotripters will
      not
      be impacted anymore in the future by the vesting of warrants to HealthTronics
      upon the purchase of a specified number of lithotripters. With respect to
      Ablatherm revenues from sales of Ablatherm devices in 2005, the Company incurred
      a non-cash charge as a reduction of revenue as a specific category of warrants
      the Company granted to HealthTronics under the distribution agreement vested
      as
      a result of HealthTronics’ purchase of an Ablatherm device in 2005. No more
      warrants are directly linked to the purchase of additional Ablatherm devices
      and
      future revenues from sales of Ablatherm will not be offset by charges for the
      vesting of warrants. Other warrants are linked to milestones reached in pursuing
      FDA approval and will be recorded as a non-cash charge in operating expenses
      directly related to FDA trials.




The
      sale
      price of the Company’s 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.




The
      Company is developing its HIFU mobile treatment activity by initially providing
      devices to clinics and hospitals for free for a limited period, rather than
      selling the devices. These hospitals and clinics perform treatments using the
      devices and remunerate the Company on a revenue-per-procedure (“RPP”) basis
      (i.e., on the basis of the number of individual treatments provided). Net sales
      from this RPP activity include only the revenues arising from the sale of
      Ablatherm treatments procedures. The treatment procedure is invoiced and paid
      only when it is performed. With this business model, the hospital or clinic
      makes no initial investment until the increase in patient demand justifies
      the
      purchase of an Ablatherm. As a consequence, the Company is able to make
      Ablatherm treatments available to a larger number of hospitals and clinics,
      which should serve to create more long-term interest in the product. Compared
      to
      the sale of devices, this business model initially generates a smaller, but
      more
      predictable stream of revenue and, if successful, should lead to more purchases
      of Ablatherms in the long term.




Net
      sales
      of spare parts, supplies and services include revenues arising from maintenance
      services furnished by the Company for the installed base of Prostatrons, ESWL
      lithotripters and Ablatherms, and from sales of disposable parts for
      Prostatrons, ESWL lithotripters and Ablatherms, net of commissions, as well
      as
      from operating leases of the Company’s medical devices and RPP revenue related
      to the HIFU mobile treatment activity.




23


The
      Company derives a significant portion of both net sales of medical devices
      and
      net sales of spare parts, supplies and services from its operations in Asia,
      through its fully owned subsidiaries or representatives offices respectively
      in
      Japan (Edap Technomed Co. Ltd), Malaysia (Edap Technomed Sdh Bhd) and Korea
      (Edap Technomed Korea). Revenue derived from the Company's operations in Asia
      represented approximately 33% of its total revenue in 2005. Net sales of medical
      devices in Asia represented approximately 31% of such sales in 2005 and
      consisted primarily of sales of ESWL lithotripters. Net sales of spare parts,
      supplies and services in Asia represented approximately 34% of such sales in
      2005 and related primarily to ESWL lithotripters, reflecting the fact that
      approximately 44% of the installed base of the Company’s ESWL lithotripters is
      located in Asia. The Company sells its products in many parts of the world
      and,
      as a result, the Company’s business is affected by fluctuations in currency
      exchange rates. The Company is exposed to foreign currency exchange rate risk
      because the mix of currencies in which its costs are denominated is different
      from the mix of currencies in which it earns revenues. In 2005, approximately
      76% of the Company’s selling, marketing and general and administrative expenses
      and approximately 93% of the Company’s research and development expenses were
      denominated in euro, while approximately 42% of the Company’s sales were
      denominated in currencies other than euro (primarily the U.S. dollar and the
      Japanese yen). The Company’s operating profitability could be materially
      affected by large fluctuations in the rate of exchange between the euro and
      such
      other currencies. In
      order
      to minimize the Company’s exposure to exchange rate risks, the Company uses
      certain financial instruments for hedging purposes.




Reserves
      for slow-moving and obsolete inventory are determined based upon quarterly
      reviews of all inventory items. Items which are not expected to be sold or
      used
      in production, based on management’s analysis, are written down to their net
      realizable value, which is their fair market value or zero in the case of spare
      parts or disposable parts for devices that are no longer in commercial
      production.




In
      December 2003, the Company decided to restructure its organization and
      implemented a headcount reduction in 2004 in its two French operational
      divisions. This reorganization mainly entailed a reduction of operating expenses
      in research and development, marketing and manufacturing during these two years.




Consolidated
      research and development expenses include all costs related to the development
      of new technologies and products and the enhancement of existing products,
      including the costs of organizing clinical trials and of obtaining patents
      and
      regulatory approvals. The Company does not capitalize any of its research and
      development expenses, except for the expenses relating to the production of
      machines to be used in clinical trials and that have alternative future uses
      as
      equipment or components for future research projects.




Consolidated
      research and development expenses, as described above, amounted to €1.8 million,
€1.5 million and €3.1 million in 2005, 2004 and 2003, respectively, representing
      approximately 9%, 7% and 17% of total revenues in 2005, 2004 and 2003,
      respectively. The increase in research and development in 2005 compared to
      2004
      was primarily due to an increase in HIFU and ESWL development activities and
      the
      launch of new clinical studies to maintain the Company's leadership in HIFU
      for
      prostate cancer. Beginning 2006, management expects the budget for research
      and
      development expenses to increase to approximately 10% of total revenues, in
      line
      with its strategy to launch new clinical studies, thus strengthening its
      clinical credibility, to focus its efforts on getting regulatory approvals
      and
      reimbursement in key countries and to fund projects to expand the use of HIFU
      beyond the treatment of prostate cancer. Because the Company is likely to book
      a
      non-cash charge as an operating expense (specifically, a clinical trial expense)
      for warrants that would vest when HealthTronics achieves a milestone in the
      FDA
      approval process for the Ablatherm, R&D expenses could be affected in the
      future by the vesting of the HealthTronics warrants.




Selling
      and marketing expenses amounted to €3.8 million in 2005, €3.4 million in 2004
      and €4.2 million in 2003. The increase of 10% from 2004 to 2005 was primarily
      due to the Company's focus on Ablatherm-HIFU marketing. Management expects
      marketing expenses to grow in line with its efforts to increase awareness and
      educate patients and physicians on the availability of the Ablatherm-HIFU
      technology for treating localized prostate cancer.




In
      2005,
      the Company did not record any non-recurring operating expense. In 2004, the
      Company recorded a non-recurring operating expense of €0.3 million reflecting
      mainly the costs associated with the reduction of headcount initiated in 2003.
      In 2003, the Company recorded a non-recurring operating expense of €2.1 million
      reflecting mainly the costs associated with the reduction of headcount at the
      Company’s two French operating divisions. See Note 18 of the Notes to the
      Consolidated Financial Statements.




24


In
      accordance with Statement of Financial Accounting Standards No. 142 (SFAS No.
      142), ‘‘ *Goodwill
      and Other Intangible Assets* ’’,
      the
      Company no longer amortizes its goodwill on a straight line basis over its
      estimated useful life but, instead, tests it for impairment on an annual basis
      and/or whenever indicators of impairment arise. The Company did not record
      any
      charge in 2005, 2004 or 2003 for the impairment of goodwill. See Note 7 of
      the
      Notes to the Consolidated Financial Statements.




On
      February 25, 2004, 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 granted HealthTronics 1 million warrants on January
      28, 2005, each entitling HealthTronics to purchase a share of the Company at
      a
      price of U.S.$1.50 upon their vesting. The distribution agreement allows
      HealthTronics to exercise specified numbers of warrants as it meets various
      specified milestones set out in the distribution agreement, some of which relate
      to HealthTronics’s commitment to purchase a specified number of lithotripter
      units and others which relate to the completion of various stages of the
      clinical trials and the regulatory process leading to the PMA for the Ablatherm.
      On December 29, 2005, HealthTronics, through its subsidiary, and the Company
      entered into an amendment to the distribution agreement. HealthTronics
      wishes to focus its efforts on obtaining the PMA for Ablatherm and on developing
      the HIFU market potential on the US territory, and does not want to pursue
      the
      distribution of the Company's ** lithotripters
      in the US. Therefore, the Parties decided to amend the terms and conditions
      of
      some warrants and 200,000 warrants directly linked to the purchase of
      lithotripters for the years to come were then cancelled. In
      accordance with EITF 96-18, the Company accounts for the warrants issued to
      HealthTronics under the distribution agreement based on their fair value,
      measured at the date that the warrants vest (which corresponds to the date
      that
      a milestone in the distribution agreement is achieved). The related amount,
      which is a non-cash charge, is then recorded either as an operating expense
      for
      warrants that vest when HealthTronics achieves a milestone in the FDA approval
      process for the Ablatherm, or as a reduction of revenue if the warrants vest
      as
      a result of HealthTronics’s purchase of a specified number of devices. The
      non-cash charge recorded for 2004 as a reduction of revenue related to a series
      of warrants linked to HealthTronics's purchase of four lithotripters in 2004,
      in
      accordance with the terms of the agreement. The non-cash charge recorded for
      2005 as a reduction of revenue related to the vesting of a series of warrants
      linked to HealthTronics's purchase of two lithotripters and one Ablatherm in
      2005, in accordance with the terms of the Amendment to the distribution
      agreement dated December 29, 2005.




The
      Company has no control over the pace at which HealthTronics may achieve the
      milestones set forth in the distribution agreement and, consequently, the dates
      on which the warrants may vest. Because the fair valuation of the warrants
      is
      based in part on the price of the Company’s Shares on a given vesting date, and
      further because the number of warrants issued to HealthTronics represents a
      significant portion of the Company’s share capital, the amount of the non-cash
      charges that may be recorded when series of warrants vest could be large and
      subject to significant variation from period to period. Accounting for the
      cost
      of vested warrants may therefore significantly affect the Company’s reported
      income statements.




For
      the
      last several years, the Company experienced declining sale prices in the market
      for ESWL lithotripters. The Company believes that the market for ESWL
      lithotripters is now mature and has become primarily a replacement and
      maintenance market, with high equipment penetration rates driving down demand
      and increasing price competition. In addition, the trend toward more compact
      devices with lower unit sale prices is driving down unit sale prices worldwide.
      As a result of these factors, the Company expects 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.




The
      Company believes that its results of operations in the near future will be
      affected by the Company’s ability to control expenses in connection with the
      development, marketing and commercial launch of HIFU applications, including
      the
      Ablatherm. See ‘‘—Liquidity and Capital Resources.’’ Increases, if any, in
      expenses may only be offset partially in the near future by revenues arising
      from sales of HIFU devices.




The
      Company believes that its partnership with HealthTronics will help in further
      expanding its market share in placing Ablatherm devices in the U.S., when and
      if
      the PMA is granted.




See
      Item
      3, ‘‘Key Information—Risk Factors—Risk of Exchange Rate Fluctuations’’ and Item
      11, ‘‘Quantitative and Qualitative Disclosures About Market Risk’’ for a
      description of the impact of foreign currency fluctuations on the
      Company.




25


****** In
      October 2000, the Company sold its Prostatron business to Urologix. See Item
      4,
‘‘Information on the Company.’’ Historically the Company has derived a
      significant proportion of net sales of medical devices and net sales of spare
      parts, supplies and services from its Prostatron business. Following the sale
      of
      the Prostatron business, the Company continued to generate revenues from the
      manufacturing and distribution of Prostatron units and disposable parts on
      behalf of Urologix under the Supply Agreement and the Distribution Agreement,
      although significantly less than before the sale. Revenues from sales under
      the
      Supply Agreement and the Distribution Agreement represented €0.4 million or
      approximately 2% of total revenues in 2003, €0.2 million or approximately 1% of
      total revenues in 2004, and €46 thousand in 2005. The Supply Agreement
      terminated in 2003 and subsequent revenue was derived from outstanding
      deliverables under the agreement.







**Fiscal
      Year Ended December 31, 2005 Compared to Fiscal Year Ended December 31,
      2004**




*Total
      revenues* .
      The
      Company’s total revenues decreased 6% from €22.2 million in 2004 to €20.8
      million in 2005, principally due to a decline in ESWL unit sales, particularly
      in Japan.




*HIFU
      division* .
      The
      HIFU division’s total revenues increased 14% from €7.0 million in 2004
      (including €0.3 million of internal segment revenues) to €7.9 million in 2005
      (no significant internal segment revenues), principally due to a slight increase
      in the number of Ablatherm units sold, an increase in Ablatherm RPP and revenues
      related to service activity.




The
      HIFU
      division’s net sales of medical devices increased 5%, from €4.0 million in 2004
      (including internal segment revenues) to €4.3 million in 2005, with 10 Ablatherm
      units sold in 2005 compared to 9 in 2004. In 2005, net sales of medical devices
      included a €0.1 million charge related to the recognition of the non-cash charge
      associated with the warrants issued to HealthTronics.




Net
      sales
      of RPPs directly related to the Company's HIFU mobile activity increased 23%,
      from €1.4 million in 2004 to €1.7 million in 2005. This is primarily due to an
      increase in demand as of result of the Company's efforts to increase patient
      and
      physician awareness about the availability of Ablatherm-HIFU treatment for
      localized prostate cancer, which has increased demand from hospitals and
      clinics, as well as from patients, for this HIFU treatment. As a result of
      the
      increase in activity, n et
      sales
      of HIFU-related spare parts, supplies, leasing and services increased 28% from
      €1.5 million in 2004 to €1.9 million in 2005.




Other
      HIFU-related revenue decreased from €34 thousand in 2004 to €14 thousand in
      2005, primarily related to a decrease in subsidies received.




*UDS
      division* .
      The UDS
      division’s total revenues decreased 7% from €17.4 million in 2004 to €16.2
      million in 2005 (including €0.1 million and €0.2 million related to the
      recognition of the non-cash charge associated with the warrants issued to
      HealthTronics in 2005 and 2004, respectively, and including €3.2 million and
€1.9 million related to internal segment revenues recorded in 2005 and 2004,
      respectively).




The
      UDS
      division’s net sales of medical devices decreased 27% from €8.0 million in 2004
      to €5.9 million in 2005 with 39 lithotripters sold in 2004 compared to 33 in
      2005. The decrease in the number of units sold in 2005 resulted principally
      from
      the decline in ESWL unit sales in Japan.




Net
      sales
      of UDS-related spare parts, supplies and services decreased 4% from €7.3 million
      in 2004 to €7.0 million in 2005, primarily related to a decrease in TUMT service
      revenues. See ‘‘—Operating Results—Overview.’’




Other
      UDS-related revenue decreased 55% from €174 thousand in 2004 to €79 thousand in
      2005, primarily related to a reduction in the royalties received.




*Cost
      of sales* .
      Cost of
      sales decreased 10% from €13.7 million in 2004 to €12.3 million in 2005, and as
      a percentage of net sales decreased from 62% in 2004 to 59% in 2005, primarily
      due to the cost reduction program initiated in 2003 and continued in 2004 and
      2005.




*Operating
      expenses* .
      Operating expenses increased 5% from €9.3 million in 2004 to €9.8 million in
      2005. This increase in operating expenses was mainly due to the strengthening
      the Company's strategy to focus on market education on HIFU and to enhance
      its
      Ablatherm-HIFU global leadership position. See Note 18 of the Notes to the
      Consolidated Financial Statements.




HIFU
      division R&D expenses increased 28% from €0.8 million in 2004 to €1.0
      million in 2005. HIFU division R&D expenses specifically related to the
      development of new technologies and products and enhancement of existing
      products, increased 30% from €0.5 million in 2004 to €0.6 million in 2005 as a
      result of the Company's focus on strengthening its leadership on HIFU technology
      by developing its HIFU patent portofolio and developing HIFU beyond prostate
      cancer. In addition, clinical trial expenses increased 24% from €0.3 million in
      2004 to €0.4 million in 2005, as a result of launch of HIFU clinical studies to
      strengthen the Company's HIFU clinical leadership. The Company anticipates
      these
      expenses will increase in the future, in line with its strategy to launch new
      clinical studies, thus enhancing its clinical credibility and focusing its
      efforts on getting regulatory approvals and reimbursement in key countries.
      See
‘‘—Operating Results—Overview.’’




26


UDS
      division R&D expenses remained stable at €0.7 million in 2005 and 2004. UDS
      division R&D expenses specifically related to the development of new
      technologies and products and enhancement of existing products, increased 14%
      from €0.3 million in 2004 to €0.4 million in 2005. The Company anticipates to
      increase these R&D expenses in the near future. See ‘‘— Operating
      Results—Overview.’’




HIFU
      division marketing expenses increased 110% from €0.3 million in 2004 to €0.6
      million in 2005, as a result of the Company's continuing efforts to increase
      awareness and educate patients and physicians on the availability of the
      Ablatherm-HIFU technology for treating localized prostate cancer. The Company
      anticipates these expenses will increase in the future. See ‘‘—Operating
      Results—Overview.’’




HIFU
      division selling expenses increased 39% from €1.0 million in 2004 to €1.4
      million in 2005, as a result of the Company's strengthening of its Sales force
      to develop market shares. As a percentage of net sales, HIFU division related
      selling expenses increased from 14% in 2004 to 18% in 2005.




UDS
      division selling expenses decreased 14% from €1.7 million in 2004 to €1.4
      million in 2005, primarily due to continued control of expenses. The Company
      anticipates that these expenses will remain stable in the future. As a
      percentage of net sales, selling expenses decreased from 10% in 2004 to 9%
      in
      2005.




General
      and administrative expenses, at the consolidated level, increased 4.5% from
€4.1
      million in 2004 to €4.3 million in 2005, primarily due to an increase of
      expenses related to the implementation of Sarbanes-Oxley Act, Section 404.
      As a
      percentage of net sales, general and administrative expenses increased from
      18%
      in 2004 to 20% in 2005. The holding company continues to manage these expenses
      so that the expenses at each of the divisions remain consistent with the
      business and revenue levels of each segment.




*Operating
      loss* .
      As a
      result of the factors discussed above, the Company recorded a consolidated
      operating loss of €1.3 million in 2005, including the holding company expenses,
      as compared to a consolidated operating loss of €0.8 million in
      2004.




The
      Company realized an operating profit in its HIFU division of €0.1 million in
      2005, compared to an operating profit of €0.4 million in 2004 and an operating
      profit in its UDS division of €0.2 million in 2005, as compared to operating
      profit of €0.2 million in 2004.




*Interest
      income, net* .
      Interest income, net remained stable at €0.1 million in 2004 and
      2005.




*Foreign
      currency exchange gains (loss), net* .
      In
      2004, the Company recorded a net foreign currency exchange loss of €38,000
      compared to a gain of €0.2 million in 2005 due to a strengthening of the US
      dollar against the Euro.




*Other
      income (expense), net* .
      Other
      income (expense), net decreased from a loss of €0.1 million in 2004 to a gain of
€9,000 in 2005.




*Income
      taxes* .
      The
      Company recorded a corporate income tax benefit of €0.1 million in 2005 compared
      to €0.3 million in 2004, principally reflecting current income tax. In 2004,
      this income tax also reflected an exceptional exit tax in France of 2.5% (which was
      enacted in compensation for the mandatory reclassification as equity of the
      capital gains tax on participation ).
      Accordingly, in 2004, t he
      Company had booked a deferred tax liability amounting to €161,000 related to
      this exit tax, which will be paid in two equal instalments in 2006 and 2007,
      pursuant to the Amended Finance Law of 2004, dated December 30, 2004.




*Net
      loss* .
      The
      Company realized consolidated net loss of €1.2 million in 2004 compared with
      consolidated net loss of €1.1 million in 2005, as a result of the factors
      mentioned above.







**Fiscal
      Year Ended December 31, 2004 Compared to Fiscal Year Ended December 31,
      2003**




*Total
      revenues* .
      The
      Company’s total revenues increased 20.0% from €18.5 million in 2003 to €22.2
      million in 2004, principally due to a 2.5 times revenue increase in the HIFU
      division, despite the strength of the euro during the year, which reduced the
      value of sales denominated in other currencies, mainly the Japanese yen and
      the
      U.S. dollar, once converted into euro.




27


*HIFU
      division* .
      The
      HIFU division’s total revenues increased 136% from €3.0 million in 2003 to €7.0
      million in 2004 (including €3 thousand and €0.3 million of internal segment
      revenues in 2003 and 2004, respectively), principally due to an increase in
      the
      number of Ablatherm units sold and a progression in its Ablatherm mobile
      activity.




The
      HIFU
      division’s net sales of medical devices increased approximately 2.5 times, from
€1.1 million in 2003 to €4.0 million in 2004 (including €0.3 million of internal
      segment revenues), with 9 Ablatherm units sold in 2004 versus 3 in 2003.




Net
      sales
      of RPPs directly related to the Company's HIFU mobile activity increased 153%,
      from €0.6 million in 2003 to €1.4 million in 2004. This is primarily due to the
      Company's efforts to increase patient and physician awareness about the
      availability of Ablatherm-HIFU treatment for localized prostate cancer, which
      has increased demand from hospitals and clinics, as well as from patients,
      for
      this HIFU treatment. Net
      sales
      of HIFU-related spare parts, supplies, leasing and services increased 31% from
      €1.2 million in 2003 to €1.5 million in 2004.




Other
      HIFU-related revenue decreased 66% from €99 thousand in 2003 to €34 thousand in
      2004, primarily related to a decrease in subsidies received.




*UDS
      division* .
      The UDS
      division’s total revenues were stable at €17.5 million in 2003 compared to €17.4
      million in 2004 (including €0.2 million related to the recognition of the
      expenses associated with the warrants issued to HealthTronics and €2.0 million
      and €1.9 million of internal segment revenues in 2003 and 2004, respectively).




The
      UDS
      division’s net sales of medical devices increased 8% from €7.4 million in 2003
      to €8.0 million in 2004 (including a €174,000 reduction in revenue reflecting
      the impact of the warrants), primarily due to an increase in the number of
      units
      sold in 2004 compared to 2003. The increase in the number of units sold in
      2004
      resulted principally from the Company's aggressive marketing strategy to take
      market share in Asia and Europe and its increased penetration of the U.S. market
      via its partner HealthTronics.




Net
      sales
      of UDS-related spare parts, supplies and services decreased 6% from €7.8 million
      in 2003 to €7.3 million in 2004, primarily related to a decrease in annual
      service contract revenue, as most units in the installed base were still under
      warranty after the replacement of older machines with new machines. The decrease
      was also due to the replacement of high cost service contracts for LT02
      lithotriptors, which yielded higher revenues, by lower cost, lower revenue,
      service contracts for the new Sonolith device line. See ‘‘—Operating
      Results—Overview.’’




Other
      UDS-related revenue decreased 49% from €342 thousand in 2003 to €174 thousand in
      2004, primarily related to an accounting of an insurance reimbursement in
      2003.




*Cost
      of sales* .
      Cost of
      sales, increased 4.4% from €13.1 million in 2003 to €13.7 million in 2004, but
      as a percentage of net sales decreased from 73% in 2003 to 62% in 2004,
      primarily due to the cost reduction program initiated in 2003 and the increase
      in net sales in 2004 compared with 2003




*Operating
      expenses* .
      Operating expenses decreased 31% from €13.5 million in 2003 (including a €2.1
      million one-time charge related to the restructuring) to €9.3 million in 2004.
      This decrease in operating expenses was mainly due to the restructuring of
      the
      Company’s two operating divisions initiated at the end of 2003. See Note 18 of
      the Notes to the Consolidated Financial Statements.




HIFU
      division R&D expenses decreased 65% from €2.3 million in 2003 to €0.8
      million in 2004. HIFU division R&D expenses specifically related to the
      development of new technologies and products and enhancement of existing
      products decreased 68% from €1.5 million in 2003 to €0.5 million in 2004, as a
      result of the restructuring of the HIFU division initiated at the end of 2003.
      R&D spending is primarily related to ongoing research into HIFU
      technologies. The Company anticipates these expenses will increase in the future
      to fund projects to expand the use of HIFU beyond the treatment of prostate
      cancer. HIFU division clinical trial expenses decreased 50% from €0.7 million in
      2003 to €0.3 in 2004, as a result of the restructuring of the HIFU division
      initiated at the end of 2003. The Company anticipates these expenses will
      increase in the future, in line with its strategy to launch new clinical
      studies, thus strengthening its clinical credibility and focusing its efforts
      on
      getting regulatory approvals and reimbursement in key countries. See
‘‘—Operating Results—Overview.’’




UDS
      division R&D expenses remained stable at €0.7 million in 2003 and 2004 See
‘‘— Operating Results—Overview.’’




28


HIFU
      division marketing expenses decreased 70% from €0.9 million in 2003 to €0.3
      million in 2004, as a result of the restructuring of the HIFU division initiated
      at the end of 2003. The
      Company anticipates these expenses will increase in the future as part of its
      effort to increase awareness and educate patients and physicians on the
      availability of the Ablatherm-HIFU technology for treating localized prostate
      cancer. See ‘‘—Operating Results—Overview.’’




