|As
filed with the  Security and Exchange Commission on May 20, 2005
|-------------------------------------------------------------------

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|SECURITIES
AND EXCHANGE COMMISSIONWashington, D.C. 20549
|--------------------------