HIFU
      division selling expenses decreased 8% from €1.1 million in 2003 to €1.0 million
      in 2004, as a result of the restructuring of the HIFU division initiated at
      the
      end of 2003 As a percentage of net sales, HIFU division related selling expenses
      decreased from 38% in 2003 to 14% in 2004.




UDS
      division selling expenses decreased 11% from €1.9 million in 2003 to €1.7
      million in 2004., primarily due to continued control of expenses. The Company
      anticipates that these expenses will remain stable in the future. As a
      percentage of net sales, selling expenses decreased from 12% in 2003 to 10%
      in
      2004.




General
      and administrative expenses, at the consolidated level, decreased 4% from €4.1
      million in 2003 to €4.0 million in 2004. As a percentage of net sales, general
      and administrative expenses decreased from 23% in 2003 to 18% in 2004. The
      holding company continues to manage these expenses so that the expenses at
      each
      of the divisions remain consistent with the business and revenue levels of
      each
      segment.




*Operating
      loss* .
      As a
      result of the factors discussed above, the Company realized an operating loss
      of
€0.8 million in 2004, as compared to an operating loss of €8.1 million in 2003.




The
      Company realized an operating profit in its HIFU division of €0.4 million in
      2004, as compared to an operating loss of €5.8 million in 2003 and an operating
      profit in its UDS division of €0.2 million, as compared to operating loss of
€0.7 million in 2003.




*Interest
      income, net* .
      Interest income, net decreased to income of €0.1 million in 2004 compared to an
      income of €0.2 million in 2003, reflecting lower interest income received by the
      Company on its short-term cash investment due to lower cash balances and lower
      interest rates during the year.




*Foreign
      currency exchange losses, net* .
      Net
      foreign currency exchange losses decreased from a loss of €0.9 million in 2003
      to a loss of €38,000 in 2004.




*Other
      income (expense), net* .
      Other
      income (expense), net decreased to a loss of €0.1 million in 2004 compared to
€0.2 million in 2003.




*Income
      taxes* .
      The
      Company recorded a corporate income tax benefit of €0.3 million in 2004,
      principally reflecting income tax with respect to the results of various
      subsidiaries and an exceptional exit tax in France of 2.5% (which was
      enacted in compensation for the mandatory reclassification as equity of the
      capital gains tax on participation ). The
      Company has booked a deferred tax liability amounting to €161,000 related to
      this exit tax, which will be paid in two equal instalments in 2006 and 2007,
      pursuant to the Amended Finance Law of 2004, dated December 30, 2004.




*Net
      loss* .
      The
      Company realized consolidated net loss of €1.2 million in 2004 compared with
      consolidated net loss of €9.0 million in 2003, as a result of the factors
      mentioned above.




**Effect
      of Inflation**




Management
      believes that the impact of inflation was not material to the Company’s net
      sales or loss from operations in the three years ended December 31,
      2005.




**Liquidity
      and Capital Resources**




The
      Company’s 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 which were not necessarily indicative of changes in the
      Company’s business. The Company believes its working capital is sufficient for
      its present working capital requirements although, it has in the past
      experienced negative cash flows and associated risks to liquidity, and may
      in
      the future experience the same. The Company’s negative cash flow situation, and
      management’s plans to address it, are described in more detail below.




The
      Company anticipates that cash flow in future periods will be mainly derived
      from
      ongoing operations and any capital raising the Company undertakes.  The
      Company does not have any commercial commitments nor does it employ any
      off-balance sheet financing. Because the Company anticipates relying principally
      on cash flow from operating activities and cash and cash flow equivalent
      balances to meet its liquidity requirements, a decrease in the demand for the
      Company’s products, or the inability of the Company’s customers to meet their
      financial obligations to the Company due to operating difficulties or adverse
      market conditions, would reduce the availability of funds to the Company.




29


The
        Company ' s
        cash
        position as of December 31, 2005, 2004 and 2003, was €8.3 million, €9.4 million
        and €10.4 million respectively. In 2005, 2004 and 2003, the company experienced
        negative cash flows of €1.1 million, €1.0 million and €5.3 million,
        respectively. In 2005, the Company ' s
        negative cash flow situation was primarily due to increased sales and marketing
        expenses for the promotion of the Ablatherm and the increased cash requirements
        associated with the Company's strategy to develop the RPP activity. The Company
        financed negative cash flows during the period using cash and cash equivalents
        on hand. In order to address its negative cash flow situation and finance
        increased sales and marketing and R&D expenses and the cash requirements
        arising from the transition to an RPP business model, the Company is
        contemplating seeking financing through a share capital
        increase.




In
      2005,
      net cash used in operating activities was €0.3 million compared with net cash
      used in operating activities of €1.1 million and €3.6 million in 2004 and 2003,
      respectively. In 2005, net cash used in operating activities reflected
      principally:




-
            a
                net loss of €1.1 million,




-
            elimination
                of €1.8 million of net expenses without effects on
                cash,




-
            an
                increase in trade accounts receivable of €1.5 million, principally
                reflecting an increase in revenue in the fourth quarter of
                2005,




-
            an
                increase in inventories of €0.7 million related to an increase in
                both the inventory of finished goods and spare parts, primarily
                due to an increase in spare parts inventory, itself reflecting anticipated
                revenue growth greater than actual
                growth,




-
            an
                increase in trade accounts payable of €0.7 million, also primarily due to
                the increase in activity in the fourth quarter of
                2005, and,




-
            an
                increase in accrued expenses and other current liabilities of €0.4
                million.




In
      2004,
      net cash used in operating activities reflected principally a net loss of €1.2
      million, a decrease in inventories of €2.3 million related to both a reduction
      of the inventory of finished goods and work-in-progress and the retirement
      of
      previously depreciated spare parts assets, a decrease in trade accounts payable
      of €0.4 million and a decrease in accrued expenses and other current liabilities
      of €1.9 million, primarily related to severance packages linked to the
      restructuring that took place at the end of 2003.




In
      2003,
      net cash used in operating activities reflected principally a net loss of €9.0
      million, elimination of €0.8 million of expenses and benefits without effects on
      cash, a decrease in trade accounts receivable of €3.1 million, a decrease in
      inventories of €1.1 million, a decrease in trade accounts payable of €1.0
      million and an increase in accrued expenses and other current liabilities of
      €1.4 million.




In
      2005,
      net cash used in investing activities was €1.1 million compared with no net cash
      used in investing activities in 2004 and €0.5 million in 2003. In 2005, net cash
      used in investing activities reflected principally an increased investment
      of
€1.0 million in capitalized assets produced by the company (specifically
      devices), an investment of €0.4 million in property and equipment, net proceeds
      from sales of lease-back assets for €0.2 million, net proceeds from sales of
      assets for €0.1 million. In 2004, net cash used in investing activities
      reflected principally an increased investment of €0.8 million in capitalized
      assets produced by the Company, net proceeds from sales of devices produced
      by
      the Company for €0.7 million, an investment of €0.2 million in property and
      equipment, net proceeds from sales of lease-back assets for €0.3 million and a
      decrease in deposits and guarantees for €0.1 million. In 2003, net cash used in
      investing activities reflected principally an increased investment of €0.8
      million in capitalized assets produced by the Company (specifically devices),
      an
      investment of € 0.4 million in property and equipment, net proceeds from sales
      of lease-back assets for €0.3 million and a decrease in financial assets for
€0.4 million.




In
      2005,
      net cash provided by financing activities was €0.2 million compared with net
      cash used in financing activities of €0.1 million and €0.7 million in 2004 and
      2003 respectively. In 2005 net cash provided by financing activities reflected
      principally short term debt increase for €0.4 million, an increase in long term
      borrowing for €0.3 million reimbursed for €0.1 million and repayment of capital
      lease obligations totalling €0.4 million. In 2004, net cash used in financing
      activities was €0.1 million, reflecting mainly repayment of capital lease
      obligations totalling €0.3 million and long-term debt repayment for €0.1
      million. In 2003, net cash used in financing activities was € 0.7 million,
      reflecting mainly scheduled long term debt repayment totalling €0.4 million, a
      decrease in short-term borrowings of €0.2 million and repayments of obligations
      under a capital lease totalling €0.1 million.




30


The
        Company anticipates that cash flows from operations, together with its current
        cash balances, will provide it with sufficient resources to meet its expenditure
        requirements for approximately eighteen to twenty four months. As discussed
        above, the Company is contemplating raising additional equity capital in
        order
        to finance the growth of its HIFU business and its transition to an RPP business
        model. To the extent that the Company is unsuccessful in its plan to raise
        additional capital, if any opportunities for the sale of non-strategic assets
        become available, the Company may seek to exploit those opportunities in
        order
        to obtain liquidity.




The
      Company’s future cash flow may also be affected to the extent the Company
      decides to continue to expand the leasing of its products and to grow its mobile
      RPP business. In 1999, in an effort to increase the availability of its
      equipment, the Company implemented a new marketing strategy of leasing its
      medical devices on a monthly, quarterly or yearly basis, rather than selling
      them directly to end-users, and in 2002, the Company began to develop its mobile
      activity by making certain devices available to hospitals and clinics free
      of
      charge, charging instead on the basis of each procedure that was performed.
      Relative to the sale of devices, these business models initially generate
      smaller, but more predictable cash flows. The Company anticipates continuing
      to
      make these options available.




It
      is the
      policy of the Company that its treasury function should maintain the liquidity
      of the Company 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 the Company’s
      short-term debt is based on an annual variable rate: Eonia+0.5. The Company
      maintains bank accounts, at each of its subsidiaries, in the local currencies
      of
      each subsidiary. The primary currencies in which the Company maintains balances
      are the euro, the U.S. dollar and the Japanese yen. In order to minimize the
      Company’s exposure to exchange rate risks, the Company uses certain financial
      instruments for hedging purposes. As of March 31, 2006, the Company had six
      foreign exchange sale contracts, three for the Japanese yen and three for the
      U.S. dollar.




**Contractual
      Obligations and Commercial Commitments (in thousands of
      euro)**




**Payments
                Due by Period****Total**
            **Less
                than**
              **1
                year**
            **1-3
                years**
            **4-5
                years**
            **More
                than**
              **5
                years**Short-Term
                Debt
            
            899
            899
            —
            —
            —Long-Term
                Debt
            
            202
            147
            55
            —
            —Capital
                Lease Obligations
            
            859
            385
            474
            —
            —Operating
                Leases
            481
            428
            53
            —
            —




**New
      Accounting Pronouncements**





In
      December 2004, the FASB issued Statement 153, Exchanges of Non-monetary Assets,
      an Amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions
      (FAS 153). This Statement eliminates the exception from fair value measurement
      for non-monetary exchanges of similar productive assets and replaces it with
      an
      exception for exchanges that do not have commercial substance. FAS 153, is
      effective for non-monetary asset exchanges occurring in fiscal periods beginning
      after June 15, 2005 and is not expected to have a material impact on the
      Company’s results of operations, cash flows or financial position.




On
      June
      7, 2005, the FASB issued Statement No. 154, “Accounting Changes and Error
      Corrections”, a replacement of APB Opinion No. 20, “Accounting Changes”, and
      Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”.
      Statement 154 changes the requirements for the accounting for and reporting
      of a
      change in accounting principle. Previously, most voluntary changes in accounting
      principles were required recognition via a cumulative effect adjustment within
      net income of the period of the change. Statement 154 requires retrospective
      application to prior periods' financial statements, unless it is impracticable
      to determine either the period-specific effects or the cumulative effect of
      the
      change. Statement 154 is effective for accounting changes made in fiscal years
      beginning after December 15, 2005; however, the Statement does not change the
      transition provisions of any existing accounting pronouncements. We do not
      believe adoption of Statement 154 will have a material effect on our
      consolidated financial position, results of operations or cash
      flows.





31


On
      December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB
      Statement No. 123 (revised 2004), *Share-Based
      Payment* ,
      which
      is a revision of FASB Statement No. 123, *Accounting
      for Stock-Based Compensation* .
      Statement 123(R) supersedes APB Opinion No. 25, *Accounting
      for Stock Issued to Employees* ,
      and
      amends FASB Statement No. 95, *Statement
      of Cash Flows* .
      Generally, the approach in Statement 123(R) is similar to the approach described
      in Statement 123. However, Statement 123(R) *requires* all
      share-based payments to employees of the Company, including grants of employee
      stock options, to be recognized in the income statement based on their fair
      values. Pro forma disclosure is no longer an alternative.





Statement
      123(R) must be adopted no later than the first fiscal year beginning after
      June
      15, 2005. Early adoption will be permitted in periods in which financial
      statements have not yet been issued. The Company will adopt Statement 123(R)
      as
      of January 1, 2006.





Statement
      123(R) permits public companies to adopt its requirements using one of two
      methods:





1.
            A
                “modified prospective” method, in which compensation cost is recognized
                beginning with the effective date (a) based on the requirements of
                Statement 123(R) for all share-based payments granted after the effective
                date and (b) based on the requirements of Statement 123 for all awards
                granted to employees prior to the effective date of Statement 123(R)
                that
                remain unvested on the effective
                date.


2.
            A
                “modified retrospective” method, which includes the requirements of the
                modified prospective method described above, but also permits entities
                to
                restate based on the amounts previously recognized under Statement
                123 for
                purposes of pro forma disclosures either (a) all prior periods presented
                or (b) prior interim periods of the year of
                adoption.





The
      Company plans to adopt Statement 123 using the modified prospective
      method.




As
      permitted by Statement 123, the Company currently accounts for share-based
      payments to employees using Opinion 25’s intrinsic value method and, as such,
      generally recognizes no compensation cost for employee stock options.
      Accordingly, the adoption of Statement 123(R)’s fair value method will have a
      significant impact on the Company's result of operations, although it will
      have
      no impact on the Company's overall financial position. The impact of the
      adoption of Statement 123(R) cannot be predicted at this time because it will
      depend on levels of share-based payments granted in the future. However, had
      the
      Company adopted Statement 123(R) in prior periods, the impact of that standard
      would have approximated the impact of the application of the principles in
      Statement 123.




**Research
      and Development, Patents and Licenses**




See
      Item
      4, ‘‘Information on the Company—High Intensity Focused Ultrasound Division—HIFU
      Division Patents and Intellectual Property’’ and ‘‘Information on the
      Company—Urology and Services Division—UDS Division Patents and Intellectual
      Property.’’




**Off-Balance
      Sheet Arrangements**




The
      Company has no off-balance sheet arrangements.




32


**Item
      6. Directors, Senior Management and Employees**




**Senior
      Executive Officers**




The
      following table sets forth the name, age and position of each Senior Executive
      Officer of the Company. Each of the persons listed below has entered into an
      employment contract with the Company or its subsidiaries (which permits the
      employee to resign subject to varying notice periods). In addition, in case
      of a
      change of control of the Company, or of a termination of their employment
      contract by the Company without cause, the Senior Executive Officers are
      entitled to receive severance packages totalling approximately € 0.4
      million.


Name
              Age
              PositionPhilippe
                  Chauveau
              70
              Chairman
                  of the Board of DirectorsHugues
                  de Bantel
              36
              Chief
                  Executive Officer of EDAP TMS S.A. and President of the HIFU Division
                  and
                  the UDS DivisionThierry
                  Turbant
              45
              Chief
                  Financial OfficerPhilippe
                Chauveau
              In
                  1997, Philippe Chauveau was named chairman of EDAP-TMS S.A.'s Supervisory
                  Board, involving a two-tier board structure overseeing a Management
                  Board.
                  In 2002, both these boards were replaced by a single Board of Directors,
                  which Philippe Chauveau headed as Chairman and CEO. While remaining
                  Chairman of the Board, he was succeeded by Hugues de Bantel as
                  CEO in
                  2004. Since 2002, Philippe Chauveau has also served as founding
                  Chairman
                  of the Board of Scynexis Inc., funded by private equity, which
                  is an
                  innovative drug discovery company based in the United States, partnering
                  with major pharmaceutical companies worldwide. As of today, he
                  remains on
                  the Board as a Director. He is also personal executive coach to
                  senior
                  research leaders at Hoffmann LaRoche. Additionally, he is involved
                  in
                  management development programs at IMD, in Lausanne, Switzerland.
                  He was
                  R&D Vice-President at AT&T Bell Labs and has also served as
                  Chairman of Apple Computer Europe, preceded by increasing marketing
                  roles
                  in ITT and in Procter & Gamble. He has an Honours Degree from Trinity
                  College Dublin with a BA. and a Bsc.Hugues de
                Bantel
              Hugues
                  de Bantel joined the Company in 1996, and since then has served
                  as Asia
                  Pacific Area Manager and Manager of EDAP Technomed Malaysia from
                  its
                  founding in 1997 and, since April 2000, President of EDAP Technomed
                  Japan.
                  He was appointed President of TMS S.A. on November 6, 2002, and
                  President
                  of EDAP S.A. on November 13, 2003. Prior to joining EDAP Technomed,
                  Mr. de
                  Bantel was Sales Manager for Europe and Asia at AFE’s Lifts Division. He
                  previously worked at Procter & Gamble as Area Sales Manager. Mr. de
                  Bantel graduated from Ecole Superieure de Commerce, Rouen
                  (France).Thierry
                Turbant
              Thierry
                  Turbant was appointed Chief Financial Officer of the Company on
                  July 1,
                  2004. He joined the Company in 1997, and since then has served
                  as Group
                  Financial Controller. Prior to joining the Company, Mr. Turbant
                  was
                  Accounting Manager and Controller at Gatefossé, specialized in
                  Pharmaceutical and Cosmetic Products. He previously worked at EGL
                  and at
                  Clemessy (Civil Engineering) as a Controller. Mr. Turbant graduated
                  from
                  the Business and Management Institute (IAE) at Lyon University
                  (France).


33


**Board
      of Directors**




The
      following table sets forth the names of the members of the Board of Directors
      and the background of the members of the Board of Directors who are individuals.
      The mandate for each member of the Board of Directors expires on the date of
      the
      assembly meeting of shareholders approving the financial results for fiscal
      year
      2007.




Philippe
                Chauveau
            See
                biography in Senior Executive OfficersPierre
                Beysson
              Age:
                64
            Pierre
                Beysson was appointed as a member of the Board of Directors in September
                2002. Pierre Beysson was then the Chief Financial Officer of Compagnie
                des
                Wagons-Lits ("CWL"), the on-board train service division of Accor,
                a
                French multinational Hotel and Business Services Group. In this capacity,
                he sat in a number of boards of companies related to the Accor Group.
                He
                is now an M&A consultant. Prior to his assignment at CWL, Pierre
                Beysson held a number of senior financial positions with Nixdorf
                Computers, Trane (Air Conditioning), AM International (Office Equipment)
                and FMC (Petroleum Equipment). Pierre Beysson was trained as a CPA,
                has
                auditing experience and holds an MBA from Harvard Business
                School.Karim
                Fizazi
              Age:
                40
            Dr.
                Karim Fizazi was appointed as a member of the Company's Board of
                Directors
                in November 2002. He is currently Chairman of the Genito-Urinary
                Oncology
                group at Institut Gustave Roussy (IGR) in Villejuif, France, which
                is the
                biggest cancer center in Europe. He was appointed Head of Department
                of
                Medicine of Institut Gustave Roussy in 2005. He is also Assistant
                Professor in Medical Oncology at IGR. He was visiting Assistant Professor,
                Genitourinary Medical Oncology Department, MD Anderson Cancer Center
                in
                Houston, Texas, for 18 months. His Residency included a position
                at the
                Institut Curie in Paris.Olivier
                Missoffe
              Age:
                49
            Olivier
                Missoffe was appointed as a member of the Company's Board of Directors
                in
                November 2002. He is Chairman and CEO of Société Services de Santé (SSS),
                a services and support provider to hospitals and clinics. He is an
                advisor
                to the Management Board of the French healthcare group "Générale de
                Santé." He was Chief Executive Officer of the Company until
                1998.Siemens
                France S.A., represented by Holger
              Schmidt
              Age:
                40
            Siemens
                France S.A. was appointed as a member of the Company's Supervisory
                Board
                in January 1997 following Siemens purchase of 1,003,250 shares of
                the
                Company and representing 12.0% of the Company's total share capital.
                Siemens became a member of the Company's Board of Directors in July
                2002.Guy
                Vallancien
              Age:
                59
            Dr.
                Guy Vallancien was appointed as a member of the Company's Board of
                Directors in November 2002. He is Professor of Urology and Chief
                of the
                Urology Department at the Institut Mutualiste Montsouris (Paris,
                France).
                He is a member of the Executive Committee of the French Urological
                Association (AFU) and a member of the European and International
                Urological Association.




**Compensation
      and Options**




On
      December 17, 2002, the Board of Directors decided that the whole Board of
      Directors will act as a ‘‘Compensation Committee’’ to review the compensation of
      the Company’s Senior Executive Officers and to propose any changes to
      compensation to the Board of Directors, which under French law is the competent
      body to approve any such change. On July 22, 2005, in order to comply with
      Nasdaq Corporate Governance rules, the Board of Directors decided to review
      the
      composition of the Compensation Committee and appointed two members out of
      the
      six Directors: Mr. Olivier Missoffe, Mr. Pierre Beysson to act as the
      Compensation Committee. Mr. Olivier Missoffe was elected Chairman of the
      Compensation Committee. During that meeting, the Board of Directors approved
      an
      updated version of the charter of the "Compensation Committee". Aggregate
      compensation paid or accrued for services in all capacities by the Company
      and
      its subsidiaries to Senior Executive Officers and to the Board of Directors
      as a
      group for the fiscal year 2005 was approximately € 0.4 million. No amount was
      set aside or accrued by the Company to provide pension, retirement or similar
      benefits for Senior Executive Officers and to the Board of Directors as a group
      in respect of the year 2005.




34


As
      of
      December 18, 2002, the shareholders of two of the Company’s wholly owned and
      fully consolidated subsidiaries, TMS S.A. and EDAP S.A., authorized the
      respective Boards of Directors to grant certain Senior Executive Officers
      warrants to subscribe to an aggregate of 604,538 new shares of TMS S.A.’s and
      EDAP S.A.’s common stock. The average exercise price of such warrants is
      equivalent to the higher of either (a) the share value of the capital of each
      company or (b) the net book value, each such amount to be calculated on the
      date
      of exercise. Following the resignation of the President of EDAP S.A. in November
      2003, outstanding warrants allow today's President of both divisions, to
      subscribe to an aggregate of 252,111 new shares of each of TMS S.A.’s and EDAP
      S.A.’s common stock. The total number of warrants granted, if exercised, would
      represent 3.5% and 2.5% of the respective share capital of TMS S.A. and EDAP
      S.A. after subscription. These warrants begin vesting three years after their
      date of grant. These warrants to subscribe to shares expire on the earlier
      of
      December 18, 2007 or when employment with the Company ceases.




As
      of
      December 31, 2005, Senior Executive Officers held an aggregate of 146,000
      options to purchase or to subscribe to shares of the Company’s common stock,
      with a weighted average exercise price of €1.69. Of these options, 9,000 expire
      on December 31, 2008, 24,000 expire on September 25, 2011 and 113,000 expire
      on
      February 24, 2014.




**Audit
      Committee**




On
      December 17, 2002, the Board of Directors decided that the whole Board of
      Directors will act as an ‘‘Audit Committee’’ headed by Mr. Pierre Beysson. On
      July 22, 2005, in order to fully comply with Nasdaq Corporate Governance rules
      on Independence of Directors, the composition of the Company Audit Committee
      was
      reviewed. The Board of Directors elected four fully independent Members to
      the
      Audit Committee: Mr. Olivier Missoffe, Mr. Guy Vallancien, Mr. Karim Fizazi
      and
      Mr. Pierre Beysson, the latter acting as the Head of the Audit Committee. The
      Audit Committee Charter was also reviewed to reflect those changes. The purpose
      of the Committee shall be to:





-
            Provide
                assistance to the Board of Directors in fulfilling their oversight
                responsibility to the shareholders, potential shareholders, the investment
                community and others relating to: the integrity of the Company’s financial
                statements, the Company’s compliance with legal and regulatory
                requirements,the
                accounting practices and financial reporting processes of the Company,
                the
                effectiveness of the Company’s disclosure controls and procedures and
                internal control over financial reporting,the
                independent auditor’s qualifications and independence, and the performance
                of the Company’s internal audit function and independent
                auditors.


-
            Prepare
                the Audit Committee report that SEC proxy rules require to be included
                in
                the Company’s annual proxy statement.The
                Audit Committee may request any officer or employee of the Company
                or the
                Company’s outside counsel or independent auditor to attend a meeting of
                the Committee or to meet with any members of, or consultants to,
                the
                Committee.




**Employees**




As
      of
      December 31, 2003, the Company employed 148 individuals on a full-time basis,
      employed as follows:





Sales
                &
              Marketing
            Manufac-
              turing
            Service
            Research
              &
                Dvpt
            Regula-
              tory
            Clinical
              Affairs
            Adminis-
              trative
            TotalFrance
            14
            26
            25
            14
            5
            4
            14
            102Italy
            3
            0
            0
            0
            0
            0
            3
            6Japan
            11
            0
            13
            0
            1
            0
            5
            30Malaysia
            2
            0
            3
            0
            0
            0
            2
            7USA
            0
            0
            0
            0
            0
            0
            1
            1South
                Korea
            1
            0
            0
            0
            0
            0
            1
            2**Total
                =**
            31
            26
            41
            14
            6
            4
            26
            148




35


The
      restructuring of the French operating divisions was approved as of December
      31,
      2003 and was implemented in 2004.




As
      of
      December 31, 2004, the Company employed 122 individuals on a full-time basis,
      employed as follows:





Sales
                &
              Marketing
            Manufac-
              turing
            Service
            Research
              &
                Dvpt
            Regula-
              tory
            Clinical
              Affairs
            Adminis-
              trative
            TotalFrance
            11
            21
            22
            8
            3
            1
            14
            80Italy
            3
            0
            0
            0
            0
            0
            2
            5Japan
            9
            0
            13
            0
            2
            0
            4
            28Malaysia
            2
            0
            3
            0
            0
            0
            2
            7South
                Korea
            1
            0
            0
            0
            0
            0
            1
            2**Total
                =**
            26
            21
            38
            8
            5
            1
            23
            122




As
      of
      December 31, 2005, the Company employed 134 individuals on a full-time basis,
      employed as follows:





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




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




**Share
      Ownership**




As
      of
      March 31, 2006, Siemens France S.A. owned 1,003,250 Shares representing 12.0%
      of
      the total share capital and (after subtracting treasury stock which under French
      law carries no voting rights) 12.8% of the voting rights of the Company. No
      other member of the Board of Directors or Senior Executive Officers is the
      beneficial owner of securities representing or giving the right to subscribe
      for
      or purchase more than 1% of the Shares.




As
      of
      March 31, 2006, the Board of Directors and the Senior Executive Officers of
      the
      Company hold a total of 1,014,376 Shares (including Siemens France SA acting
      as
      a moral entity seating at the Board of Directors) representing 12.1% of the
      total share capital and (after subtracting treasury stock which under French
      law
      carries no voting rights) 13.0% of the voting rights of the
      Company.




**Options
      to Purchase or Subscribe for Securities**




As
      of
      March 31, 2006, the Company had sponsored six stock purchase and subscription
      option plans and one Free Performance Shares plan.




On
      December 2, 1996, the shareholders of EDAP TMS S.A. authorized the Board of
      Directors to grant up to 177,750 options to purchase pre-existing Shares and
      156,625 options to subscribe to newly issued Shares at a fixed exercise price
      of
€ 6.97 per Share.




On
      May
      14, 1998, the shareholders of EDAP TMS S.A. authorized the Board of Directors
      to
      grant up to 713,425 options to purchase pre-existing Shares at a fixed exercise
      price to be set by the Board of Directors. The shareholders also authorized
      the
      Board of Directors to cause EDAP TMS S.A. to repurchase up to 535,675 of its
      own
      Shares (treasury stock) to cover the options granted under the new plan. Up
      to
      279,000 of the 713,425 options were reserved for modification of the terms
      of
      pre-existing options.




36


On
      June
      12, 2001, the shareholders of EDAP TMS S.A. authorized the Board of Directors
      to
      grant up to 300,000 options to purchase pre-existing Shares and 80,000 options
      to subscribe to new Shares, at a fixed exercise price to be set by the
      Supervisory Board.




On
      January 29, 2004, the shareholders of EDAP TMS S.A. authorized the Board of
      Directors to grant up to 240,000 options to purchase pre-existing Shares and
      100,000 options to subscribe to new Shares, at a fixed price to be set by the
      Board of Directors. All of the Shares that may be purchased through the exercise
      of stock options are currently held as treasury stock.




On
      January 29, 2004, the shareholders also authorized the Board of Directors to
      grant up to 1,000,000 warrants to H.T. Prostate LLC, a fully owned subsidiary
      of
      HealthTronics Surgical Services Inc, at a fixed price of U.S.$1.50. These
      warrants were granted by the Board of Directors on January 28,
      2005.




On
      February 17, 2005, the shareholders of EDAP TMS S.A. authorized the Board of
      Directors to grant up to 625,000 free shares to be issued to certain employees
      of the Company, subject to compliance with the conditions and performance
      criteria fixed by the Board of Directors. On March 30, 2005, 500,900 rights
      to
      subscribe to free shares were granted by the Board of Directors, based on
      certain performance criteria to be met for years 2005 and 2006. However, given
      the dramatic shift of business model during 2005 from the sales of Ablatherm
      equipment towards the sales of treatment procedures (RPPs), on January 6, 2006,
      the Board of Directors decided to cancel the 2005 allocation plan and to set
      up
      a new one reflecting the new business model for years 2006 and 2007. On January
      6, 2006, in accordance with the Performance Stock Plan authorized by the
      shareholders, 564,100 rights to subscribe to new shares were distributed,
      including new entrants. This plan will be accounted for in compliance with
      FASB
      123(R). See
      Item
      5, “Operating and Financial Review and Prospects—New Accounting
      Pronouncements.”




On
      December 31, 2005, the duration of stock option contracts was as
      follows:




**months
                until expiration**
            **Number
                of**
              **Shares**24
            33
                62536
            92
                00048
            121272
            112
                00078
            14
                42598
            325
                000109
            15
                000




37


As
      of
      December 31, 2005, a summary of stock option activity to purchase or to
      subscribe to Shares under these plans is as follows:




2005
            2004
            2003Options
            Weighted
                average exercise price
              (€)
            Options
            Weighted
                average exercise price
              (€)
            Options
            Weighted
                average exercise price
              (€)Outstanding
                on January 1,
            580,262
            2.49
            391,262
            2.68
            654,341
            2.58Granted
            15,000
            2.78
            325,000
            2.19
            0Exercised
            (1,000)
            1.62
            0
            
            0Forfeited
            (1,000)
            3.81
            (136,000)
            2.34
            (263,079)
            2.43Expired
            -
            -
            -
            -
            -
            -Outstanding
                on December 31,
            593,262
            2.50
            580,262
            2.49
            391,262
            2.68Exercisable
                on December 31,
            409,652
            2.45
            219,547
            2.99
            272,442
            2.94Shares
                purchase options available for grant on December 31
            0
            -
            0
            -
            0
            -




The
      following table summarizes information about options to purchase Shares already
      held by the Company as treasury Shares, or to subscribe to new Shares, at
      December 31, 2005:




Outstanding
                options
            Exercisable
                optionsExercise
                price (€)
            
            Options
            Weighted
                average remaining contractual life
            Weighted
                average exercise price
              (€)
            Options
            Weighted
                average exercise price
              (€)3.81
            
            116,625
            2.5
            3.81
            116,625
            3.812.78
            
            15,000
            9.1
            2.78
            3,750
            2,782.60
            
            240,000
            8.7
            2.60
            60,000
            2.602.08(1)
            
            112,000
            6.0
            2.08
            112,000
            2.082.02(2)
            
            14,425
            6.5
            2.02
            10,815
            2.021.83
            
            10,212
            3.5
            1.83
            10,212
            1.831.28
            
            100,000
            8.2
            1.28
            100,000
            1.281.28
                to 3.81
            
            593,262
            6.3
            2.50
            409,652
            2.11




(1)
            All
                the 112,000 options were granted on September 25, 2001 with an exercise
                price expressed in U.S. dollars ($1.92) and converted here to euros
                based
                on the noon buying rate on September 25, 2001 ($1 = €
                1.085).


(2)
            All
                the 14,425 options were granted on June 18, 2002 with an exercise
                price
                expressed in U.S. dollars ($1.92) and converted here to euros based
                on the
                noon buying rate on June 18, 2002 ($1 = €
                1.0545).




**Exemptions
      from Certain Nasdaq Corporate Governance Rules**




Nasdaq
      rules permit Nasdaq to provide exemptions from the Nasdaq corporate governance
      standards to a foreign issuer when those standards are contrary to a law, rule
      or regulation of any public authority exercising jurisdiction over such issuer
      or contrary to generally accepted business practices in the issuer’s country of
      domicile. The Company has 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, is described below:




38


The
      Company is 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. The Company has
      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
      the
      Company’s knowledge, it is not directly or indirectly owned or controlled by
      another corporation, by any foreign government, or by any other natural or
      legal
      person or persons acting severally or jointly. At March 31, 2006, to the
      Company’s knowledge, the following persons had beneficial ownership of more than
      5% of the Shares: Siemens France S.A. owned 1,003,250 Shares representing 12.0%
      of the total share capital of the Company and (after subtracting treasury stock,
      which under French law carries no voting rights) 12.8% of voting rights and
      Wells Capital Management, Inc., formerly Benson Associates LLC, owned 1,313,875
      Shares representing 15.7% of the total share capital of the Company and (after
      subtracting treasury stock, which under French law carries no voting rights)
      16.8% of voting rights. The Shares owned by these persons do not carry special
      voting rights.




To
      the
      Company's knowledge, there have been no significant changes in the percentage
      of
      ownership of its Shares over the past three years.




There
      are
      no arrangements known to the Company, the operation of which may at a subsequent
      date result in a change of control of the Company.




As
      of
      March 31, 2006, 8,362,821 Shares were issued, including 7,823,331 outstanding
      and 539,490 treasury Shares. At the same date, there were 7,353,863 ADSs, each
      representing one Share, all of which were held of record by 9 registered holders
      in the United States (including The Depositary Trust Company).




**Related
      Party Transactions**





The
      General Manager of the Company’s Korean branch, EDAP-TMS Korea, is also the
      Chairman of Dae You, a company incorporated in Korea and unrelated to EDAP
      TMS.
      Dae You acts as an agent for the promotion of the Company’s medical devices in
      Korea, and EDAP TMS Korea also subcontracts the maintenance of its medical
      devices installed in Korea to Dae You. Dae You also purchases medical devices
      from the Company and operates them in partnership with hospitals and clinics
      in
      Korea.





In
      2005,
      EDAP TMS Korea paid Dae You €136,000 for its services under service maintenance
      contracts, and Dae You purchased €396,000 of medical devices from the
      Company.





The
      Company purchases certain technological elements to Siemens AG. Total purchases
      amounted €547 thousand in 2005, €405 thousand in 2004 and €360 thousand in
      2003.  As of December 31, 2005, payables due to Siemens AG amounted to €46
      thousand and as of December 31, 2004, payables due to Siemens AG amounted to
€ 3
      thousand.




39


**Item
      8. Financial Information**




**Consolidated
      Financial Statements**




See
      Item
      18, ‘‘Financial Statements.’’




**Export
      Sales**




As
      of
      December 31, 2005, total export sales, which the Company defines as sales made
      outside of France, amounted €16 million, which represented 76% of total sales.




**Legal
      Proceedings**




To
      date,
      the Company is a party to two product liability actions in the United States
      by
      patients claiming to have been injured in the course of a Prostatron procedure.
      The Company has agreed to retain liability for these two cases following the
      sale of the Prostatron business in October 2000. However, in one of the two
      cases, the Company believes that it may be able to claim indemnification from
      Urologix. The Company believes that the patients’ claims against the Company are
      without merit. In addition, if the claims against the Company are successful,
      the Company believes any potential damages assessed against it would be covered
      by insurance and/or by a contribution obligation of the physicians and/or the
      organization which provided services with the product. However, these product
      liability claims could have a material adverse impact on the
      Company.




**Dividends
      and Dividend Policy**




The
      payment and amount of dividends depend on the earnings and financial condition
      of the Company and such other factors that the Company’s Board of Directors
      deems relevant. Dividends are subject to recommendation by the Board of
      Directors and a vote by the shareholders at the shareholders’ ordinary general
      meeting. Dividends, if any, would be paid in euro and, with respect to ADSs,
      would be converted at the then-prevailing exchange rate into U.S. dollars.
      Holders of ADSs will be entitled to receive payments in respect of dividends
      on
      the underlying Shares in accordance with the Deposit Agreement.




In
      France, dividends are paid out of after-tax income. Dividends paid to holders
      of
      shares who are not residents of France generally will be subject to French
      withholding tax at a rate of 25%. Holders who qualify for benefits under an
      applicable tax treaty and who comply with the procedures for claiming treaty
      benefits may be entitled to a reduced rate of withholding tax and, in certain
      circumstances, certain other benefits, under conditions provided for in the
      relevant treaty under French law. See Item 10 ‘‘Additional Information—French
      Taxation—Taxation of Dividends on Shares or ADSs.’’




No
      dividends were paid with respect to fiscal years 2001 through 2004. Subject
      to
      the approval of the shareholders’ meeting to be held on or before June 30, 2006,
      the Company does not anticipate paying any dividends with respect to fiscal
      year
      2005.




**Significant
      Changes**




Except
      as
      otherwise disclosed in this Annual Report, there has been no material change
      in
      the financial position of EDAP TMS and its consolidated subsidiaries since
      December 31, 2005.




**Item
      9. The Offer and Listing**




**Description
      of Securities**




The
      Shares are traded solely in the form of ADSs, each ADS representing one Share.
      Each ADS is evidenced by an American Depositary Receipt issued by The Bank
      of
      New York acting as Depositary in respect thereof. The principal United States
      trading market for the ADSs, which is also the principal trading market for
      the
      ADSs overall, is the Nasdaq National Market of the Nasdaq Stock Market, Inc.
      (‘‘Nasdaq’’), on which the ADSs are quoted under the symbol ‘‘EDAP.’’ The
      principal non-U.S. trading market for the ADSs was Nasdaq Europe, formerly
      known
      as the European Association of Securities Dealers Automated Quotation System
      (‘‘EASDAQ’’), on which the ADSs were quoted under the symbol ‘‘EDAP’’. The
      Company requested and received a conditional approval from Nasdaq Europe for
      the
      delisting of its ADSs effective on April 25, 2002.




40


**Trading
      Markets**




The
      following tables set forth, for the years 2001 through 2005, the reported high
      and low sales prices of the ADSs on Nasdaq and Nasdaq Europe (through to April
      25, 2002 for Nasdaq Europe).




**Nasdaq****High**
            **Low****$**2006
                (through March 31)
            
            
            
            
            21.64
            5.302005
            
            
            
            
            5.68
            3.102004
            
            
            
            
            3.92
            1.552003
            
            
            
            
            1.99
            1.002002
            
            
            
            
            2.49
            1.152001
            
            
            
            
            3.43
            0.59




The
      following tables set forth, for the years 2004 and 2005 and the first quarter
      of
      2006, the reported high and low sales prices of the ADSs on Nasdaq for each
      full
      financial quarter:




**Nasdaq****High**
            **Low****$**2006:First
                Quarter
            
            
            
            
            21.64
            5.302005:First
                Quarter
            
            
            
            
            5.50
            3.41Second
                Quarter
            
            
            
            
            5.00
            3.65Third
                Quarter
            
            
            
            
            4.27
            3.18Fourth
                Quarter
            
            
            
            
            5.68
            3.102004:First
                Quarter
            
            
            
            
            2.12
            1.55Second
                Quarter
            
            
            
            
            3.61
            1.95Third
                Quarter
            
            
            
            
            2.51
            1.64Fourth
                Quarter
            
            
            
            
            3.92
            1.96




41


The
      following table sets forth, for the most recent six months (from November 2005
      through April 2006), the reported high and low sale prices of the ADSs on Nasdaq
      for each month:





NasdaqHigh
            Low$2005:November
            
            
            
            
            4.50
            3.25December
            
            
            
            
            5.68
            3.812006:January
            
            
            
            
            8.65
            5.30February
            
            
            
            
            8.88
            7.25March
            
            
            
            
            21.64
            8.43April
            
            
            
            
            19.46
            12.68




**Item
      10. Additional Information**




**Memorandum
      and Articles of Association**




Set
      forth
      below is a brief summary of significant provisions of the Company’s articles of
      association ( *statuts* )
      and
      applicable French laws. This description does not purport to be complete and
      is
      qualified in its entirety by reference to the Company’s *statuts* .
      Each
      time they are modified, the Company files copies of its articles of association
      with, and such articles of association are publicly available from, the Registry
      of Commerce and Companies in Lyon, France, under number 316488204
      RCS-LYON.




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




The
      Company’s articles of association were last updated in July 2002 in order
      formally to comply with French Rules on Economic Regulation (the NRE law) and
      to
      reflect the new management structure.




**Corporate
      Purposes**




Pursuant
      to Article 2 of the articles of association, the purposes of the Company
      are:




-
            the
                taking of financial interests, under whatever form, in all French
                or
                foreign groups, companies or businesses which currently exist or
                which may
                be created in the future, mainly through contribution, subscription
                or
                purchasing of stocks or shares, obligations or other securities,
                mergers,
                holding companies, groups, alliances or
                partnerships;


-
            the
                management of such financial
                interests;


-
            the
                direction, management, control and coordination of its subsidiaries
                and
                interests;


-
            the
                provision of all administrative, financial, technical or other services;
                and


-
            generally,
                all operations of whatever nature, financial, commercial, industrial,
                civil, relating to property and real estate which may be connected
                directly or indirectly, in whole or in part, to the Company’s purposes or
                to any other similar or related purposes which may favor the extension
                or
                development of said purposes.




**Board
      of Directors**




On
      July
      30, 2002, the shareholders approved a new management structure for EDAP TMS.
      The
      shareholders opted for management by a Board of Directors instead of a
      Management Board controlled by a Supervisory Board.




The
      Board
      of Directors is currently composed of six members who were appointed by the
      shareholders on July 30, 2002 and November 26, 2002, for a period of three
      years. (See Item 6, ‘‘Directors, Senior Management and Employees’’). However, as
      the Company's articles of association set the duration of the Directors' mandate
      at six years (one year being calculated as the period in between two consecutive
      annual ordinary general shareholder's meetings), the next annual general
      shareholders’ meeting will acknowledge the Directors’ mandate as six years
      expiring upon the date of the general shareholders’ meeting approving the
      financial results for fiscal year 2007. The tenure of a Director terminates
      at
      the end of the ordinary general shareholders' meeting convened to vote upon
      the
      accounts of the then-preceding fiscal year and is held in the year during which
      the office of such Director comes to an end. Directors may always be re-elected;
      the Director may also be dismissed at any time at the shareholders’
meeting.




42


The
      mandate for each member of the Board of Directors expires on the date of the
      ordinary general shareholders' meeting approving the financial results for
      fiscal year 2007.




Each
      Director must own at least one share during his/her term of office. If, at
      the
      time of his/her appointment, the Director does not own the required number
      of
      shares or if during his/her term, he/she no longer owns the required number
      of
      shares, he/she is considered to have automatically resigned if he/she has failed
      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 between two general shareholders
      meetings. Any such provisional appointments must be ratified by the next
      following ordinary shareholders meeting. Even if a provisional appointment
      is
      not ratified, resolutions and acts previously approved by the Board of Directors
      nonetheless remain valid.




When
      the
      number of Directors falls below the compulsory legal minimum, the remaining
      directors must convene an ordinary general shareholders’ meeting, in order 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.




An
      employee of the Company may be appointed as a Director. His/her contract of
      employment must however entail actual work obligations. In this case, he/she
      does not loose the benefit of his/her employment contract.




The
      number of Directors who are also linked to the Company by an employment contract
      cannot exceed one third of the Directors then in office and in any case five
      members.




Directors
      cannot be more than seventy years old. In case one of the Directors reaches
      this
      limit during his/her tenure, the said Director is automatically considered
      to
      have resigned at the next general shareholders meeting. One June 21, 2005,
      the
      shareholders approved a resolution extending the age limit for the Directors
      to
      seventy five years old. The by-laws were then modified accordingly.




The
      Board
      of Directors determines the direction of the Company’s business and supervises
      its operations. Within the limits set out by the corporate purposes and the
      powers expressly granted by law to the general shareholders’ meeting, the Board
      of Directors may deliberate upon the operations of the Company and make any
      decisions in accordance with the Company's business. However, a Director must
      abstain from voting on matters in which he 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 the Company’s 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 the Company
      with regard to criminal proceedings which might be taken against the Company.




43


As
      with
      any other Director, the Chairman cannot be over seventy years old. In case
      the
      Chairman reaches this limit during his/her tenure, he/she will automatically
      be
      considered to have resigned. However, his/her tenure is extended until the
      next
      Board of Directors meeting, during which his/her successor will be appointed.
      Subject to the age limit provision, the Chairman of the Board may also be
      re-elected. One June 21, 2005, the shareholders approved a resolution extending
      the age limit for the Chairman of the Board to seventy five years old. The
      by-laws were then modified accordingly.




***The
      Chief Executive Officer***




The
      Company is managed by the Chairman of the Board of Directors or an individual
      elected by the Board bearing the title of Chief Executive Officer. The choice
      between these two methods of management belongs to the Board of Directors and
      must be made as provided for by the articles of association. On July 1, 2004,
      the Board of Directors appointed Mr. Hugues de Bantel as Chief Executive
      Officer.




The
      Chief
      Executive Officer is vested with the powers to act under all circumstances
      on
      behalf of the Company, within the limits set out by the 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 the Company with respect to third parties. The
      Company is bound by any acts of the Chief Executive Officer even if they are
      contrary to the corporate purposes, unless it is proven that the third party
      knew such act exceeded the corporate purposes or could not ignore so in light
      of
      the circumstances. Publication of the articles of association alone is not
      sufficient evidence of such knowledge.




The
      remuneration of the Chief Executive Officer is set by the Board of Directors,
      upon recommendation of the Compensation Committee. The Chief Executive Officer
      can be terminated at any time by the Board of Directors. If such termination
      is
      found to be unjustified, damages may be allocated to the Chief Executive
      Officer, except when the Chief Executive Officer is also the Chairman of the
      Board.




The
      Chief
      Executive Officer may not hold another position as Chief Executive Officer
      or
      member of a Management Board in a company registered in France except when
      (a)
      such company is controlled (as referred to in Section L.233-16 of the French
      Commercial Code) by the Company and (b) when this controlled company’s shares
      are not quoted on a regulated market.




The
      Chief
      Executive Officer cannot be over seventy years old. In case the Chief Executive
      Officer reaches this limit during his/her office, he/she is automatically be
      considered to have resigned. However, his/her tenure is extended until the
      next
      Board of Directors meeting, during which his/her successor must be
      appointed. ******




***Dividend
      and Liquidation Rights (French Law)***




Net
      income in each fiscal year, as increased or reduced, as the case may be, by
      any
      profit or loss of the Company carried forward from prior years, less any
      contributions to legal reserves, is available for distribution to the
      shareholders of the Company as dividends, subject to the requirements of French
      law and the Company’s articles of association.




Under
      French law and the Company’s articles of association, the Company is required to
      allocate 5% of its net profits in each fiscal year to a legal reserve fund
      until
      the amount in such reserve fund is equal to 10% of the nominal amount of the
      registered capital. The legal reserve is distributable only upon the liquidation
      of the Company.




The
      shareholders of the Company may, upon recommendation of the Board of Directors,
      decide to allocate all or a part of distributable profits, if any, among special
      or general reserves, to carry them forward to the next fiscal year as retained
      earnings, or to allocate them to the shareholders as dividends.




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




If
      the
      Company has made distributable profits since the end of the preceding fiscal
      year (as shown on an interim income statement certified by the Company’s
      statutory auditors), the Board of Directors has the authority under French
      law,
      without the approval of shareholders, to distribute interim dividends to the
      extent of such distributable profits. The Company has never paid interim
      dividends in the past.




44


Under
      French law, dividends are distributed to shareholders pro-rata according to
      their respective shareholdings. Dividends are payable to holders of shares
      outstanding on the date of the shareholders' meeting deciding the distribution
      of dividends, or in the case of interim dividends, on the date of the Board
      of
      Directors meeting approving the distribution of interim dividends. However,
      holders of newly issued shares may have their rights to dividends limited with
      respect to certain fiscal years. The actual dividend payment date is decided
      by
      the shareholders in an ordinary general meeting or by the Board of Directors
      in
      the absence of such a decision by the shareholders. The payment of the dividends
      must occur within nine months from the end of the Company’s fiscal year. Under
      French law, dividends not claimed within five years of the date of payment
      revert to the French State.




In
      the
      event that the Company is liquidated, the Company’s assets remaining after
      payment of its debts, liquidation expenses and all of its remaining obligations
      will be distributed first to repay in full the nominal value of the shares,
      then
      the surplus, if any, will be distributed pro-rata among the shareholders based
      on the nominal value of their shareholdings and subject to any special rights
      granted to holders of priority shares, if any.




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




The
      share
      capital of the Company may be increased only with the approval of the
      shareholders entitled to vote at an extraordinary general meeting, following
      a
      recommendation of the Board of Directors. Increases in the share capital may
      be
      effected either by the issuance of additional shares (including the creation
      of
      a new class of shares) or by an increase in the nominal value of existing
      shares. Additional Shares may be issued for cash or for assets contributed
      in
      kind, upon the conversion of debt securities previously issued by the Company,
      by capitalization of reserves, or, subject to certain conditions, in
      satisfaction of indebtedness incurred by the Company. Dividends paid in the
      form
      of Shares may be distributed in lieu of payment of cash dividends, as described
      above under ‘‘—Dividend and Liquidation Rights (French law).’’ French law
      permits different classes of shares to have liquidation, voting and dividend
      rights different from those of the outstanding ordinary shares.




The
      share
      capital of the Company may be decreased only with the approval of the
      shareholders entitled to vote at an extraordinary general meeting. The share
      capital may be reduced either by decreasing the nominal value of the shares
      or
      by reducing the number of outstanding shares. The conditions under which the
      registered capital may be reduced will vary depending upon whether or not the
      reduction is attributable to losses incurred by the Company. The number of
      outstanding shares may be reduced either by an exchange of shares or by the
      repurchase and cancellation by the Company of its shares. Under French law,
      all
      the shareholders in each class of shares must be treated equally unless the
      inequality in treatment is accepted by the affected shareholder. If the
      reduction is not attributable to losses incurred by the Company, each
      shareholder will be offered an opportunity to participate in such capital
      reduction and may decide whether or not to participate therein.




***Repurchase
      of Shares (French Law)***




Pursuant
      to French law, the Company may not acquire its own shares except (a) to reduce
      its share capital under certain circumstances with the approval of the
      shareholders at an extraordinary general meeting, (b) to provide shares for
      distribution to employees under a profit sharing or stock option plan and (c)
      after obtaining approval from the shareholders at an ordinary general meeting,
      to make purchases for stabilization of quotations on a regulated stock exchange.
      In either case, the amounts to be repurchased under (b) and (c) may not result
      in the Company holding more than 10% of its shares then-issued. A subsidiary
      of
      the Company is prohibited by French law from holding shares of the Company
      and,
      in the event it becomes a shareholder of the Company, such shareholder must
      transfer all the shares of the Company that it holds.




***Attendance
      and Voting at Shareholders’ Meetings (French Law)***




In
      accordance with French law, there are two types of general shareholders’
meetings, ordinary and extraordinary. Ordinary general meetings are required
      for
      matters such as the election of directors, the 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.




45


The
      Board
      of Directors is required to convene an annual ordinary general shareholders
      meeting, which must be held within six months of the end of the Company’s fiscal
      year, for approval of the annual accounts. Other ordinary or extraordinary
      meetings may be convened at any time during the year. Shareholders meetings
      may
      be convened by the Board of Directors or, if the Board of Directors fails to
      call such a meeting, by the Company’s statutory auditors or by a court-appointed
      agent. The court may be requested to appoint an agent either by one or more
      shareholders holding at least 5% of the Company’s registered capital or by an
      interested party under certain circumstances, or, in case of an urgent matter,
      by the Work Council ( *Comit* *é* *d’entreprise* )
      representing the employees. The notice calling a meeting must state the agenda
      for such meeting.




French
      law provides that, at least 15 days before the date set for any general meeting
      on first notice, and at least six days before the date set for any general
      meeting on second notice, notice of the meeting must be sent by mail to all
      holders of properly registered shares who have held such shares for more than
      one month prior to the date of the notice. A preliminary written notice
      ( *avis
      de r* *é* *union* )
      must be
      sent to each shareholder who has requested to be notified in writing. Under
      French law, one or several shareholders together holding a specified percentage
      of shares may propose resolutions to be submitted for approval by the
      shareholders at the meeting. Holders of ADSs will receive notices of
      shareholders meetings and other reports and communications that are made
      generally available to shareholders from the Bank of New York, the Depositary
      for the ADSs. The Work Council may also require the registration of resolution
      proposals on the agenda.




Attendance
      and exercise of voting rights at ordinary and extraordinary general meetings
      are
      subject to certain conditions. Shareholders deciding to exercise their voting
      rights must have their shares registered in their names in the shareholder
      registry maintained by or on behalf of the Company prior to the meeting. Certain
      procedures to effect such requirements will be required of a holder of ADSs
      to
      exercise the voting rights relating to the shares represented by such ADSs.


All
      shareholders who have properly registered their shares have the right to
      participate in general meetings, either in person, by proxy, or by mail, and
      to
      vote according to the number of shares they hold. Each share confers on the
      shareholder the right to one vote. Under French law, an entity controlled
      directly or indirectly by the Company is prohibited from holding shares in
      the
      Company and, in the event it becomes a shareholder, such entity would not be
      entitled to any voting rights. A proxy may be granted by a shareholder whose
      name is registered on the Company’s share registry to his or her spouse, to
      another shareholder or to a legal representative, in the case of a legal entity,
      or by sending a proxy in blank to the Company without nominating any
      representatives. In the latter case, the Chairman of the shareholders’ meeting
      will vote such blank proxy in favor of all resolutions proposed by the Board
      of
      Directors and against all others.




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




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




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




46


Under
      French law, shareholders can nominate individuals for election to the Board
      of
      Directors at a shareholders’ meeting. When the nomination is part of the agenda
      of the shareholders’ meeting, the nomination must contain the name, age,
      professional references and professional activity of the nominee for the past
      five years, as well as the number of shares owned by such candidate, if any.
      In
      addition, if the agenda for the shareholders’ meeting includes the election of
      members of the Board of Directors, any shareholder may require, during the
      meeting, the nomination of a candidate for election at the Board of Directors
      at
      the shareholders’ meeting, even if such shareholder has not followed the
      nomination procedures. Under French law, shareholders cannot elect a new member
      of the Board of Directors at a general shareholders meeting if the agenda for
      the meeting does not include the election of a member of the Board of Directors,
      unless such nomination is necessary to fill a vacancy due to the previous
      resignation of a member.




As
      set
      forth in the Company’s articles of association, shareholders’ meetings are held
      at the registered office of the Company or at any other locations specified
      in
      the written notice. The Company has no staggered or cumulative voting
      arrangements for the election of Directors.




***Preferential
      Subscription Rights (French Law)***




Shareholders
      have preferential rights to subscribe for additional shares issued by the
      Company for cash on a pro-rata basis (or any equity securities of the Company
      or
      other securities giving a right, directly or indirectly, to equity securities
      issued by the Company). Shareholders may waive their preferential rights, either
      individually or at an extraordinary general meeting under certain circumstances.
      Preferential subscription rights, if not previously waived, are transferable
      during the subscription period relating to a particular offering of shares.
      U.S.
      holders of ADSs may not be able to exercise preferential rights for Shares
      underlying their ADSs unless a registration statement under the Securities
      Act
      is effective with respect to such rights or an exemption from the registration
      requirement thereunder is available.




***Form
      and Holding of Shares (French Law)***




*Form
      of Shares*




The
      Company’s articles of association provide that shares can only be held in
      registered form.




*Holding
      of Shares*




The
      shares are registered in the name of the respective owners thereof in the
      registry maintained by or on behalf of the Company.




Stock
      certificates evidencing shares, in a manner comparable to that in the United
      States, are not issued by French companies, but the Company may issue or cause
      to be issued confirmations of shareholdings registered in such registry to
      the
      persons in whose names the shares are registered. Such confirmations do not
      constitute documents of title and are not negotiable instruments.




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




Under
      French law, there is no limitation on the right of non-French residents or
      non-French security holders to own, or where applicable, vote securities of
      a
      French company. A non-resident of France must file a *d* *é* *claration
      administrative* ,
      or
      administrative notice, with French authorities in connection with the
      acquisition of a controlling interest in any French company. Under existing
      administrative rulings, ownership, by a non-resident of France or a French
      corporation which is itself controlled by a foreign national, of 33 1/3% or
      more
      of a company’s share capital or voting rights is regarded as a controlling
      interest, but a lower percentage may be held to be a controlling interest in
      certain circumstances (depending upon such factors as the acquiring party’s
      intentions, its ability to elect directors or financial reliance by the French
      company on the acquiring party).




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




Under
      the
      U.S. securities laws, as a foreign private issuer, EDAP TMS is exempt from
      certain rules that apply to domestic U.S. issuers with equity securities
      registered under the U.S. Securities Exchange Act of 1934, including the proxy
      solicitation rules and the rules requiring disclosure of share ownership by
      directors, officers and certain shareholders. EDAP TMS is also exempt from
      certain of the current corporate governance requirements of the Nasdaq Stock
      Market. For more information on these exemptions, see Item 6, ‘‘Directors,
      Senior Management and Employees—Exemptions from Certain Nasdaq Corporate
      Governance Rules.’’




47


***Enforceability
      of Civil Liabilities (French Law)***




EDAP
      TMS
      is a *soci* *é* *t* *é* *anonyme* ,
      or
      limited liability corporation, organized under the laws of the Republic of
      France. The majority of the directors and executive officers of EDAP TMS reside
      in the Republic of France. All or a substantial portion of the assets of such
      persons and of the Company 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.
      The
      Company believes 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 the obtaining of evidence in France or from French
      persons in connection with such actions.




**Material
      Contracts**




The
      Company is a party to a commercial lease agreement for its corporate
      headquarters and R&D and manufacturing facilities are located in
      Vaulx-en-Velin, on the outskirts of Lyon. The premises comprise 3,740 square
      meters. The lease has a term of nine years and is renewable at the lessee’s
      option. The Company believes that the terms of the lease reflect commercial
      practice and market rates.




On
      February 25, 2004, the Company entered into a distribution agreement with a
      subsidiary of HealthTronics granting HealthTronics, among other things, (i)
      the
      right to begin clinical trials with the Ablatherm (which utilizes HIFU to
      provide minimally invasive treatment of prostate cancer), (ii) the right to
      seek
      Pre-Market Approval (‘‘PMA’’) from the FDA and (iii) exclusive distribution
      rights in the United States, when and if a PMA is granted. Under the terms
      of
      the distribution agreement, the Company also agreed to grant HealthTronics
      1
      million warrants ( *bons
      de souscription d’actions* )
      on
      January 28, 2005, each which will entitle HealthTronics to purchase a Share
      of
      the Company at a price of U.S.$1.50. The warrants are subject to the terms
      and
      conditions of an accompanying escrow agreement, which, among other things,
      include restraints on subsequent resale of the warrant Shares. The distribution
      agreement allows HealthTronics to exercise specified numbers of warrants as
      it
      meets various specified distribution milestones. Under a December 2004 amendment
      to the distribution agreement, HealthTronics’s exclusive use of the Ablatherm
      trade names was waived until such time as it obtained the PMA from the FDA.
      On
      December 29, 2005, HealthTronics, through its subsidiary, and the Company
      entered into an amendment to the distribution agreement. HealthTronics
      wishes to focus its efforts on obtaining the PMA for Ablatherm and on developing
      the HIFU market potential on the US territory, and does not want to pursue
      the
      distribution of the Company's ** lithotripters
      in the US. The
      200,000 warrants that had been issued to HealthTronics were cancelled, as the
      conditions precedent to their exercise were directly linked to future purchases
      of lithotripters manufactured by the Company.




**Exchange
      Controls**




Under
      current French foreign exchange control regulations, there are no limitations
      on
      the amount of cash payments that may be remitted by the Company 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.




48


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 changes in applicable laws and tax treaties
      after
      such date.




This
      discussion is intended only as a descriptive summary and does not purport to
      be
      a complete analysis or listing of all potential tax effects of the purchase,
      ownership or disposition of Shares or ADSs. The following summary does not
      address the treatment of Shares or ADSs that are held by a resident of France
      (except for purposes of describing related tax consequences for other holders)
      or in connection with a permanent establishment or fixed base through which
      a
      holder carries on business or performs personal services in France, or by a
      person that owns, directly or indirectly, 5% or more of the stock of the
      Company. Moreover, the following discussion of the tax treatment of dividends
      only deals with distributions made on or after January 1, 2006.




There
      are
      currently no procedures available for holders that are not U.S. residents to
      claim tax treaty benefits in respect of dividends received on ADSs or Shares
      registered in the name of a nominee. Such holders should consult their own
      tax
      advisor about the consequences of owning and disposing of ADSs.




Investors
        should consult their own tax advisors regarding the tax consequences of the
        purchase, ownership and disposition of shares in light of their particular
        circumstances.




***Taxation
      of Dividends on Shares or ADSs - Withholding Tax***




In
      France, dividends are paid out of after-tax income. Dividends paid to
      non-residents normally are subject to a 25% French withholding tax. However,
      non-resident holders that are entitled to and comply with the procedures for
      claiming benefits under an applicable tax treaty may be subject to a reduced
      rate (generally 15%) of French withholding tax. If a non-resident holder
      establishes its entitlement to treaty benefits prior to the payment of a
      dividend, then French tax generally will be withheld a the reduced rate provided
      under the treaty.




*New
      Tax Credit*


As
        a
        results of the reforms implemented by the French Finance Law for 2004 and
        the
        French Finance Law for 2006, from January 1, 2006, French resident individuals
        are taxed on only 60% of the dividends they receive and, in addition to a
        fixed
        allowance, are entitled to a tax credit equal to 50% of all dividends received
        within on year (the "Tax Credit"). The Tax Credit is capped at €230 for married
        couples and members of a union agreement subject to joint taxation and €115 for
        single persons, widows or widowers, divorcees or married persons subject
        to
        separate taxation.
 
 Dividends
        paid to non-residents are not normally eligible for the Tax Credit described
        above. However, qualifying non-resident individuals may, depending on the
        provisions of the tax treaty possibly entered into between France and their
        country of residence, benefit from a refund of the Tax Credit (net of applicable
        withholding tax) under certain conditions, subject to compliance with the
        procedures for claiming benefits under the applicable treaty. The French
        tax
        authorities have not yet issued any guidance with regard to the procedures
        for
        claiming the refund of the Tax Credit to non-resident
        individuals.




49


Individual
      investors are urged to consult their own tax adviers in this
      respect.




***Taxation
      on Sale or Disposition of Shares or ADSs***




Subject
      to the more favorable provisions of a relevant tax treaty, holders that are
      not
      residents of France for tax purposes, do not hold Shares or ADSs in connection
      with the conduct of a business or profession in France, and have not held more
      than 25% of dividend rights ( *droits
      aux bénéfices sociaux* )
      of the
      Company, directly or indirectly, at any time during the preceding five years,
      are not subject to French income tax or capital gains tax on the sale or
      disposition of Shares or ADSs.




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




*Estate
      and Gift Tax*




France
      imposes estate and gift tax on shares or ADSs of a French company that are
      acquired by inheritance or gift. The tax applies without regard to the tax
      residence of the transferor. However, France has entered into estate and gift
      tax treaties with a number of countries pursuant to which, assuming certain
      conditions are met, residents of the treaty country may be exempted from such
      tax or obtain a tax credit.




*Wealth
      Tax*




Individuals
      who are not residents of France for purposes of French taxation are not subject
      to a wealth tax ( *impôt
      de solidarité sur la fortune* )
      in
      France as a result of owning an interest in the share capital of a French
      company, provided that such ownership interest is less than 10% of the company’s
      share capital and does not enable the shareholder to exercise influence over
      the
      company. Double taxation treaties may provide for a more favorable tax
      treatment.




**Taxation
      of U.S. Investors**




The
      following is a summary of the material French and U.S. federal income tax
      consequences of the purchase, ownership and disposition of Shares or ADSs by
      a
      holder that is a resident of the United States for purposes of the income tax
      convention between the United States and France (the ‘‘Treaty’’) and is fully
      eligible for benefits under the Treaty (a ‘‘U.S. holder’’). A holder generally
      will be entitled to Treaty benefits in respect of Shares or ADSs if he
      is:




50


·
            the
                beneficial owner of the shares or ADSs (and the dividends paid with
                respect thereto);




·
            an
                individual resident of the United States, a U.S. corporation, or
                a
                partnership, estate or trust to the extent its income is subject
                to
                taxation in the United States in its hands or in the hands of its
                partners
                or beneficiaries;




·
            not
                also a resident of France for French tax purposes;
                and




·
            not
                subject to an anti-treaty shopping article that applies in limited
                circumstances.




Special
      rules apply to pension funds and certain other tax-exempt
      investors.




For
      U.S.
      federal income tax purposes, a U.S. holder’s ownership of the company’s ADSs
      will be treated as ownership of the company’s underlying shares.




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




This
      summary does not discuss the treatment of Shares or ADSs that are held in
      connection with a permanent establishment or fixed base through which a holder
      carries on business or performs personal services in France. Moreover, the
      following discussion of the tax treatment of dividends only deals with
      distributions made on or after January 1, 2006.




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




***Dividends***




Generally,
      dividend distributions to non-residents of France are subject to French
      withholding tax at a 25% rate and are not eligible for the benefit of the Tax
      Credit available to French resident individuals, as described above. However,
      under the Treaty, holders can claim the benefit of a reduced dividend
      withholding tax rate of 15%.





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




U.S.
      holders that are legal entities, pension funds or other tax-exempt holders
      are
      no longer entitled to tax credit payments from the French Treasury.




French
      withholding tax will be withheld at the 15% Treaty rate for holders that have
      established before the date of payment that they are residents of the United
      States under the Treaty by following the simplified procedure described
      below.





The
      gross
      amount of dividend and Tax Credit that a U.S. holder receives (prior to
      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.





51


Subject
      to certain exceptions for short-term and hedged positions, the U.S. dollar
      amount of dividends received by an individual prior to January 1, 2009 with
      respect to the Shares or ADSs will be subject to taxation at a maximum rate
      of
      15% if the dividends are “qualified dividends.” Dividends paid on the Shares or
      ADSs will be treated as qualified dividends if (i) t he
      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, the Company believes that it was not treated as a PFIC for U.S. federal
      income tax purposes with respect to its 2005 taxable year. In addition, based
      on
      the Company’s audited financial statements and its current expectations
      regarding the value and nature of its assets, the sources and nature of its
      income, and relevant market and shareholder data, the Company does not
      anticipate becoming a PFIC for its 2006 taxable year. Accordingly, dividends
      paid by the Company in 2006 to a U.S. holder should constitute “qualified
      dividends” unless such holder acquired its Shares or ADSs during a year in which
      the Company was a PFIC and such holder did not make a mark-to-market election
      (as described under “—Passive Foreign Investment Company Rules”
below).




The
      U.S.
      Treasury has announced its intention to promulgate rules pursuant to which
      holders of ADSs or common stock and intermediaries though whom such securities
      are held will be permitted to rely on certifications from issuers to establish
      that dividends are treated as qualified dividends. Because such procedures
      have
      not yet been issued, it is not clear whether the Company will be able to comply
      with them.




*Holders
      of ADSs and Shares should consult their own tax advisers regarding the
      availability of the reduced dividend tax rate in the light of their own
      particular circumstances.*




Distributions
      out of earnings and profits with respect to the Shares or ADSs generally will
      be
      treated as dividend income from sources outside of the United States and
      generally will be treated separately along with other items of “passive” (or, in
      the case of certain U.S. holders, “financial services”) income for purposes of
      determining the credit for foreign income taxes allowed under the Code. Subject
      to certain limitations, French income tax withheld in connection with any
      distribution with respect to the Shares or ADSs may be claimed as a credit
      against the U.S. federal income tax liability of a U.S. holder if such U.S.
      holder elects for that year to credit all foreign income taxes. Alternatively
      such French withholding tax may be taken as a deduction against taxable income.
      Foreign tax credits will not be allowed for withholding taxes imposed in respect
      of certain short-term or hedged positions in securities and may not be allowed
      in respect of certain arrangements in which a U.S. holder’s expected economic
      profit is insubstantial. U.S. holders should consult their own tax advisors
      concerning the implications of these rules in light of their particular
      circumstances.





To
      the
      extent that an amount received by a U.S. holder exceeds the allocable share
      of
      current and accumulated earnings and profits of the Company, such excess will
      be
      applied first to reduce such U.S. holder’s tax basis in its Shares or ADSs and
      then, to the extent it exceeds the U.S. holder’s tax basis, it will constitute
      capital gain from a deemed sale or exchange of such Shares or ADSs.




Dividends
      paid in euro will be included in the income of a U.S. Holder in a U.S. dollar
      amount calculated by reference to the exchange rate in effect on the date of
      receipt by the holder (or, in the case of the ADSs, by the Depositary),
      regardless of whether the payment is in fact converted into U.S. dollars. If
      such a dividend is converted into U.S. dollars on the date of receipt, a U.S.
      holder generally should not be required to recognize foreign currency gain
      or
      loss in respect of the dividend income.




***Procedures
      for Claiming Treaty Benefits***




The
      French tax authorities issued new guidelines in the Instruction No. 4-J-1-05,
      dated February 25, 2005 that significantly changed the formalities to be
      complied with by non-resident shareholders, including U.S. holders, in order
      to
      obtain the reduced withholding tax rate on distributions made on or after
      January 1, 2005.





52


Pursuant
      to the new guidelines, U.S. holders can either claim Treaty benefits under
      a
      simplified procedure or under the normal procedure. The procedure to be followed
      depends on whether the application for Treaty benefits is filed before or after
      the dividend payment.




Under
        the
        simplified procedure, in order to benefit from the lower rate of withholding
        tax
        applicable under the Treaty before the payment of the dividend, you must
        complete and deliver to the paying agent (through its account holder) as
        set out
        in the Instruction n° 4 J-1-05 mentioned above, a certificate stating
        that:




·
            you
                are a U.S. resident within the meaning of the
                Treaty;


·
            the
                dividend is not derived from a permanent establishment or a fixed
                base
                that you own in France;


·
            the
                dividend received is subject to tax in the United
                States.




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




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
      the
      certificate 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 a
      specific treaty form (No. 5052 RF1-EU or No. 5053 RF1-EU) no
      later
      than December 31 of the second year following the year in which the dividend
      is
      paid.




Copies
      of
      the simplified certificate and of the specific treaty forms are available from
      the U.S. Internal Revenue Service and from the *Centre
      des Impôts des Non-Résidents* (9 rue
      d’Uzès, 75094 Paris Cedex 2).





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




***Capital
      Gains***




Under
      the
      Treaty, a U.S. holder will not be subject to French tax on any gain derived
      from
      the sale or exchange of Shares or ADSs, unless the gain is effectively connected
      with a permanent establishment or fixed base maintained by the holder in
      France.




For
      U.S.
      federal income tax purposes, gain or loss realized by a U.S. holder on the
      sale
      or other disposition of Shares or ADSs will be capital gain or loss, and will
      be
      long-term capital gain or loss if the Shares or ADSs were held for more than
      one
      year. The net amount of long-term capital gain recognized by an individual
      U.S.
      holder generally is subject to taxation at a maximum rate of 20%; however,
      net
      long-term capital gain recognized by an individual U.S. holder after May 5,
      2003
      and before January 1, 2009 generally is subject to taxation at a maximum rate
      of
      15%. U.S. Holders’ ability to offset capital losses against ordinary income is
      limited.




***Passive
      Foreign Investment Company Rules***




The
      Company will be classified as a PFIC in a particular taxable year if
      either:




·
            75%
                or more of the Company’s gross income is treated as passive income for
                purposes of the PFIC rules; or




·
            the
                average percentage of the value of the Company’s assets that produce or
                are held for the production of passive income is at least
                50%.




53


As
      discussed above (see “—Dividends”) the Company believes that it was not a PFIC
      in 2005 and does not anticipate being a PFIC in 2006. However, as discussed
      in
      Forms 20-F filed by the Company with respect to prior years, the Company
      believes that it was a PFIC during certain periods.




If
      a U.S.
      holder held Shares or ADSs during a year in which the Company was a PFIC and
      does not make the mark-to-market election, described in the next paragraph,
      such
      holder will be subject to a special additional tax, determined as described
      below, on certain dividends received and gains realized (‘‘excess
      distributions’’) in subsequent years, without regard to whether the Company was
      a PFIC in the year the excess distribution was received. The amount of this
      tax
      is equal to the sum of (i) tax at ordinary rates on the amount of the excess
      distribution, plus (ii) an interest charge to compensate for tax deferral,
      calculated as if the excess distribution had been earned ratably over the period
      the U.S. holder held its Shares or ADSs. Classification as a PFIC may also
      have
      other adverse tax consequences, including the denial of a step-up in the basis
      of Shares and ADSs at death.




U.S.
      holders can avoid the unfavorable treatment described above by electing to
      mark
      their Shares or ADSs to market. For any year in which the Company is a PFIC,
      a
      U.S. holder who makes a mark-to-market election would include as ordinary income
      the excess of the fair market value of the Shares or ADSs at year-end over
      the
      holder’s basis in those Shares or ADSs. In addition, any gain recognized upon a
      sale of Shares or ADSs in such year would be taxed as ordinary
      income.




The
      Company does not intend to furnish holders with the information necessary to
      make a qualified electing fund (‘‘QEF’’) election.




***French
      Estate and Gift Tax***




Under
      the
      estate and gift tax convention between the United States and France, a transfer
      of Shares or ADSs by gift or by reason of the death of a U.S. holder entitled
      to
      benefits under that convention will not be subject to French gift or inheritance
      tax, so long as the donor or decedent was not domiciled in France at the time
      of
      the transfer, and Shares or ADSs were not used or held for use in the conduct
      of
      a business or profession through a permanent establishment or fixed base in
      France.




***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**




The
      Company is subject to the informational requirements of the Securities Exchange
      Act of 1934, as amended. In accordance with these requirements, the Company
      files reports and other information with the Securities and Exchange Commission.
      These materials, including this Annual Report and the exhibits hereto, may
      be
      inspected and copied at the Commission’s Public Reference Room at 450 Fifth
      Street, N.W., Washington, D.C. 20549 and at the Commission’s regional offices at
      500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and 233 Broadway,
      New York, New York 10279. Copies of the materials may be obtained from the
      Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington,
      D.C. 20549 at prescribe rates. The public may obtain information on the
      operation of the Commission’s Public Reference Room by calling the Commission in
      the United States at +1 800 SEC 0330.




54


**Item
      11. Quantitative and Qualitative Disclosures about Market
      Risk**




The
      Company is exposed to market risk from changes in both foreign currency exchange
      rates and interest rates. The Company does not hold or issue derivative or
      other
      financial instruments for trading purposes. As of December 31, 2005, the Company
      had five foreign exchange sale contracts, three for the Japanese yen which
      expire on March, June and September 2006 and two for U.S. dollar which expire
      on
      February and April 2006. As
      of
      March 31, 2006, the Company had three new foreign exchange sale contracts,
      one
      for the Japanese yen and two for U.S. dollars .




**Exchange
      Rate Risk**




***Revenues
      and Expenses in Foreign Currencies***




The
      Company is exposed to foreign currency exchange rate risk because a significant
      portion of its costs are denominated in currencies other than those in which
      it
      earns revenues. In 2005, approximately 76% of the Company’s selling and general
      and administrative expenses and approximately 93% of the Company’s R&D
      expenses were denominated in euro. During the same period, only 58% of the
      Company’s sales were denominated in euro, the remainder being denominated
      primarily in U.S. dollars and Japanese yen.




A
      uniform
      10% strengthening in the value of the euro as of December 31, 2005 relative
      to
      the U.S. dollar and the Japanese yen would have resulted in an increase in
      income before taxes and minority interests of approximately €28,000 for the year
      ended December 31, 2005, compared to an increase of approximately €43,000 for
      the year ended December 31, 2004. This calculation assumes that the U.S. dollar
      and Japanese yen exchange rates would have changed in the same direction
      relative to the euro. In addition to the direct effects of changes in exchange
      rates quantified above, changes in exchange rates also affect the volume of
      sales. The foreign exchange sale contracts in place as of December 31, 2005
      will
      be effective as from January 2006. The Company regularly assesses the exposure
      of its receivables to fluctuations in the exchange rates of the principal
      foreign currencies in which its sales are denominated (in particular, the U.S.
      dollar and the Japanese yen) and, from time to time, hedges such exposure by
      entering into forward sale contracts for the amounts denominated in such
      currencies that it expects to receive from its local subsidiaries. As of
      December 31, 2005, the Company had three options to hedge against Japanese
      yen
      for a total nominal amount of JPY45 million (i.e. €331 thousand), an amount of
      JPY15 million each, expiring on March, June and September 2006 respectively
      and
      two options to hedge against US$ for a total nominal amount of US$200 thousand
      (i.e. €160 thousand), an amount of US$100 thousand each, expiring on February
      and April 2006. As of March 31, 2006, the Company had three new foreign exchange
      sale contracts, one for the Japanese yen and two for U.S. dollars.




***Financial
      Instruments and Indebtedness***




Over
      the
      past three years, the Company also has had exchange rate exposures with respect
      to indebtedness and assets denominated in Japanese yen. Approximately €0.2
      million, €0.5 million and €0.3 million of the outstanding indebtedness of the
      Company at December 31, 2005, 2004 and 2003, respectively, was denominated
      in
      Japanese yen. None of the Company’s outstanding indebtedness over the past three
      years was denominated in U.S. dollars. In addition, the Company had
      approximately €0.5 million, €1.2 million and €0.4 million of cash denominated in
      U.S. dollars at December 31, 2005, 2004 and 2003, respectively, and €0.9
      million, €1.3 million and €0.7 million of cash denominated in Japanese yen at
      December 31, 2005, 2004 and 2003, respectively.




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




Not
      Applicable.





**PART
      II**




**Item
      13. Defaults, Dividend Arrearages and Delinquencies**




Not
      Applicable.




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




Not
      Applicable.




55


**Item
      15. Controls and Procedures**




Within
      the 90 days prior to date of this Annual Report, the Company carried out an
      evaluation under supervision and with the participation of the Company’s
      management, including the Chief Executive Officer and Chief Financial Officer,
      of the effectiveness of the design and operation of the Company’s disclosure
      controls and procedures. There are inherent limitations to the effectiveness
      of
      any system of disclosure controls and procedures, including the possibility
      of
      human error and the circumvention or overriding of the controls and procedures.
      Accordingly, even effective disclosure controls and procedures can only provide
      reasonable assurance of achieving their control objectives. Based upon and
      as of
      the date of the Company’s evaluation, the Chief Executive Officer and Chief
      Financial Officer concluded that the disclosure controls and procedures are
      effective in all material respects to ensure that information required to be
      disclosed in the reports the Company files and submits under the Exchange Act
      is
      recorded, processed, summarized and reported as and when required.




There
      has
      been no change in the Company’s internal control over financial reporting during
      the Company’s 2005 fiscal year 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**




The
      board
      of directors of the Company 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**




The
      Company has adopted a code of ethics applicable to its Chief Executive Officer,
      Chief Financial Officer, principal accounting officers and to any persons
      performing similar functions. The code of ethics is reviewed every year by
      the
      Board of Directors. In 2005, there were no waivers of its applicability. The
      Company has attached its code of ethics as an exhibit to this report and has
      made it available on the Company’s 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 the Audit
      Committee of EDAP TMS SA Board of Directors on December 22, 2003 and reviewed
      on
      July 22, 2005. This requires all services which are to be performed by our
      external auditors to be pre-approved. This may be in the form of a general
      pre-approval or as pre-approval on a case-by-case basis. All services to be
      performed by the external auditors were subjected to the above policy and
      approved in advance. The Audit Committee has been regularly informed of the
      services and the fees to be paid. No services which are classified as prohibited
      services by the U.S. Securities and Exchange Commission under the 2003 Rules
      were commissioned after May 6, 2003. Our external auditors Ernst & Young
      Audit (‘‘ E&Y’’) billed the following services related to our 2005 financial
      year:





**Nature
                of the Fees**
            
            
            **2004**
              **(in
                €)**
            **2005**
              **(in
                €)**Audit
                fees
            
            
            143,265
            136,020Audit-related
                fees
            
            
            8,010
            97,305Tax
                fees
            
            
            -
            -All
                other fees
            
            
            -
            -**Total**
            
            
            **151,275**
            **233,325**





***Audit
      Fees***




The
      following services were billed under the category ‘‘audit services’’: audit of
      financial statements and services performed in relation to legal obligations,
      including the formulation of audit opinions and reports, domestic and
      international legal audits and support in the preparation and auditing of the
      documents to be filed. Audit services also included the auditing of information
      systems and processes and tests, which serve to promote understanding and
      reliability of the systems and internal corporate controls, as well as advice
      on
      issues of billing, accounting and reporting.




56


***Audit-Related
      Fees***




Audit-related
      services mainly consisted of services, which are normally performed by the
      external auditor in connection with the auditing of the annual financial
      statements. Audit-related services also included advice on issues of accounting
      and reporting which were not classified as audit services, support with the
      interpretation and implementation of new accounting and reporting standards,
      auditing of employee benefit plans and support with the implementation of
      corporate control requirements for reporting.




***Tax
      Fees***




Tax
      services consisted of services relating to issues of domestic and international
      taxation (adherence to tax law, tax planning and tax consulting). Furthermore,
      services were commissioned for the review of tax returns, assistance with tax
      audits, as well as assistance relating to tax law. No tax services were rendered
      over 2005 fiscal year.




***All
      Other Fees***




Other
      services mainly consisted of routine and administrative follow-up of patents
      and
      brand names. All these services were unrelated to the audits of our financial
      statements.




**Item
      16D. Exemptions from the Listing Standards for Audit
      Committees**





Not
      applicable





**Item
      16E. Purchases of Equity Securities by the Issuer and Affiliated
      Purchasers**





In
      2005,
      neither the Company nor affiliated purchasers made purchases of equity
      securities of the Company registered pursuant to Section 12 of the Exchange
      Act.







57


**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.









58


**INDEX
      TO EXHIBITS**





Pursuant
      to the rules and regulations of the Securities and Exchange Commission, the
      Company has filed certain agreements as exhibits to this annual report on Form
      20-F. These agreements may contain representations and warranties by the
      parties. These representations and warranties have been made solely for the
      benefit of the other party or parties to such agreements and (i) may be intended
      not as statements of fact, but rather as a way of allocating the risk to one
      of
      the parties to such agreements if those statements turn out to be inaccurate;
      (ii) may have been qualified by disclosures that were made to such other party
      or parties and that either have been reflected in the Company’s filings or are
      not required to be disclosed in those filings; (iii) may apply materiality
      standards different from what may be viewed as material to investors; and (iv)
      were made only as of the date of such agreements or such other
      date(s) as may be specified in such agreements and are subject to more recent
      developments. Accordingly, these representations and warranties may not describe
      the Company’s actual state of affairs at the date hereof.




**Exhibit
      Description**




**Number:**




1.1
            By-laws
                (*statuts*)
                of EDAP TMS S.A. as amended as of June 21, 2005 (together with an
                English
                translation thereof).


4.1
            (a)
            Distribution
                Agreement, dated as of February 25, 2004, among the Company, HT Prostate
                Therapy
                Management Company, LLC, EDAP S.A. and Technomed Medical Systems,
                S.A.(2)


(b)
            Amendment
                No. 1 to the Distribution Agreement dated December 23, 2004.(1)


(c)
            Amendment
                No. 2 to the Distribution Agreement dated December 29,
                2005.


4.2
            (a)
            Commercial
                Leases dated October 1, 2002 and Amendment No. 1 dated October 15,
                2002,
                between
                Maison Antoine Baud and EDAP TMS S.A., EDAP S.A. and Technomed MedicalSystems
                S.A. (together with an English translation thereof).(1)


(b)
            Appendix
                No. 2 to commercial leases between TMS S.A. and Maison Antoine Baud,
                signed on June 28, 2004.(1)


8.1
            List
                of subsidiaries of EDAP TMS S.A. as of March 31,
                2006.


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.





*(1)*
            *Previously
                filed**.*


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








59




**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:
      June 5, 2006


*Hugues
      de Bantel*


*Chief
      Executive Officer*









Dated:
      June 5, 2006


*Thierry
      Turbant*


*Chief
      Financial Officer*







60


**INDEX
      TO FINANCIAL STATEMENTS**


**Audited
                    Consolidated Financial Statements for EDAP TMS S.A. and Subsidiaries
                    for
                    the Years Ended December 31, 2005, 2004 and
                    2003**Report
                    of Independent Auditors
                F-1Consolidated
                    Balance Sheets as of December 31, 2005 and 2004
                F-2Consolidated
                    Statements of Income for the years ended December 31, 2005, 2004
                    and 2003
                F-3Consolidated
                    Statements of Comprehensive Income for the years ended December
                    31, 2005,
                    2004 and 2003
                F-4Consolidated
                    Statements of Shareholders’ Equity for the years ended December 31, 2005,
                    2004 and 2003
                F-5Consolidated
                    Statements of Cash Flows for the years ended December 31, 2005,
                    2004 and
                    2003
                F-6Notes
                    to Consolidated Financial Statements
                F-7
   
 **Report
        of Independent Auditors**
 
  To
        the
        Board of Directors
 and
        Shareholders of EDAP TMS S.A.
  We
        have
        audited the accompanying consolidated balance sheets of EDAP TMS S.A. (the
        ‘‘Company’’) and its subsidiaries as of December 31, 2005 and 2004, and the
        related consolidated statements of income, comprehensive income, shareholders’
equity and cash flows for each of the three years in the period ended December
        31, 2005. These financial statements are the responsibility of the Company’s
        management. Our responsibility is to express an opinion on these financial
        statements based on our audits.
  We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States). Those standards require that
        we plan
        and perform the audit to obtain reasonable assurance about whether the financial
        statements are free of material misstatement. We were not engaged to perform
        an
        audit of the Company’s internal control over financial reporting. An
        audit
        includes consideration of internal control over financial reporting as a
        basis
        for designing audit procedures that are appropriate in the circumstances,
        but
        not for the purpose of expressing an opinion on the effectiveness of the
        Company’s internal control over financial reporting. Accordingly, we express no
        such opinion. An audit also includes examining, on a test basis, evidence
        supporting the amounts and disclosures in the financial statements, assessing
        the accounting principles used and significant estimates made by management,
        as
        well as evaluating the overall financial statement presentation. We believe
        that
        our audits provide a reasonable basis for our opinion.
  In
        our
        opinion, the financial statements referred to above present fairly, in all
        material respects, the consolidated financial position of EDAP TMS S.A. and
        its
        subsidiaries at December 31, 2005 and 2004, and the consolidated results
        of
        their operations and their cash flows for each of the three years in the
        period
        ended December 31, 2005 in conformity with U.S. generally accepted accounting
        principles.
  ERNST
        & YOUNG Audit
  
 Represented
        by
 *Jean-Luc
        Desplat*
 June
        6,
        2006
 Lyon,
        France
 
 
 F-1
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **CONSOLIDATED
        BALANCE SHEETS**
 **As
        of December 31, 2005 and 2004**
 **(in
        thousands of euros unless otherwise noted)**
 
 **ASSETS**
              **Notes**
              **2005**
              **2004****Current
                  assets**Cash
                  and cash equivalents
              2
              8,317
              9,398Trade
                  accounts and notes receivable, net of allowance of €663 in 2005 and €705
                  in 2004
              3
              8,769
              7,722Other
                  receivables
              4
              850
              473Inventories
              5
              4,450
              3,939Deferred
                  tax assets
              21-3
              0
              77Prepaid
                  expenses
              
              391
              432Total
                  current assets
              
              22,777
              22,041Property
                  and equipment, net
              6
              3,130
              2,807Intangible
                  assets, net
              7
              86
              119Goodwill
              7
              2,412
              2,412Deposits
                  and other non-current assets
              
              391
              522Total
                  assets
              
              28,796
              27,901**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY****Current
                  liabilities**Trade
                  accounts and notes payable
              8
              4,305
              3,675Deferred
                  revenues, current portion
              9
              771
              843Social
                  security and other payroll withholdings taxes
              
              605
              513Employee
                  absences compensation
              
              438
              424Income
                  taxes payable
              
              19Accruals
                  for restructuring
              18
              
              136Other
                  accrued liabilities
              10
              2,305
              1,816Short-term
                  borrowings
              12
              899
              525Current
                  portion of capital lease obligations
              11
              385
              334Current
                  portion of long-term debt
              13
              147
              6Total
                  current liabilities
              
              9,874
              8,
                  272Deferred
                  revenues, long term portion
              9
              439
              442Capital
                  lease obligations, less current portion
              11
              474
              663Long-term
                  debt, less current portion
              13
              55
              —Deferred
                  income taxes
              21-3
              7
              0Other
                  long-term liabilities
              14
              575
              560Total
                  liabilities
              
              11,424
              9,937**Shareholders’
                  equity**Common
                  stock, €0.13 par value, 9,318,875 shares authorized;8,362,821
                  shares issued; 7,782,731 and 7,781,731 shares outstanding at December
                  31,2005
                  and 2004, respectively
              
              1,087
              1,087Additional
                  paid-in capital
              
              20,359
              19,999Retained
                  earnings
              
              597
              1,662Cumulative
                  other comprehensive loss
              
              (2,877)
              (2,987)Treasury
                  stock, at cost; 580,090 and 581,090 shares at December 31, 2005
                  and 2004,
                  respectively
              
              (1,794)
              (1,797)Total
                  shareholders’ equity
              15
              17,372
              17,964Total
                  liabilities and shareholders’ equity
              
              28,796
              27,901
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
 F-2
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **CONSOLIDATED
        STATEMENTS OF INCOME**
 **For
        the years ended December 31, 2005, 2004 and 2003**
 **(in
        thousands of euros unless otherwise noted)**
 
 **Notes**
              **2005**
              **2004**
              **2003**Sales
                  of medical devices
              
              10,242
              11,922
              8,512Sales
                  of disposables, RPPs, leases, spare parts and services
              
              10,710
              10,207
              9,518Total
                  sales
              16
              20,952
              22,129
              18,030Warrants
                  granted
              
              (235)
              (174)
              -Total
                  net sales
              16
              20,717
              21,955
              18,030Other
                  revenues
              17
              93
              208
              443Total
                  revenues
              
              20,810
              22,163
              18,473Cost
                  of sales
              
              (12,313)
              (13,676)
              (13,094)Gross
                  profit
              
              8,497
              8,487
              5,379Research
                  and development expenses
              
              (1,784)
              (1,523)
              (3,069)Selling
                  and marketing expenses
              
              (3,758)
              (3,402)
              (4,228)General
                  and administrative expenses
              
              (4,278)
              (4,074)
              (4,106)Non
                  recurring operating expenses
              18
              -
              (318)
              (2,097)Loss
                  from operations
              
              (1,323)
              (830)
              (8,121)Interest
                  income, net
              19
              135
              71
              177Foreign
                  currency exchange gain (loss), net
              
              218
              (38)
              (928)Other
                  income (expense), net
              20
              9
              (74)
              (218)Loss
                  before taxes
              
              (961)
              (871)
              (9,090)Income
                  tax (expense) benefit
              21
              (104)
              (278)
              114Net
                  loss
              
              (1,065)
              (1,149)
              (8,976)Basic
                  loss per share
              1-18
              (0.14)
              (0.15)
              (1.15)Weighted
                  average shares outstanding used in basiccalculation
              1-18
              7,782,731
              7,781,731
              7,781,731Diluted
                  loss per share
              1-18
              (0.14)
              (0.15)
              (1.15)Weighted
                  average shares outstanding used indiluted
                  calculation
              1-18
              8,373,574
              8,074,210
              7,817,303
  
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
 
 F-3
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **CONSOLIDATED
        STATEMENTS OF COMPREHENSIVE INCOME**
 **For
        the years ended December 31, 2005, 2004 and 2003**
 **(in
        thousands of euros unless otherwise noted)**
 
 
 
 **2005**
              **2004**
              **2003**Net
                  loss
              (1,065)
              (1,149)
              (8,976)Other
                  comprehensive loss:Foreign
                  currency translation adjustments
              110
              (36)
              (547)Comprehensive
                  loss, net of tax
              (955)
              (1,185)
              (9,523)
 
 
 
 The
        accompanying notes are an integral part of the consolidated financial
        statements.
 
 F-4
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS’ EQUITY**
 **For
        the years ended December 31, 2005, 2004 and 2003**
 **(in
        thousands of euros unless otherwise noted)**
  
 **Number
                  of**
                **Shares**
              **Common**
                **Stock**
              **Additional**
                **paid-in**
                **Capital**
              **Retained**
                **Earnings**
              **Cumulative**
                **Other**
                **Comprehensive**
                **Income**
                **(loss)**
              **Treasury**
                **Stock**
              **Total**Balance
                  as of January 1, 2003
              7,781,731
              1,087
              19,811
              11,787
              (2,513)
              (1,797)
              28,375Net
                  loss
              
              
              
              (8,976)
              
              
              (8,976)Translation
                  adjustment
              
              
              
              
              (547)
              
              (547)Change
                  in unrealized gain/loss oninvestments
                  available for sale
              
              
              
              
              109
              
              109Balance
                  as of December 31, 2003
              7,781,731
              1,087
              19,811
              2,811
              (2,951)
              (1,797)
              18,961
 Net
                  loss
              
              
              
              (1,149)
              
              
              (1,149)Translation
                  adjustment
              
              
              
              
              (36)
              
              (36)Warrants
                  and stock options granted
              
              
              188
              
              
              
              188Balance
                  as of December 31, 2004
              7,781,731
              1,087
              19,999
              1,662
              (2,987)
              (1,797)
              17,964Net
                  loss
              
              
              
              (1,065)
              
              
              (1,065)Translation
                  adjustment
              
              
              
              
              110
              
              110Warrants
                  and stock options granted
              1,000
              
              360
              
              
              3
              363Balance
                  as of December 31, 2005
              7,782,731
              1,087
              20,359
              597
              (2,877)
              (1,794)
              17,372
 
 
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
 
 F-5
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 **For
        the years ended December 31, 2005, 2004 and 2003**
 **(in
        thousands of euros unless otherwise noted)**
  **2005**
              **2004**
              **2003****Cash
                  flows from operating activities**Net
                  loss
              (1,065)
              (1,149)
              (8,976)Adjustments
                  to reconcile net loss to net cash provided by (used in) operating
                  activities:Depreciation
                  and amortization
              1,202
              1,049
              983Non-cash
                compensation (1)
              360
              188
              —Change
                  in allowances for doubtful accounts & slow-moving
                  inventories
              128
              (834)
              (147)Change
                  in long-term provisions
              67
              (94)
              46Deferred
                  tax expense/(benefit)
              84
              255
              (226)Net
                  loss (gain) on sale of assets
              (21)
              (389)
              (9)Net
                  loss (gain) on sale of investments available for sale
              —
              —
              123Increase/Decrease
                  in operating assets and liabilities:Decrease/(Increase)
                  in trade accounts and notes and other receivables
              (1,473)
              20
              3,076Decrease/(Increase)
                  in inventories
              (681)
              2,341
              1,110Decrease/(Increase)
                  in prepaid expenses
              41
              (9)
              (36)(Decrease)/Increase
                  in trade accounts and notes payable
              632
              (439)
              (1,025)(Decrease)/Increase
                  in accrued expenses, other current liabilities
              441
              (1,884)
              1,432**Net
                  cash (used in) provided by operating activities**
              (285)
              (945)
              (3,649)**Cash
                  flows from investing activities**Acquisitions
                  of property and equipment
              (372)
              (247)
              (400)Acquisitions
                  of intangible assets
              (24)
              (18)
              (27)Capitalized
                  assets produced by the Company
              (1,042)
              (750)
              (780)Net
                  proceeds from sale of assets
              113
              722
              10Net
                  proceeds from sale of leased back assets
              239
              342
              250Proceeds
                  from sale of investments available for sale
              —
              —
              55Increase
                  in deposits and guarantees
              (21)
              (108)
              —Reimbursement
                  of deposits and guarantees
              48
              75
              350**Net
                  cash (used in) provided by investing activities**
              (1,059)
              16
              (542)**Cash
                  flow from financing activities**Proceeds
                  from long term borrowings
              288
              —
              —Repayment
                  of long term borrowings
              (93)
              (77)
              (370)Repayment
                  of obligations under capital leases
              (378)
              (316)
              (77)Increase/(decrease)
                  in bank overdrafts and short-term borrowings
              371
              310
              (222)**Net
                  cash used in financing activities**
              188
              (83)
              (669)Net
                  effect of exchange rate changes on cash and cash equivalents
              75
              (19)
              (466)**Net
                  increase/(decrease) in cash and cash equivalents**
              (1,081)
              (1,031)
              (5,326)Cash
                  and cash equivalents at beginning of year
              9,398
              10,429
              15,755**Cash
                  and cash equivalents at end of year**
              8,317
              9,398
              10,429
  (1)
        Certain prior years amounts have been reclassified to conform the current
        year's
        presentation.
  The
        accompanying notes are an integral part of the consolidated financial
        statements.
 F-6
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **1—SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES**
  ***1-1
        Nature of operations***
  EDAP
        TMS
        S.A. and its subsidiaries (‘‘the Company’’) are engaged in the development,
        production, marketing and distribution of a portfolio of minimally-invasive
        medical devices for the treatment of urological diseases. The Company currently
        produces devices for treating stones of the urinary tract, benign prostatic
        hyperplasia and localized prostate cancer. Net sales consist primarily of
        direct
        sales to hospitals and clinics in France and Europe, export sales to third-party
        distributors and agents, and export sales through subsidiaries based in Italy
        and Asia.
  The
        Company purchases the majority of the components used in its products from
        a
        number of suppliers but for some components, relies on a single source. Delay
        would be caused if the supply of these components or other components was
        interrupted and these delays could be extended in certain situations where a
        component substitution may require regulatory approval. Failure to obtain
        adequate supplies of these components in a timely manner could have a material
        adverse effect on the Company’s business, financial position and results of
        operation.
  ***1-2
        Management estimates***
  The
        preparation of financial statements in conformity with U.S. generally accepted
        accounting principles ( ‘‘ US
        GAAP ’’ )
        requires management to make estimates and assumptions that affect the reported
        amounts of assets and liabilities and disclosure of contingent assets and
        liabilities at the date of the financial statements and the reported amounts
        of
        revenues and expenses during the reporting period. Actual results could differ
        from those estimates.
  ***1-3
        Consolidation***
  The
        accompanying consolidated financial statements include the accounts of EDAP
        TMS
        S.A. and all its domestic and foreign owned subsidiaries, which include
        Technomed Medical Systems S.A. (‘‘TMS S.A.’’), EDAP Technomed Inc., Edap
        Technomed Sdn Bhd, Edap Technomed Italia S.R.L, EDAP Technomed Co. Ltd.
        (formerly Nippon Euro Edap Technomed KK) and EDAP S.A. Edap Technomed Sdn
        Bhd
        was incorporated in early 1997. Edap Technomed Co. Ltd. was created in late
        1996. EDAP S.A. was incorporated in May 2000. All intercompany transactions
        and
        balances are eliminated in consolidation.
  ***1-4
        Revenue recognition***
  For
        medical device sales with no significant remaining vendor obligation, payments
        contingent upon customer financing, acceptance criteria that can be subjectively
        interpreted by the customer, or tied to the use of the device, revenue is
        recognized when evidence of an arrangement exists, title to the device passes
        (depending on terms, either upon shipment or delivery), and the customer
        has the
        intent and ability to pay in accordance with contract payment terms that
        are
        fixed or determinable. For sales in which payment is contingent upon customer
        financing, acceptance criteria can be subjectively interpreted by the customer,
        or payment depends on use of the device, revenue is recognized when the
        contingency is resolved. The Company provides training and usually provides
        a
        one-year warranty upon installation. The Company accrues for the estimated
        training and warranty costs at the time of sale.
  Revenues
        related to disposables and spare parts are recognized when goods are delivered.
        Maintenance contracts rarely exceed one year and are recognized on a linear
        basis. Revenues related to the leasing of devices are recognized on a linear
        basis. Billings or cash receipts in advance of services due under maintenance
        contracts and leases are recorded as deferred revenue.
  Revenues
        related to the sale of Ablatherm treatments invoiced on a
‘‘Revenue-Per-Procedure’’ (‘‘RPP’’) basis are recognized when the treatment
        procedure has been completed.
  F-7
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  ***1-5
        Shipping and handling costs***
  The
        Company recognizes revenue from the shipping and handling of its products
        as a
        component of revenue. Shipping and handling costs are recorded as a component
        of
        cost of sales.
  ***1-6
        Cash equivalents***
  Cash
        equivalents are cash investments which are highly liquid and have initial
        maturities of 90 days or less.
  ***1-7
        Accounts Receivables***
  Accounts
        receivables are stated at cost net of allowances for doubtful accounts. The
        Company makes judgements as to its ability to collect outstanding receivables
        and provides allowances for the portion of receivables when collection becomes
        doubtful. Provision is made based upon a specific review of all significant
        outstanding invoices. These estimates are based on our bad debt write-off
        experience, analysis of credit information, specific identification of probable
        bad debt based on our collection efforts, aging of accounts receivables and
        other known factors.
  ***1-8
        Inventories***
  Inventories
        are valued at the lower of manufacturing cost, which is principally comprised
        of
        components and labor costs, or market (net realizable value). Cost is determined
        on a first-in, first-out basis for components and spare parts and by specific
        identification for finished goods (medical devices). The Company establishes
        reserves for inventory estimated to be obsolete, unmarketable or slow moving,
        first based on a detailed comparison between quantity in inventory and
        historical consumption and then based on case-by-case analysis of the difference
        between the cost of inventory and the related estimated market
        value.
  ***1-9
        Property and equipment***
  Property
        and equipment is stated at historical cost. Depreciation and amortization
        of
        property and equipment are calculated using the straight-line method over
        the
        estimated useful life of the related assets, as follows:
  Leasehold
                  improvements
              10
                years or lease term if shorterEquipment
              3-10
                yearsFurniture,
                  fixtures, fittings and other
              2-10
                years
  Equipment
        includes industrial equipment and research equipment that has alternative
        future
        uses. Equipment
        also includes devices that are manufactured by the Company and leased to
        customers through operating leases related to Revenue-Per-Procedure transactions
        and devices subject to sale and lease-back transactions. This equipment is
        depreciated over a period of five years.
  ***1-10
        Long-lived assets***
  The
        Company reviews the carrying value of its long-lived assets, including fixed
        assets and intangible assets, for impairment whenever events or changes in
        circumstances indicate that the carrying amount of such assets may not be
        fully
        recoverable. Recoverability of long-lived assets is assessed by a comparison
        of
        the carrying amount of the assets (or the Group of assets, including the
        asset
        in question, that represents the lowest level of separately-identifiable
        cash
        flows) to the total estimated undiscounted cash flows expected to be generated
        by the asset or group of assets. If the future net undiscounted cash flows
        is
        less than the carrying amount of the asset or group of assets, the asset
        or
        group of assets is considered impaired and an expense is recognized equal
        to the
        amount required to reduce the carrying amount of the asset or group of assets
        to
        its then fair value. Fair value is determined by discounting the cash flows
        expected to be generated by the assets, when the quoted market prices are
        not
        available for the long-lived assets. Estimated future cash flows are based
        on
        assumptions and are subject to risk and uncertainty.
  F-8
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  ***1-11
        Goodwill and intangible assets***
  Goodwill
        represents the excess of purchase price over the fair value of identifiable
        net
        assets of businesses acquired. Goodwill is not amortized but instead tested
        annually for impairment or more frequently when events or change in
        circumstances indicate that the assets might be impaired by comparing the
        carrying value to the fair value of the reporting units to which it is assigned.
  Intangible
        assets consist primarily of purchased patents relating to lithotripters,
        purchased licenses, a purchased tradename and a purchased trademark. The
        basis
        for valuation of these assets is their historical acquisition cost. Amortization
        of intangible assets is calculated by the straight-line method over the shorter
        of the contractual or estimated useful life of the assets, as
        follows:
  Patents
              5
                yearsLicenses
              5
                  yearsTradename
                and trademark
              7
                  years
  ***1-12*** ***Treasury
            Stocks***
  Treasury
        Stocks purchases are accounted for at cost. The sale of treasury stocks is
        accounted for using the first in first out method. Gains on the sale or
        retirement of treasury stocks are accounted for as additional paid-in capital
        whereas losses on the sale or retirement of treasury stock are recorded as
        additional paid-in capital to the extent that previous net gains from sale
        or
        retirement of treasury stocks are included therein, otherwise the losses
        shall
        be recorded to accumulated benefit (deficit) account. Gains or losses from
        the
        sale or retirement of treasury stock do not affect reported results of
        operations.
  ***1-13
        Warranty expenses***
  The
        Company generally provides customers with a warranty for each product sold
        and
        accrues warranty expense at time of sale based upon historical claims
        experience. Actual warranty costs incurred are charged against the accrual
        when
        paid and are classified in cost of sales in the statement of income. Warranty
        expense amounted to €517 thousand, €558 thousand and €690 thousand for the years
        ended December 31, 2005, 2004 and 2003, respectively.
  ***1-14
        Income taxes***
  The
        Company accounts for income taxes in accordance with SFAS No. 109, ‘‘Accounting
        for Income Taxes’’ Under SFAS No. 109, deferred tax assets and liabilities are
        determined based on differences between the financial reporting and tax basis
        of
        assets and liabilities and are measured by applying enacted tax rates and
        laws
        to taxable years in which such differences are expected to reverse. A valuation
        allowance is established if, based on the weight of available evidence, it
        is
        more likely than not that some portion, or all of the deferred tax assets,
        will
        not be realized. In accordance with SFAS No. 109, no provision has been made
        for
        income or withholding taxes on undistributed earnings of foreign subsidiaries,
        such undistributed earnings being permanently reinvested.
  ***1-15
        Research and development costs***
  Research
        and development costs are recorded as an expense in the period in which they
        are
        incurred.
  The
        French government provides tax credits to companies for annual increased
        spending for innovative research and development. Income tax benefits correspond
        to these French research tax credits, which are credited against income taxes
        payable in each of the four years after being incurred or, if not utilized,
        are
        recoverable in cash. As of December 31, 2005, Edap had total research tax
        credits receivable of €64 thousand.
  F-9
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  ***1-16
        Advertising costs***
  Advertising
        costs are recorded as an expense in the period in which they are incurred.
        Advertising costs for the years ended December 31, 2005, 2004 and 2003 were
        not
        material to the consolidated financial statements.
  ***1-17
        Foreign currency translation and transactions***
  *Translation
        of the financial statements of consolidated companies*
  The
        translation rules applicable to the financial statements of foreign subsidiaries
        (EDAP Technomed Inc., Edap Technomed Sdn Bhd and Edap Technomed Co. Ltd.)
        are as
        follows:
  ·
              assets
                  and liabilities are translated at year-end exchange
                  rates;
  ·
              shareholders’
                  equity is translated at historical exchange rates (as of the date
                  of
                  contribution);
  ·
              statement
                  of income items are translated at average exchange rates for the
                  year;
                  and
  ·
              translation
                  gains and losses are recorded in a separate component of shareholders’
                  equity.
  *Foreign
        currencies transactions*
  Transactions
        involving foreign currencies are translated into the functional currency
        using
        the exchange rate prevailing at the time of the transactions. Receivables
        and
        payables denominated in foreign currencies are translated at year-end exchange
        rates. The resulting unrealized exchange gains and losses are carried to
        the
        statement of income.
  ***1-18
        Earnings per share***
 
 Basic
        earnings per share is computed by dividing income available to common
        shareholders by the weighted average number of shares of common stock
        outstanding for the period. Diluted earnings per share reflects potential
        dilution that could occur if securities or other contracts to issue common
        stock
        were exercised or converted into common stock or resulted in the issuance
        of
        common stock that then shared in the earnings of the Company. The dilutive
        effects of the Company’s common stock options and warrants is determined using
        the treasury stock method to measure the number of shares that are assumed
        to
        have been repurchased using the average market price during the period, which
        is
        converted from U.S. dollars at the average exchange rate for the
        period.
  ***1-19
        Derivative instruments***
  Financial
        Accounting Standards Board Statement No. 133 ‘‘Accounting for Derivative
        Instruments and Hedging Activities’’ (‘‘SFAS 133’’) requires the Company to
        recognize all of its derivative instruments as either assets or liabilities
        in
        the statement of financial position at fair value. The accounting for changes
        in
        the fair value (i.e., gains or losses) of a derivative instruments depends
        on
        whether it has been designated and qualifies as part of a hedging relationship
        and further, on the type of hedging relationship. For those derivative
        instruments that are designated and qualify as hedging instruments, the Company
        must classify the hedging instrument, based upon the exposure being hedged,
        as
        fair value hedge, cash flow hedge or a hedge of a net investment in a foreign
        operation.
  Given
        the
        Company’s minimal use of derivative Instruments, this standard does not have any
        significant effect on the Company’s financial position, results of operations or
        cash flows.
  F-10
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  ***1-20
        Employee stock option plans***
  At
        December 31, 2005, the Company had six stock-based employee compensation
        plans.
        The Company accounts for those plans under the recognition and measurement
        principles of APB Opinion No. 25, *Accounting
        for Stock Issued to Employees* (APB
        25), and related Interpretations. In accordance with APB 25, the Company
        recognizes stock-based employee compensation costs over the vesting period
        when
        the options granted under those plans have an exercise price lower than the
        market value of the underlying common stock on the date of grant. The following
        table illustrates the effect on net income and earnings per share if the
        Company
        had applied the fair value recognition provisions of FASB Statement No. 123, *Accounting
        for Stock-Based Compensation* ,
        to
        stock-based employee compensation.
  **Year
                  Ended December 31,****2005**
              **2004**
              **2003**Net
                  loss, as reported
              (1,065)
              (1,149)
              (8,976)Add:  
                  Stock-based employee compensation expense included inReported
                  net loss, net of related tax effects
              125
              14
              —Deduct:
                  Total stock-based employee compensation expenseDetermined
                  under fair value-based method for all awards, netof
                  related tax effects
              (231)
              (44)
              (56)Pro
                  forma net loss
              (1,171)
              (1,179)
              (9,032)Loss
                  per share:Basic,
                  as reported
              (0.14)
              (0.15)
              (1.15)Basic,
                  pro forma
              (0.15)
              (0.15)
              (1.16)Diluted,
                  as reported
              (0.14)
              (0.15)
              (1.15)Diluted,
                  pro forma
              (0.15)
              (0.15)
              (1.16)
  The
        fair
        value of each stock option granted during the year is estimated on the date
        of
        grant using the Black-Scholes option pricing model with the following
        assumptions:
  **Year
                  Ended December 31,****2005**
              
              **2004**Weighted-average
                  expected life (years)
              
              
              2
              
              
              3.08Expected
                  volatility rates
              
              
              75%
              
              
              85%Expected
                  dividend yield
              
              
              —
              
              
              —Risk-free
                  interest rate
              
              
              4.3%
              
              
              3.3%Weighted-average
                  exercise price (€)
              
              
              2.78
              
              
              2.19Weighted-average
                  fair value of options granted during the year (€)
              
              
              1.82
              
              
              0.51
  ***1-21
        New accounting pronouncements***
 
 In
        December 2004, the FASB issued Statement 153, Exchanges of Non-monetary Assets,
        an Amendment of APB Opinion No. 29, Accounting for Non-monetary Transactions
        (FAS 153). This Statement eliminates the exception from fair value measurement
        for non-monetary exchanges of similar productive assets and replaces it with
        an
        exception for exchanges that do not have commercial substance. FAS 153, is
        effective for non-monetary asset exchanges occurring in fiscal periods beginning
        after June 15, 2005 and is not expected to have a material impact on the
        Company’s results of operations, cash flows or financial position.
  F-11
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  On
        June
        7, 2005, the FASB issued Statement No. 154, “Accounting Changes and Error
        Corrections”, a replacement of APB Opinion No. 20, “Accounting Changes”, and
        Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements”.
        Statement 154 changes the requirements for the accounting for and reporting
        of a
        change in accounting principle. Previously, most voluntary changes in accounting
        principles were required recognition via a cumulative effect adjustment within
        net income of the period of the change. Statement 154 requires retrospective
        application to prior periods' financial statements, unless it is impracticable
        to determine either the period-specific effects or the cumulative effect
        of the
        change. Statement 154 is effective for accounting changes made in fiscal
        years
        beginning after December 15, 2005; however, the Statement does not change
        the
        transition provisions of any existing accounting pronouncements. We do not
        believe adoption of Statement 154 will have a material effect on our
        consolidated financial position, results of operations or cash
        flows.
 
 On
        December 16, 2004, the Financial Accounting Standards Board (FASB) issued
        FASB
        Statement No. 123 (revised 2004), *Share-Based
        Payment* ,
        which
        is a revision of FASB Statement No. 123, *Accounting
        for Stock-Based Compensation* .
        Statement 123(R) supersedes APB Opinion No. 25, *Accounting
        for Stock Issued to Employees* ,
        and
        amends FASB Statement No. 95, *Statement
        of Cash Flows* .
        Generally, the approach in Statement 123(R) is similar to the approach described
        in Statement 123. However, Statement 123(R) *requires* all
        share-based payments to employees of the Company, including grants of employee
        stock options, to be recognized in the income statement based on their fair
        values. Pro forma disclosure is no longer an alternative.
  Statement
        123(R) must be adopted no later than the first fiscal year beginning after
        June
        15, 2005. Early adoption will be permitted in periods in which financial
        statements have not yet been issued. The Company will adopt Statement 123(R)
        as
        of January 1, 2006.
 
 Statement
        123(R) permits public companies to adopt its requirements using one of two
        methods:
 
 1.
              A
                  “modified prospective” method, in which compensation cost is recognized
                  beginning with the effective date (a) based on the requirements
                  of
                  Statement 123(R) for all share-based payments granted after the
                  effective
                  date and (b) based on the requirements of Statement 123 for all
                  awards
                  granted to employees prior to the effective date of Statement 123(R)
                  that
                  remain unvested on the effective
                  date.
 2.
              A
                  “modified retrospective” method, which includes the requirements of the
                  modified prospective method described above, but also permits entities
                  to
                  restate based on the amounts previously recognized under Statement
                  123 for
                  purposes of pro forma disclosures either (a) all prior periods
                  presented
                  or (b) prior interim periods of the year of
                  adoption.
 
 The
        Company plans to adopt Statement 123 using the modified prospective
        method.
  As
        permitted by Statement 123, the Company currently accounts for share-based
        payments to employees using Opinion 25’s intrinsic value method and, as such,
        generally recognizes no compensation cost for employee stock options.
        Accordingly, the adoption of Statement 123(R)’s fair value method will have a
        significant impact on the Company's result of operations, although it will
        have
        no impact on its overall financial position. The impact of the adoption of
        Statement 123(R) cannot be predicted at this time because it will depend
        on
        levels of share-based payments granted in the future. However, had the Company
        adopted Statement 123(R) in prior periods, the impact of that standard would
        have approximated the impact of Statement 123.
 
 F-12
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **2—CASH
        AND CASH EQUIVALENTS**
  Cash
        and
        cash equivalents are comprised of the following:
  **December
                  31,****2005**
              **2004**Cash
                  held at bank
              
              
              
              8,317
              5,659Money
                  market funds
              
              
              
              -
              3,739Total
              
              
              
              8,317
              9,398
 
 Gross
        realized gains on sales of these money market funds amounted to €101 thousand,
€117 thousand and €214 thousand, for the years ended December 31, 2005, 2004 and
        2003, respectively.
  **3—TRADE
        ACCOUNTS AND NOTES RECEIVABLE, NET**
  Trade
        accounts and notes receivable consist of the following:
  **December
                  31,****2005**
              **2004**Trade
                  accounts receivable
              
              
              
              9,281
              8,335Notes
                  receivable
              
              
              
              151
              92Less:
                  allowance for doubtful accounts
              
              
              
              (663)
              (705)Total
              
              
              
              8,769
              7,722
  Notes
        receivable usually represent commercial bills of exchange (drafts) with initial
        maturities of 90 days or less.
  **4—OTHER
        RECEIVABLES**
  Other
        receivables consist of the following:
  **December
                  31,****2005**
              **2004**Tax
                  loss carryback receivable from the French State
              
              
              
              -
              109Value-added
                  taxes receivable from the French State
              
              
              
              521
              210Research
                  and development tax credit receivable from the French State
              
              64
              -Other
                  receivables from the French State
              
              
              
              31
              16Others
              
              
              
              234
              138Total
              
              
              
              850
              473
  Research
        and development tax credits can be used to offset income taxes due during
        the
        three years following the year in which the credits were recorded. Any balance
        of receivable at the end of this three-year period will be reimbursed by
        the
        French State.
  F-13
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **5—INVENTORIES**
 
 Inventories
        consist of the following:
  **December
                  31,****2005**
              **2004**Components,
                  spare parts
              
              
              
              3,759
              3,491Work-in-progress
              
              
              
              369
              326Finished
                  goods
              
              
              
              1,196
              826Total
                  gross inventories
              
              
              
              5,324
              4,643Less:
                  provision for slow-moving inventory
              
              
              
              (874)
              (704)Total
              
              
              
              4,450
              3,939
  The
        provision for slow moving inventory essentially concerns the components and
        spare parts. The allowance for slow moving inventory, which is classified
        as a
        cost of sales, amounted to €386 thousand, €252 thousand and €569 thousand for
        the years ended December 31, 2005, 2004 and 2003, respectively.
  **6—PROPERTY
        AND EQUIPMENT, NET**
 
 Property
        and equipment consist of the following:
  **December
                  31,****2005**
              **2004**Equipment
              
              
              
              5,852
              4,647Furniture,
                  fixture, and fittings and other
              
              
              
              2,280
              2,180Total
                  gross value
              
              
              
              8,132
              6,827Less:
                  accumulated depreciation and amortization
              
              
              
              (5,002)
              (4,020)Total
              
              
              
              3,130
              2,807
 
 Depreciation
        and amortization expense related to property and equipment amounted to €1,145
        thousand, €934 thousand and €867 thousand for the years ended December 31, 2005,
        2004 and 2003, respectively.
  Capitalized
        costs on assets held under capital leases of €1,297 thousand and €1,058 thousand
        are included in property and equipment at December 31, 2005 and 2004,
        respectively. Accumulated amortization of these assets leased to third parties
        was €550 thousand and €283 thousand, at December 31, 2005 and 2004,
        respectively. Amortization expense on assets held under capital leases is
        included in total amortization expense and amounted to €267 thousand, €217
        thousand and €66 thousand for the years ended December 31, 2005, 2004 and 2003,
        respectively.
 
 F-14
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **7—GOODWILL
        AND INTANGIBLE ASSETS**
  As
        discussed in Note 1-11, the Company adopted SFAS 142, ‘‘Goodwill and Other
        Intangible Assets’’, on January 1, 2002. SFAS 142 requires that goodwill and
        other intangible assets that have indefinite lives not be amortized but instead
        be tested at least annually for impairment, or more frequently when events
        or
        change in circumstances indicate that the asset might be impaired, by comparing
        the carrying value to the fair value of the reporting unit to which they
        are
        assigned. The Company considers its SFAS 131 operating segment — High Intensity
        Focused Ultrasound (HIFU) and Urology Devices and Services (UDS) — to be its
        reporting units for purposes of testing for impairment, as the components
        within
        each operating segment have similar economic characteristics and thus do
        not
        represent separate reporting units. Goodwill amounts to €1,767 thousand for the
        UDS division and to €645 thousand for the HIFU division, at December 31,
        2005.
  The
        Company completed the required annual impairment test in the fourth quarter
        of
        2005. To determine the fair value of the Company’s reporting units, the Company
        used the discounted cash flow approach for each of the two reportable units.
        The
        main assumptions used are the following: (i) a five-year business plan approved
        by management, (ii) a discount rate of 15%, (iii) a residual value based
        on a
        multiple of Profit Before Tax (PBT) specific to each segment. In both cases,
        the
        fair value of the reporting unit was in excess of the reporting unit's book
        value, which resulted in no goodwill impairment.
  Intangible
        assets consist of the following:
  **December
                  31,****2005**
              **2004**Licenses
              
              
              
              443
              419Tradename
                  and trademark
              
              
              
              585
              583Patents
              
              
              
              412
              412Organization
                  costs
              
              
              
              363
              363Total
                  gross value
              
              
              
              1,803
              1,777Less:
                  accumulated amortization
              
              
              
              (1,717)
              (1,658)Total
              
              
              
              86
              119
  Amortization
        expenses related to intangible assets amounted to €57 thousand, €71 thousand and
€77 thousand, for the years ended December 31, 2005, 2004 and 2003,
        respectively.
  For
        the
        two coming years, the annual estimated amortization expense for intangible
        assets will be approximately €60 thousand.
  **8—TRADE
        ACCOUNTS AND NOTES PAYABLE**
  Trade
        accounts and notes payable consist of the following:
  **December
                  31,****2005**
              **2004**Trade
                  accounts payable
              
              
              
              3,532
              2,913Notes
                  payable
              
              
              
              773
              762Total
              
              
              
              4,305
              3,675
 
 Trade
        accounts payable usually represent invoices with a due date of 90 days or
        less.
  Notes
        payable represent commercial bills of exchange (drafts) with initial maturities
        of 90 days or less.
 
 F-15
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **9—DEFERRED
        REVENUES**
  Deferred
        revenues consist of the following:
  **December
                  31,****2005**
              **2004**Deferred
                  revenues on maintenance contracts
              
              
              
              375
              370Deferred
                  revenue on sale of devices
              
              
              
              645
              676Deferral
                  of the gain on sale-lease-back
                Transactions
              
              
              
              189
              239Total
              
              
              
              1,210
              1,285Less
                  long term portion
              
              
              
              439
              442Current
                  portion
              
              
              
              771
              843
  **10—OTHER
        ACCRUED LIABILITIES**
 
 Other
        accrued liabilities consist of the following:
  **December
                  31,****2005**
              **2004**Provision
                  for warranty costs
              
              
              
              
              700
              660Value
                  added tax payable
              
              
              
              
              543
              273Accruals
                  for social expenses
              
              
              
              
              348
              301Conditional
                  government subsidies
              
              
              
              
              398
              318Advance
                  to debtors
              
              
              
              
              29
              28Others
              
              
              
              
              287
              236Total
              
              
              
              
              2,305
              1,816
  Changes
        in the provision for warranty costs are as follows:
  **December
                  31,****2005**
              **2004**Beginning
                  of year
              
              
              
              660
              694Amount
                  used during the year (payments)
              
              
              
              (477)
              (592)New
                  warranty expenses
              
              
              
              517
              558End
                  of year
              
              
              
              700
              660
  F-16
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **11—LEASE
        OBLIGATIONS**
  ***11-1
        Capital leases***
  The
        Company leases certain of its equipment under capital leases. At December
        31,
        2005, this equipment consists of medical devices for an amount of €699 thousand
        and vehicles for an amount of €160 thousand. Future minimum lease payments under
        capital leases for the years ending December 31, are as follows:
  **December
                  31, 2005**2006
              
              
              
              4172007
              
              
              
              3022008
              
              
              
              1512009
              
              
              
              61Total
                  minimum lease payments
              
              
              
              931Less:
                  amount representing interest
              
              
              
              (72)Present
                  value of minimum lease payments
              
              
              859Less:
                  current portion
              
              
              
              (385)Long-term
                  portion
              
              
              
              474
  Interest
        paid under capital lease obligations was €28 thousand, €19 thousand, and €4
        thousand for the years ended December 31, 2005, 2004, and 2003, respectively.
  ***11-2
        Operating leases***
 
 On
        June
        30, 2004, following the reduction in headcount implemented early in 2004,
        the
        Company reduced its rented office space and cancelled two lease contracts.
        As of
        December 31, 2005, operating leases having initial or remaining non-cancelable
        lease terms greater than one year consists of one lease for the facilities
        of
        TMS S.A. in Vaulx-en-Velin, France and several leases for facilities in Japan.
        The French lease contract has a lease term of nine years expiring at the
        option
        of the lessee at the end of a first four-year period, then a two-year and
        finally a three-year period, through 2011 (i.e., in 2006, 2008 or 2011).
 
 Future
        minimum lease payments for these operating leases consist of the following
        amounts, unless leases are otherwise cancelled by the lessees:
  **TMS**
              **Japan**2006
              
              
              241
              1872007
              
              
              -
              472008
              
              
              
              -
              6Total
              
              
              
              241
              241
  Total
        rent expense under operating leases amounted to €703 thousand, €899 thousand and
€918 thousand for the years ended December 31, 2005, 2004 and 2003,
        respectively. These total rent expenses include the above mentioned operating
        leases, but also lease expenses related to subsidiaries office rentals, office
        equipment and car rentals.
 
 F-17
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **12—SHORT-TERM
        BORROWINGS**
  As
        of
        December 31, 2005, short-term borrowings consist of a loan in euros amounting
        to
€155 thousand due to mature on December 20, 2006 at an annual variable rate
        based on Eonia +0.5% and €744 thousand of account receivables factored and for
        which the Company is supporting the risk of uncollectibility. As of December
        31,
        2004, short-term borrowings consist of loans in Japanese yen amounting to
        JPY 20
        million (€143 thousand), JPY 30 million (€215 thousand) and JPY 23 million (€167
        thousand) due to mature on March 30, May 30 and June 28, 2005, respectively,
        at
        an annual rate of 2.2%.
  **13—LONG-TERM
        DEBT**
 
 Long-term
        debt consists of the following:
  **December
                  31,****2005**
              **2004**Japanese
                  yen term loan
              
              
              
              202
              -Other
                  financial debts
              
              
              
              -
              6Total
              
              
              
              202
              6Less
                  current portion
              
              
              
              (147)
              (6)Total
                  long-term portion
              
              
              
              55
              0
 
 Long-term
        debt at December 31, 2005 matures as follows:
  2006
              
              
              
              
              1472007
              
              
              
              
              55Total
              
              
              
              
              202
  As
        of
        December 31, 2005, long-term debt consist of loan in Japanese yen amounting
        to
        JPY 28.1 million (€202 thousand) with a 2.4% interest rate, due to mature on May
        11, 2007.
  **14—OTHER
        LONG-TERM LIABILITIES**
 
 Other
        long-term liabilities consist of the following:
  **December
                  31,****2005**
              **2004**Provision
                  for retirement indemnities
              
              
              
              469
              379Other
              
              
              
              106
              181Total
              
              
              
              575
              560
  F-18
 **EDAP
          TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  Pension,
        post-retirement, and post-employment benefits for most of the Company’s
        employees are sponsored by European governments. The Company’s liability with
        respect to these plans is mostly limited to specific payroll deductions.
        In
        addition to government-sponsored plans, certain subsidiaries within the Company
        have defined benefit retirement indemnity plans in place. The provision for
        retirement indemnities at December 31, 2005 represents an accrual for lump-sum
        retirement indemnity payments to be paid at the time an employee retires.
        The
        largest part of this liability relates to employees in France. This provision
        has been calculated taking into account the estimated payment at retirement
        (discounted to the current date), turnover and salary increases. Calculations
        have been performed by an actuary consultant.
  The
        actuarial assumptions as of year-end are as follows:
  **Pension
                  Benefits - France****2005**
              **2004**
              **2003**Weighted
                  average assumptions:Discount
                  rate
              
              
              4.00%
              4.50%
              4.50%Salary
                  increase
              
              
              2.00%
              2.00%
              2.50%Retirement
                  age
              
              
              65
              65
              63Average
                  retirement remaining service period
              
              
              27
              26
              25
  **Pension
                  Benefits - Japan****2005**
              **2004**
              **2003**Weighted
                  average assumptions:Discount
                  rate
              
              
              1.50%
              1.50%
              1.50%Salary
                  increase
              
              
              1.80%
              1.80%
              1.80%
  The
        reconciliation between projected benefit obligations and the accumulated
        benefit
        obligations is as follows as of December 31, 2005 (in Keuros):
  **France**
              **Japan**Projected
                  benefit obligation
              
              229
              262Normal
                  cost
              
              23
              36Accumulated
                  benefit obligation
              
              163
              225Accrued
                  pension cost
              
              202
              132
  F-19
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  Detailed
        reconciliation of pension cost components (in Keuros) during fiscal year
        ending
        December 31, 2005:
 
 **France**
              **2005**
              **2004****Change
                  in benefit obligations**Benefit
                  obligations at beginning of year
              132
              155Service
                  cost
              17
              19Interest
                  cost
              6
              7Plan
                  amendments
              -
              -(gain)
                  / loss
              74
              (49)Benefits
                  paids
              -
              -**Benefit
                  obligations at end of year**
              **229**
              **132****Change
                  in plan assets**Fair
                  value of plan assets at beginning of year
              -
              -Employer
                  contribution
              -
              -Return
                  on plan assets
              -
              -Benefits
                  paid
              -
              -**Fair
                  value of plan assets at end of year**Unrecognized
                  actuarial (gain) loss
              27
              (49)Unrecognized
                  prior service cost
              -
              -**Accrued
                  pension cost**
              **202**
              **181**
  
 **JAPAN**
              **2005**
              **2004****Change
                  in benefit obligations**Benefit
                  obligations at beginning of year
              217
              140Service
                  cost
              35
              -Interest
                  cost
              3
              -Plan
                  amendments
              -
              -Termination
                  benefits
              -
              25(gain)
                  / loss
              7
              136Benefits
                  paids
              -
              (84)**Benefit
                  obligations at end of year**
              **262**
              **217****Change
                  in plan assets**Fair
                  value of plan assets at beginning of year
              -
              -Employer
                  contribution
              -
              -Return
                  on plan assets
              -
              -Benefits
                  paid
              -
              -**Fair
                  value of plan assets at end of year**Unrecognized
                  actuarial (gain) loss
              130
              136Unrecognized
                  prior service cost
              0
              0**Accrued
                  pension cost**
              **132**
              **81**
 
 F-20
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **15—SHAREHOLDERS’
        EQUITY**
  ***15-1
        Common stock***
  As
        of
        December 31, 2005, EDAP TMS S.A.’s common stock consisted of 9,318,875
        authorized shares with a par value of €0.13 each, of which 8,362,821 were issued
        and fully paid and 7,782,731 were outstanding.
  ***15-2
        Preemptive subscription rights***
  Shareholders
        have preemptive rights to subscribe on a *pro
        rata* basis
        for additional shares issued by the Company for cash. Shareholders may waive
        such preemptive subscription rights at an extraordinary general meeting of
        shareholders under certain circumstances. Preemptive subscription rights,
        if not
        previously waived, are transferable during the subscription period relating
        to a
        particular offer of shares.
  ***15-3
        Dividend rights***
  Dividends
        may be distributed from the statutory retained earnings, subject to the
        requirements of French law and the Company’s by-laws. The Company has not
        distributed any dividends since its inception. Distributable statutory retained
        earnings amounted to €22,906 thousand and €23,967 thousand at December 31, 2005
        and 2004, respectively. Dividend distributions, if any, will be made in euros.
        The Company has no plans to distribute dividends in the foreseeable
        future.
  ***15-4
        Treasury stock***
  As
        of
        December 31, 2005, the 580,090 shares of treasury stock consisted of (i)
        177,750
        shares acquired on December 2, 1996 for €707 thousand, (ii) 352,800 shares
        acquired between August and December 1998 for €1,016 thousand, and (iii) 49,540
        shares acquired in June and July 2001 for €150 thousand. All 580,090 shares of
        treasury stock have been acquired to cover outstanding stock options (see
        Note
        15-5).
  ***15-5
        Stock-option plans***
  As
        of
        December 31, 2005, EDAP TMS S.A. sponsored six stock purchase and subscription
        option plans:
  On
        December 2, 1996, the shareholders of EDAP TMS S.A. authorized the Board
        of
        Directors to grant up to 177,750 options to purchase pre-existing Shares
        and
        156,625 options to subscribe for newly issued Shares at a fixed exercise
        price
        of €6.97 per share. The authorization to grant the options expired at the end
        of
        the five-year period beginning December 2, 1996. On February 7 and March
        3,
        1997, the Board of Directors granted the 177,750 options to buy pre-existing
        Shares and 134,750 of the options to subscribe for newly issued Shares to
        10
        employees. 25% of the options were exercisable as of the date of grant and
        the
        right to exercise the remaining 75% of the options vested at the rate of
        25%
        each January 1 following the date of grant. The options expired five years
        after
        the date of grant. On October 29, 1998, the Board of Directors amended the
        terms
        of 124,125 of the options to conform to the terms of the 1998 option plan
        discussed below.
  On
        May
        14, 1998, the shareholders of EDAP TMS S.A. authorized the Board of Directors
        to
        grant up to 713,425 options to purchase pre-existing Shares at a fixed exercise
        price to be set by the Board of Directors at the time of grant provided that
        the
        exercise price may not be less than the average stock market price of the
        Shares
        over the 20 business days preceding the date of grant. The shareholders also
        authorized the Board of Directors to cause EDAP TMS S.A. to repurchase up
        to
        535,675 of its own Shares (treasury stock) to cover the options granted under
        the new plan. The authorization to grant the options expired one year after
        the
        completion of the share repurchase program, which was completed in December
        1998. Up to 279,000 of the 713,425 options were reserved for modifications
        to
        the terms of pre-existing options.
  F-21
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  On
        October 29, 1998, the Board of Directors granted 327,000 options to French
        employees meeting certain tenure criteria. The exercise price was fixed at
€3.81
        per Share for 152,000 options and €1.83 per Share for 175,000 options; both
        exercise prices were not less than the average stock market price of the
        Shares
        over the 20 business days preceding the date of grant and also exceeded the
        market price of the Shares on the date of grant. The options were to begin
        vesting two years after the date of grant and were fully vested as of January
        1,
        2002 (i.e., four years and two months after the date of grant). Shares acquired
        pursuant to the options cannot be sold prior to five years from the date
        of
        grant. The options expire on December 31, 2008 (i.e., ten years and two months
        after the date of grant) or when employment with the Company ceases, whichever
        occurs earlier. As noted above, on October 29, 1998, the Board of Directors
        amended the terms of 124,125 of the options granted in 1997 to conform to
        the
        terms of the 1998 stock option plan.
  Conforming
        to the 1998 stock option plan, on January 4, 1999, the Board of Directors
        granted 24,000 options to French employees meeting certain tenure criteria.
        The
        exercise price was fixed at €3.81 per Share for 11,000 options and €1.83 per
        Share for 13,000 options. The options were to begin vesting two years after
        the
        date of grant and were fully vested as of January 1, 2002 (i.e., three years
        after the date of grant). Shares acquired pursuant to the options cannot
        be sold
        prior to five years from the date of grant. The options expire on December
        31,
        2008 (i.e., ten years after the date of grant) or when employment with the
        Company ceases, whichever occurs earlier. On March 15, 1999, the Board of
        Directors granted 60,000 options to certain employees of the Company; 40,000
        options were granted with an exercise price of €3.81 and 20,000 options at an
        exercise price of €2.74. Exercise prices corresponding to options granted on
        these two dates were not less than the average stock market price of the
        Shares
        over the 20 business days preceding the date of grant. Among these options
        granted on March 15, 1999: 50,000 were to begin vesting two years after the
        date
        of grant and were fully vested as of June 1, 2002 (i.e. three years and two
        and
        half months after the date of grant); Shares acquired pursuant to the options
        cannot be sold prior to five years from the date of grant; 40,000 options
        expire
        on March 31, 2009 (i.e. ten years after the date of grant) and 10,000 options
        expire on December 31, 2009 (i.e. ten years and nine months after the date
        of
        grant) or when employment with the Company ceases, whichever occurs earlier.
        For
        the remaining 10,000 options, granted on March 15, 1999, 50% of the options
        are
        exercisable as of the date of grant and the right to exercise the remaining
        50%
        of the options vested at the rate of 25% each January 1 following the date
        of
        grant. The options expired on December 31, 2003 (i.e., four years and nine
        months after the date of grant).
 
 On
        September 27, 1999, the Board of Directors decided to grant 2,425 options
        to
        certain employees of the Company at an exercise price of €1.83, which is not
        less than the average stock market price of the Shares over the 20 business
        days
        preceding the date of grant. The options were to begin vesting two years
        after
        the date of grant and were fully vested as of January 1, 2003 (i.e., three
        years
        and three months after the date of grant). Shares acquired pursuant to the
        options cannot be sold prior to five years from the date of grant. The options
        expire on December 31, 2009 (i.e., ten years and three months after the date
        of
        grant) or when employment with the Company ceases, whichever occurs
        earlier.
  On
        June
        12, 2001, the shareholders of EDAP TMS S.A. authorized the Board of Directors
        to
        grant up to 300,000 options to purchase pre-existing Shares and 80,000 options
        to subscribe to new Shares, at a fixed exercise price to be set by the
        Supervisory Board. Conforming this plan, on September 25, 2001, the Board
        of
        Directors granted 307,115 options to purchase Shares (among which 33,540
        options
        were related to the plan authorized by the shareholders on June 24, 1999)
        and
        granted 80,000 options to subscribe to new Shares to employees of the Company
        meeting certain tenure criteria. The exercise price was fixed at U.S.$1.92
        (€2.08) per share. Options were to begin vesting one year after the date of
        grant and will be fully vested as of September 25, 2005. Shares acquired
        pursuant to the options cannot be sold prior to four years from the date
        of
        grant. The options expire on September 25, 2011 (i.e., ten years after the
        date
        of grant) or when employment with the Company ceases, whichever occurs
        earlier.
 
 F-22
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  On
        March
        21, 2002, a Member of the Management Board exercised his option to subscribe
        to
        47,421 new Shares (out of the 86,885 options to subscribe to new Shares
        authorized on June 24, 1999) at an exercise price of U.S.$1.561 (€1.76). The
        capital of the Company was thus increased from €1,081 thousand to €1,087
        thousand and the number of Shares issued increased from 8,315,400 to
        8,362,821.
  On
        June
        18, 2002, conforming the June 12, 2001 stock option plan, the Board of Directors
        granted the remaining 26,425 options to French employees meeting certain
        tenure
        criteria. The exercise price was fixed at U.S.$1.92 (€2.02) per share. Options
        were to begin vesting one year after the date of grant and will be fully
        vested
        as of June 18, 2006 (i.e., four years after the date of grant). Shares acquired
        pursuant to the options cannot be sold prior to four years from the date
        of
        grant. The options expire on June 18, 2012 (i.e., ten years after the date
        of
        grant) or when employment with the Company ceases, whichever occurs earlier.
        All
        Shares that may purchased through the exercise of stock options are currently
        held as treasury stock.
  On
        January 29, 2004, the shareholders of EDAP TMS S.A. authorized the Board
        of
        Directors to grant up to 240,000 options to purchase pre-existing Shares
        and
        100,000 options to subscribe to new Shares, to employees of the Company meeting
        certain tenure criteria, at a fixed exercise price to be set by the Board
        of
        Directors.
  Conforming
        this stock option plan, on February 24, 2004, the Board of Directors granted
        225,000 options to purchase pre-existing Shares to certain employees of EDAP
        TMS. The exercise price was fixed at €2.60 per share. Options were to begin
        vesting one year after the date of grant and will be fully vested as of February
        24, 2008 (i.e., four years after the date of grant). Shares acquired pursuant
        to
        the options cannot be sold prior to four years from the date of grant. The
        options expire on February 24, 2014 (i.e., ten years after the date of grant)
        or
        when employment with the Company ceases, whichever occurs earlier. All Shares
        that may be purchased through the exercise of stock options are currently
        held
        as treasury stock.
  On
        February 24, 2004, the Board of Directors granted 100,000 options to subscribe
        to new Shares to the Chief Executive Officer of EDAP S.A. and TMS S.A. The
        exercise price was fixed at €1.28 per share. All options were to begin vesting
        one year after the date of grant. Shares acquired pursuant to the options
        cannot
        be sold prior to four years from the date of grant. The options expire on
        February 24, 2014 (i.e., ten years after the date of grant) or when employment
        with the Company ceases, whichever occurs earlier.
  On
        January 28, 2005, the Board of Directors granted 15,000 options to purchase
        pre-existing Shares to certain employees of EDAP TMS. The exercise price
        was
        fixed at €2.78 per share. 3,750 options were to begin vesting on December 31,
        2005 and 11,250 on December 31, 2006. The options expire on January 28, 2015
        (i.e., ten years after the date of grant) or when employment with the Company
        ceases, whichever occurs earlier. All Shares that may be purchased through
        the
        exercise of stock options are currently held as treasury stock.
  On
        February 17, 2005, the shareholders of EDAP TMS S.A. authorized the Board
        of
        Directors to grant up to 625,000 free shares to be issued to certain employees
        of the Company, subject to compliance with the conditions and performance
        criteria fixed by the Board of Directors. On March 30, 2005, 500,900 rights
        to
        subscribe to free shares were granted to by the Board of Directors, based
        on
        certain performances and criteria to be met for years 2005 and 2006. However,
        given the shift of business model, during 2005, from the sales of Ablatherm
        equipment towards the sales of treatment procedures (RPPs), the Board of
        Directors decided to modify the conditions and performance criteria to be
        met by
        employees, to reflect the new business model. Therefore, on January 6, 2006,
        the
        Board of Directors cancelled the Free Performance Share Plan approved on
        March
        30, 2005 and set up a new Plan with performance criteria based on the new
        RPP
        business model for years 2006 and 2007, in accordance with the Performance
        Stock
        plan approved by the shareholders. On January 6, 2006, 564.100 rights to
        subscribe to new shares were distributed, including new entrants. This plan
        will
        be accounted for in compliance with FASB 123-(R). See
        Item
        5, “Operating and Financial Review and Prospects—New Accounting
        Pronouncements.”
 
 F-23
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
 
 As
        of
        December 31, 2005, a summary of stock option activity to purchase or to
        subscribe to Shares under these plans is as follows:
  2005
              2004
              2003Options
              Weighted
                average
                exercise
                price
                (€)
              Options
              Weighted
                average
                exercise
                price
                (€)
              Options
              Weighted
                average
                exercise
                price
                (€)Outstanding
                  on January 1,
              580,262
              2.49
              391,262
              2.68
              654,341
              2.58Granted
              15,000
              2.78
              325,000
              2.19
              0Exercised
              (1,000)
              1.62
              0
              
              0Forfeited
              (1,000)
              3.81
              (136,000)
              2.34
              (263,079)
              2.43Expired
              -
              -
              -
              -
              -
              -Outstanding
                  on December 31,
              593,262
              2.50
              580,262
              2.49
              391,262
              2.68Exercisable
                  on December 31,
              409,652
              2.45
              219,547
              2.99
              272,442
              2.94Shares
                  purchase options available for grant on December 31
              0
              -
              0
              -
              0
              -
  The
        following table summarizes information about options to purchase Shares already
        held by the Company as treasury Shares, or to subscribe to new Shares, at
        December 31, 2005:
  Outstanding
                  options
              Exercisable
                  optionsExercise
                  price (€)
              
              Options
              Weighted
                average
                remaining
                contractual
                life
              Weighted
                average
                exercise
                price
                (€)
              Options
              Weighted
                average
                exercise
                price
                (€)3.81
              
              116,625
              2.5
              3.81
              116,625
              3.812.78
              
              15,000
              9.1
              2.78
              3,750
              2.782.60
              
              225,000
              8.2
              2.60
              56,250
              2.602.08(1)
              
              112,000
              6.0
              2.08
              112,000
              2.082.02(2)
              
              14,425
              6.5
              2.02
              10,815
              2.021.83
              
              10,212
              3.5
              1.83
              10,212
              1.831.28
              
              100,000
              8.2
              1.28
              100,000
              1.281.28
                  to 3.81
              
              593,262
              6.3
              2.50
              409,652
              2.11
  (1)
              All
                  the 112,000 options were granted on September 25, 2001 with an
                  exercise
                  price expressed in U.S. dollars ($1.92) and converted here to euros
                  based
                  on the noon buying rate on September 25, 2001 ($1 = €
                  1.085).
 (2)
              All
                  the 14,425 options were granted on June 18, 2002 with an exercise
                  price
                  expressed in U.S. dollars ($1.92) and converted here to euros based
                  on the
                  noon buying rate on June 18, 2002 ($1 = €
                  1.0545).
  F-24
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  The
        Company applies Accounting Principles Board Opinion No. 25, ‘‘ *Accounting
        for Stock- Based Compensation* ’’
(APB
        25), and its related interpretations in accounting for its employee stock
        options. Under APB 25 and its related interpretations, the options granted
        or
        modified in 2002 and 2001 did not result in recording any compensation expense,
        additional compensation expense or reversal of compensation expense. Options
        granted in 2005 and 2004 generated a compensation expense amounting to €10
        thousand in 2005 and €14 thousand in 2004.
 ***15-6
          Warrants granted to certain employees***
  As
          of
          December 18, 2002, the shareholders of two of the Company’s wholly owned and
          fully consolidated subsidiaries, TMS S.A. and EDAP S.A., authorized the
          respective Boards of Directors to grant certain Senior Executive Officers
          warrants to subscribe to an aggregate of 604,538 new shares of TMS S.A.’s and
          EDAP S.A.’s common stock. The average exercise price of such warrants is
          equivalent to the higher of either (a) the share value of the capital of
          each
          company or (b) the net book value, each such amount to be calculated on
          the date
          of exercise. Following the resignation of the President of EDAP S.A. in
          November
          2003, outstanding warrants allow today's President of both divisions, to
          subscribe to an aggregate of 252,111 new shares of each of TMS S.A.’s and EDAP
          S.A.’s common stock. The total number of warrants granted, if exercised, would
          represent 3.5% and 2.5% of the respective share capital of TMS S.A. and
          EDAP
          S.A. after subscription. These warrants begin vesting three years after
          their
          date of grant.  These warrants to subscribe to shares expire on the earlier
          of December 18, 2007 or when employment with the Company ceases. According
          to
          APB25, a compensation charge has been booked for an amount of  €115
          thousand as at December 31, 2005, €0 as at December 31, 2004 and €0 as at
          December 31, 2003.
  **16—NET
        SALES**
 
 Net
        sales
        consist of the following:
 
 **2005**
              **2004**
              **2003**Medical
                  devices
              10,242
              11,922
              8,557Disposables
              1,956
              1,901
              1,850RPPs
              1,747
              1,422
              562Leases
              1,399
              1,564
              1,462Spare
                  parts & services
              5,608
              5,320
              5,599Total
                  sales
              20,952
              22,129
              18,030Warrants
                  granted
              (235)
              (174)Total
                  net sales
              20,717
              21,955
              18,030
  ***Warrants***
  On
        February 25, 2004, the Company entered into a distribution agreement with
        HealthTronics granting it, among other things, (i) the right to begin clinical
        trials in the U.S. with the Ablatherm, (ii) the right to seek PMA for the
        Ablatherm from the FDA and (iii) exclusive Ablatherm distribution rights
        in the
        United States, when and if a PMA is granted. Under the terms of the distribution
        agreement, the Company also agreed to grant HealthTronics 1 million warrants
        on
        January 28, 2005, each entitling HealthTronics to purchase a share of the
        Company at a price of U.S.$1.50 upon their vesting. The distribution agreement
        allows HealthTronics to exercise specified numbers of warrants as it meets
        various specified milestones set out in the distribution agreement, some
        of
        which relate to HealthTronics’s commitment to purchase a specified number of
        lithotripter units and others which relate to completion of various stages
        of
        the clinical trials and the regulatory process leading to the PMA for the
        Ablatherm.
 
 F-25
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  In
        accordance with EITF 96-18, the company accounts for the warrants issued
        to
        HealthTronics under the distribution agreement based upon the fair value
        of the
        warrants, measured at the date of milestone achievement, as there is no
        performance obligation from HealthTronics. The related amount, which is a
        non-cash charge, is then recorded as a reduction of revenue. On December
        29,
        2005, HealthTronics, through its subsidiary, and EDAP TMS entered into an
        amendment to the distribution agreement. HealthTronics wishes to focus its
        efforts on obtaining the PMA for Ablatherm and on developing the HIFU market
        potential on the US territory, and does not want to pursue the distribution
        of
        EDAP's ** lithotripters
        in the US, therefore the parties decided to amend the terms and conditions
        of
        the contract. No more warrants are directly linked to the purchase of additional
        lithotripters and future revenues from the sales of lithotripters will not
        be
        impacted by warrants.
  As
        of
        December 31, 2005, the non-cash charge, amounting to €235 thousand, was
        calculated at the fair value of the warrants using the Black & Scholes
        pricing model based on the following assumptions:
  Risk-Free
        Interest Rate (%): 4.30,
 Strike
        (U.S.$): 1.50,
 Volatility
        (%): 75,
 Share
        price (U.S.$): 3.53,
 Dividend
        (%): 0.
  The
        Back
& Scholes valuation was made at the date the performance target was
        achieved, e.g. November 11, 2005.
  This
        non-cash charge of €235 thousand recorded for 2005 related to a series of
        warrants is linked to HealthTronics's purchase of two lithotripters and one
        Ablatherm in 2005, in accordance with the terms of the Amendment to the
        distribution agreement dated December 29, 2005.
  **17—OTHER
        REVENUES**
  Other
        revenues consists of the following:
  **2005**
              **2004**
              **2003**Royalties
              47
              163
              124Grants
                  and others
              46
              45
              319Total
              93
              208
              443
  TMS
        S.A.
        and EDAP S.A. received grants of €6 thousand in 2005, €25 thousand in 2004 and
€75 thousand in 2003, from the French Ministry of Research and Development.
  **18—OPERATING
        EXPENSES**
  Operating
        expenses include bad debt expenses amounting to €274 thousand, €204 thousand,
€41 thousand for the years ended December 31, 2005, 2004, and 2003. These
        operating expenses also include allowance for slow moving inventory which
        is
        classified as cost of goods sold and amounts to €386
        thousand, €252 thousand and €569 thousand for the years ended December 31, 2005,
        2004 and 2003 respectively.
  In
        2004,
        following the Company’s decision in 2003 to reduce headcount in both divisions
        (discussed below), the Company recorded non-recurring expenses of €0.3 million,
        including €0.2 million of employee termination expenses. In 2003, after an
        extensive review of the businesses, with consideration of the current economic
        situation and in order to maintain the competitiveness of the Company, EDAP
        TMS
        S.A. implemented a reduction in headcount in its two French operational
        divisions.
  F-26
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  The
        reductions represented a decrease of 22% of the French-based workforce. The
        Company recorded nonrecurring expenses of €2.1 million, including €1.8 million
        of employee termination expenses and €0.2 million of legal and various expenses
        linked to this reorganization. The balance of the provision as of December
        31,
        2003 amounted to €2.0 million. This provision was used over year 2004, for an
        amount of €1.7 million of employee termination expenses and €0.2 million of
        legal and various expenses linked to this reorganization. The balance of
        the
        provision as of December 31, 2004 amounted to €0.1 million and was used in 2005.
  **19—INTEREST
        INCOME, NET**
 
 Interest
        (expense) income, net consists of the following:
  **2005**
              **2004**
              **2003**Interest
                  income
              187
              146
              284Interest
                  expense
              (52)
              (75)
              (107)Total
              135
              71
              177
  **20—OTHER
        INCOME (EXPENSE), NET**
  Other
        income (expense), consists of the following:
  **2005**
              **2004**
              **2003**Net
                  loss on sale of Urologix common stock
              --
              --
              (123)Other
                  income (expense), net
              9
              (74)
              (95)Total
              9
              (74)
              (218)
  **21—INCOME
        TAXES**
  ***21-1
        Loss before income taxes***
  Loss
        before income taxes is comprised of the following:
  **2005**
              **2004**
              **2003**France
              (755)
              (361)
              (8,509)Other
                  countries
              (206)
              (510)
              (581)Total
              (961)
              (871)
              (9,090)
  
 F-27
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  ***21-2
        Income tax (expense)/ benefit***
  Income
        tax (expense)/benefit consists of the following:
  **2005**
              **2004**
              **2003***Current
                  income tax expense:*France
              38
              6
              (22)Other
                  countries
              (57)
              (29)
              (78)Sub-total
                  current income tax expense
              (19)
              (23)
              (100)*Deferred
                  income tax (expense) benefit:*France
              (90)
              (255)
              149Other
                  countries
              5
              -
              65*Sub-total
                  deferred income tax (expense) benefit*
              *(85)*
              *(255)*
              *(214)*Total
              (104)
              (278)
              114
  ***21-3
        Deferred income taxes:***
  Deferred
        income taxes reflect the impact of temporary differences between the amounts
        of
        assets and liabilities reported for financial reporting purposes and such
        amounts as measured in accordance with tax laws. The tax effect of temporary
        differences which give rise to significant deferred tax assets (liabilities)
        are
        as follows:
  **December
                  31,****2005**
              **2004**Elimination
                  of intercompany profit in inventory
              
              212
              199Other
                  items
              
              431
              413Net
                  operating loss carryforwards
              
              5,941
              5,707Total
                  deferred tax assets
              
              6,584
              6,319Capital
                  leases treated as operating leases for tax
              
              (9)
              (4)Exit
                  tax
              
              (161)
              (161)Other
                  items
              
              (198)
              (88)Total
                  deferred tax liabilities
              
              (368)
              (253)Net
                  deferred tax assets
              
              6,216
              6,066Valuation
                  allowance for deferred tax assets
              
              (6,223)
              (5,989)Deferred
                  tax assets (liabilities), net of allowance
              
              (7)
              77
 
 Net
        operating loss carryforwards of €2,109 thousand, €1,801 thousand, €1,910
        thousand, €263 thousand, €325 thousand and €10,987 thousand as of December 31,
        2005 are available at EDAP Technomed Inc., TMS S.A., EDAP S.A., Edap Technomed
        Italia S.R.L.,Edap Technomed Co Ltd Japan and EDAP TMS S.A., respectively.
        These
        net operating losses generate deferred tax assets of €5,941 thousand.
        Realization of these assets is contingent on future taxable earnings in the
        applicable tax jurisdictions. As of December 31, 2005, €5,711 thousand out of
        these €5,941 thousand net operating loss carry-forwards have no expiration date.
        The remaining tax loss carry-forwards expire in years 2006 through 2012.
        In
        accordance with SFAS No. 109, a valuation allowance is recorded as realization
        of those amounts are not considered probable.
  Deferred
        taxes have not been provided on the undistributed earnings of domestic
        subsidiaries as these earnings, with the exception of the earnings of TMS
        S.A.,
        which benefited from the tax exemption, can be distributed tax-free to EDAP
        TMS
        S.A. The tax exempted earnings of TMS S.A. would normally be taxable if
        distributed to EDAP TMS S.A. via dividends. However, no taxes will be due
        if the
        Company first incorporates these earnings into statutory capital and then
        makes
        a distribution via a statutory capital reduction (redemption). As the Company
        intends on implementing this tax planning opportunity in the event a
        distribution were to be made, no deferred taxes have been provided on these
        earnings.
  F-28
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
 
 In
        2005,
        the Company recorded a corporate income tax benefit of €0.1 million, principally
        reflecting income tax with respect to the results of various subsidiaries.
        In
        2004, the Company recorded a corporate income tax benefit of €0.3 million in
        2004, principally reflecting income tax with respect to the results of various
        subsidiaries and an exceptional exit tax in France of 2.5% (which was enacted
        in
        compensation for the phase-out of capital gains tax on participation shares).
        In
        2004, the
        Company has booked a deferred tax liability amounting to €161 thousand related
        to this exit tax, which will be paid in two equal installments in 2006 and
        2007,
        pursuant to the Amended Finance Law of 2004, dated December 30, 2004.
  ***21-4
        Effective tax rate***
  A
        reconciliation of differences between the statutory French income tax rate
        and
        the Company’s effective tax rate is as follows:
  **2005**
              **2004**
              **2003**French
                  statutory rate
              33.8%
              34.3%
              34.3%Research
                  and development tax credit
              7.6%Income
                  of foreign subsidiaries taxed at different tax rates
              1.5%
              1.9%
              0.1%Effect
                  of net operating loss carryforwards and valuationAllowances
              (22.5%)
              (31.4%)
              (23.5%)Non
                  deductible entertainment expenses
              (4.9%)
              (2.6%)
              (0.3%)Other
              (27.7%)
              (34.1%)
              (9.3%)Effective
                  tax rate
              (12.2%)
              (31.9%)
              (1.3%)
  **22—EARNINGS
        (LOSS) PER SHARE**
 
 A
        reconciliation of the numerators and denominators of the basic and diluted
        EPS
        calculations for the years ended December 31, 2005, 2004 and 2003 is as
        follows:
 
 **For
                  the year ended Dec. 31, 2005**
              **For
                  the year ended Dec. 31, 2004**
              **For
                  the year ended Dec. 31, 2003****Loss
                  in euro (Numerator)**
              **Shares
                  (Denominator)**
              **Per-Share
                  Amount)**
              **Loss
                  in euro (Numerator)**
              **Shares
                  (Denominator)**
              **Per-Share
                  Amount**
              **Loss
                  in euro (Numerator)**
              **Shares
                  (Denominator)**
              **Per-Share
                  Amount****Basic
                  EPS**Loss
                  available tocommon
                  Shareholders
              (1,065,375)
              7,782,731
              (0.14)
              (1,148,792)
              7,781,731
              (0.15)
              (8,975,846)
              7,781,731
              (1.15)Effect
                  of dilutive securities:Stock
                  options
              
              590,843
              
              
              292,479
              
              
              35,572**Diluted
                  EPS**Loss
                  available tocommon
                  shareholders,Including
                  assumedConversions
              (1,065,375)
              8,373,574
              (0.14)
              (1,148,792)
              8,074,210
              (0.15)
              (8,975,846)
              7,817,303
              (1.15)
  
 F-29
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **23—COMMITMENTS
        AND CONTINGENCIES**
  ***23-1
        Commitments***
  The
        Company currently has commitments regarding its operating leases as described
        in
        Note 11- 2.
  ***23-2
        Litigation***
  To
        date,
        the Company is a party to two product liability actions in the United States
        by
        patients claiming to have been injured in the course of a Prostatron procedure.
        The Company has agreed to retain liability for these two cases following
        the
        sale of the Prostatron business in October 2000. However, in one of the two
        cases, the Company believes that it may be able to claim indemnification
        from
        Urologix. The Company believes that the patients’ claims against the Company are
        without merit. While it is not possible to predict the outcome of legal actions
        brought against the Company, the Company believes that the liability resulting
        from the pending claims and suits would not have a material adverse effect
        on
        the results of its operations, cash flows, or financial position as of December
        31, 2005, and for the year then ended.
  **24—FAIR
        VALUE OF FINANCIAL INSTRUMENTS**
  The
        following disclosure of the estimated fair value of financial instruments
        was
        made in accordance with the requirements of SFAS No. 107 ‘‘Disclosure about fair
        value of financial instruments.’’ The estimated fair value amounts have been
        determined by the Company using available market information and appropriate
        valuation methodologies. The estimates of fair values of the Company’s financial
        instruments are compared below to the recorded amounts at December 31, 2005
        and
        2004.
  **December
                  31,**
              **December
                  31,****2005**
                **Recorded**
                **Value**
              **2005**
                **Estimated**
                **Fair
                  Value**
              **2004**
                **Recorded**
                **Value**
              **2004**
                **Estimated**
                **Fair
                  Value**Assets:Cash
                  and cash equivalents
              8,317
              8,317
              9,398
              9,398Trade
                  accounts and notes receivable, net
              8,025
              8,025
              7,722
              7,722Liabilities:Short-term
                  borrowings
              155
              155
              525
              525Trade
                  accounts payable
              3.532
              3,532
              2,913
              2,913Notes
                  payable
              773
              773
              762
              762Long-term
                  debt
              55
              53
              6
              6
  The
        recorded amount of cash and cash equivalents, investments available for sale,
        trade accounts and notes receivable (drafts), short-term borrowings, and
        trade
        accounts and notes payable (drafts) are a reasonable estimate of their fair
        value due to the short-term maturities of these instruments.
  Fair
        value of long-term debt is estimated based on borrowing rates currently
        available to the Company for loans with similar terms and
        maturities.
 
 F-30
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  **25—CONCENTRATION
        OF CREDIT RISK**
  Financial
        instruments, which potentially subject the Company to concentrations of credit
        risk, consist principally of cash and cash equivalents and trade accounts
        and
        notes receivable from customers, primarily located in France, Japan and the
        United States. The Company maintains cash deposits with major banks. Management
        periodically assesses the financial condition of these institutions and believes
        that any possible credit risk is limited.
  The
        Company has procedures in effect to monitor the creditworthiness of its
        customers. The Company obtains bank guarantees for first-time or infrequent
        customers, and in certain cases obtains insurance against the risk of a payment
        default by the customer. The Company reviewed individual customer balances
        considering current and historical loss experience and general economic
        conditions in determining the allowance for doubtful accounts receivable
        of €0.7
        million as of December 31, 2005 and 2004. Ultimate losses may vary from the
        current estimates, and any adjustments are reported in earnings in the periods
        in which they become known.
  In
        2005
        and 2004, the Company did not generate significant revenue with a single
        customer.
 
 **26—FOREIGN
        CURRENCY TRANSACTIONS**
 
 The
        Company generates a significant percentage of its revenues, and of its operating
        expenses, in currencies other than euro. The Company’s operating profitability
        could be materially adversely affected by large fluctuations in the rate
        of
        exchange between the euro and such other currencies. The Company engages
        in
        foreign exchange hedging activities when it deems necessary, but there can
        be no
        assurance that hedging activities will be offset by the impact of movements
        in
        exchange rates on the Company’s results of operations. As of December 31, 2005,
        the Company had three options to hedge against Japanese yen for a total nominal
        amount of JPY45 million (i.e. €331 thousand), an amount of JPY15 million each,
        expiring on March, June and September 2006 respectively and two options to
        hedge
        against US$ for a total nominal amount of US$200 thousand (i.e. €160 thousand),
        an amount of US$100 thousand each, expiring on February and April 2006. The
        fair
        value of these derivatives was not material as of December 31,
        2005.
 
 **27—SEGMENT
        INFORMATION**
 
 In
        July
        of fiscal year 2002, the Company announced an organizational realignment
        that
        created two operating divisions within the Company. For reporting purposes,
        this
        organizational realignment created three reporting segments: the holding
        company, EDAP TMS S.A., the High Intensity Focused Ultrasound division and
        the
        Urological Devices and Services division. The following tables set forth
        the key
        income statement figures, by segment for fiscal years 2005, 2004 and 2003
        and
        the key balance sheet figures, by segment, for fiscal years 2005 and
        2004.
  The
        business in which the Company operates is the development and production
        of
        minimally invasive medical devices, primarily for the treatment of urological
        diseases. Substantially all revenues result from the sale of medical devices
        and
        their related license and royalty payments from third parties. The segments
        derive their revenues from this activity.
 
 F-31
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
 
 Segment
        operating profit or loss and segment assets are determined in accordance
        with
        the same policies as those described in the summary of significant accounting
        policies except that interest income and expense, current and deferred income
        taxes, and goodwill are not allocated to individual segments. A reconciliation
        of segment operating profit or loss to consolidated net loss is as
        follows:
  **2005**
              **2004**
              **2003**Segment
                  operating loss
              (1,323)
              (830)
              (8,121)Interest
                  income, net
              135
              71
              177Foreign
                  Currency exchange (losses) gains, net
              218
              (38)
              (928)Other
                  income, net
              9
              (74)
              (218)Income
                  tax (expense) credit
              (104)
              (278)
              114Consolidated
                  net loss
              (1,065)
              (1,149)
              (8,976)
  A
        summary
        of the Company’s operations by business unit is presented below for years ending
        December 31, 2005, 2004 and 2003:
 
 **HIFU
                  Division**
              **UDS
                  Division**
              **EDAP
                  TMS**
                **(Corporate)**
              **Consolidation**
              **Total**
                **consolidated****2005**External
                  sales of medical devices
              4,260
              5,982
              
              
              10,242External
                  sales of spares parts,Supplies
                  & services
              3,685
              7,025
              
              
              10,710Internal
                  segment revenues
              3
              3,185
              
              (3,188)Total
                  sales
              7,948
              16,192
              
              (3,188)
              20,952Warrants
                  granted
              (118)
              (117)
              
              
              (235)Total
                  net sales
              7,830
              16,075
              
              (3,188)
              20,717External
                  other revenues
              14
              79
              
              
              93Internal
                  other revenues
              105
              -
              
              (105)
              -Total
                  revenues
              7,949
              16,154
              
              (3,293)
              20,810Total
                  COS
              (3,998)
              (11,457)
              
              3,142
              (12,313)Gross
                  margin
              3,951
              4,697
              
              (151)
              8,497R&D
              (1,042)
              (742)
              
              
              (1,784)Selling
                  expenses
              (1,983)
              (1,775)
              
              
              (3,758)G&A
              (791)
              (1,937)
              (1,550)
              
              (4,278)Total
                  expenses
              (3,816)
              (4,454)
              (1,550)
              
              (9,820)Operating
                  income (loss)
              135
              243
              (1,550)
              (151)
              (1,323)Total
                  Assets
              9,177
              22,163
              5,620
              (8,164)
              28,796Capital
                  expenditures
              696
              645
              
              
              1,341Long-lived
                  assets
              2,172
              3,787
              59
              
              6,018Goodwill
              645
              1,767
              
              
              2,412
 
 F-32
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
  
 **HIFU
                  Division**
              **UDS
                  Division**
              **EDAP
                  TMS**
                **(Corporate)**
              **Consolidation**
              **Total**
                **consolidated****2004**External
                  sales of medical devices
              3,733
              8,189
              
              
              11,922External
                  sales of spares parts,Supplies
                  & services
              2,915
              7,291
              
              
              10,206Internal
                  segment revenues
              287
              1,905
              
              (2,192)Total
                  sales
              6,935
              17,385
              
              (2,192)
              22,128Warrants
                  granted
              
              (174)
              
              
              (174)Total
                  net sales
              6,935
              17,211
              
              (2,192)
              21,954Other
                  revenues
              34
              174
              
              
              208Total
                  revenues
              6,969
              17,385
              
              (2,192)
              22,162Total
                  COS
              (3,749)
              (12,119)
              
              2,192
              (13,676)Gross
                  margin
              3,220
              5,266
              
              
              8,486R&D
              (817)
              (706)
              
              
              (1,523)Selling
                  expenses
              (1,275)
              (2,128)
              
              
              (3,403)G&A
              (659)
              (2,221)
              (1,193)
              
              (4,073)Non
                  recurring
              (82)
              (27)
              (208)
              
              (317)Total
                  expenses
              (2,833)
              (5,082)
              (1,401)
              
              (9,316)Operating
                  income (loss)
              387
              184
              (1,401)
              
              (830)Total
                  Assets
              7,162
              20,334
              6,645
              (6,256)
              27,885Capital
                  expenditures
              287
              844
              2
              
              1,133Long-lived
                  assets
              1,781
              4,048
              31
              
              5,860Goodwill
              645
              1,767
              
              
              2,412
 
 F-33
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
 
 
 **HIFU
                  Division**
              **UDS
                  Division**
              **EDAP
                  TMS**
                **(Corporate)**
              **Consolidation**
              **Total**
                **consolidated****2003**External
                  sales of medical devices
              1,148
              7,364
              
              
              8,512External
                  sales of spares parts,supplies
                  & services
              1,709
              7,809
              
              
              9,518Internal
                  segment revenues
              3
              1,967
              
              (1,970)
              —Other
                  revenues
              99
              342
              2
              
              443Total
                  revenues
              2,959
              17,482
              2
              (1,970)
              18,473Total
                  COS
              (2,056)
              (12,771)
              —
              1,733
              (13,094)Gross
                  margin
              903
              4,711
              —
              (237)
              5,379R&D
              (2,345)
              (725)
              
              
              (3,070)Selling
                  expenses
              (2,023)
              (2,205)
              
              
              (4,228)G&A
              (747)
              (2,005)
              (1,353)
              
              (4,105)Non
                  recurring
              (1,590)
              (463)
              (44)
              
              (2,097)Total
                  expenses
              (6,705)
              (5,398)
              (1,397)
              —
              13,500Operating
                  income (loss)
              (5,802)
              (687)
              (1,395)
              (237)
              (8,121)Total
                  Assets
              9,432
              21,050
              5,238
              (3,810)
              31,910Capital
                  expenditures
              635
              1,138
              25
              
              1,798Long-lived
                  assets
              1,951
              4,054
              35
              
              6,040Goodwill
              645
              1,767
              
              
              2,412
 
 F-34
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
 
  **28—VALUATION
        ACCOUNTS**
  **Allowance
                  for doubtful accounts**
              **Slow-moving
                  inventory**Restated
                  balance as of January 1, 2003
              862
              1,528Charges
                  to costs and expenses
              41
              569Deductions:
                  write-off provided in prior periods
              (377)
              (380)Restated
                  balance as of December 31, 2003
              526
              1,717Charges
                  to costs and expenses
              204
              252Deductions:
                  write-off provided in prior periods
              (25)
              (1,265)Restated
                  balance as of December 31, 2004
              705
              704Charges
                  to costs and expenses
              274
              386Deductions:
                  write-off provided in prior periods
              (316)
              (216)Restated
                  balance as of December 31, 2005
              663
              874
  **29—SUPPLEMENTAL
        DISCLOSURES OF CASH FLOW INFORMATION**
  Interest
        and income taxes paid are as follows:
  **2005**
              **2004**
              **2003**Income
                  taxes paid (refunds received)
              (66)
              (82)
              (560)Interest
                  paid
              7
              19
              21Interest
                  received
              119
              120
              223Non-cash
                  transactions:
              **2005**
              **2004**
              **2003**Capital
                  lease obligations incurred
              859
              998
              792
  **30—RELATED
        PARTY TRANSACTIONS**
 
 The
        General Manager of the Company's Korean branch "EDAP-TMS Korea" is also Chairman
        of a Korean company named Dae You.
 
 EDAP-TMS
        Korea subcontracts to Dae You the service contract maintenance of the Company
        medical devices installed in Korea for an amount of €136 thousand, €63 thousand
        and €33 thousand, for 2005, 2004 and 2003 respectively.
 
 Dae
        You
        is also acting as an agent to promote the Company's medical devices in South
        Korea, and receives commissions on sales.
 
 F-35
 **EDAP
        TMS S.A. AND SUBSIDIARIES**
  **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 **(in
        thousands of euros unless otherwise noted, except per share
        data)**
 
 
 Dae
        You
        also purchased medical devices from the Company and operates them in partnership
        with hospitals or clinics for an amount of €396 thousand, €401 thousand and €309
        thousand in 2005, 2004 and 2003 respectively.
 
 As
        of
        December, 31 2005, receivables amounted to €148 thousand and payables to €83
        thousand. As of December 31, 2004, there were no receivables nor payables,
        related to DAE YOU.
 
 The
        Company purchases certain technological elements to Siemens AG. Total purchases
        amounted to €547 thousand in 2005, €405 thousand in 2004 and €360 thousand in
        2003. As of December 31, 2005, payables due to Siemens AG amounted to €46
        thousand and as of December 31, 2004, payables due to Siemens AG amounted
        to €3
        thousand.
     F-36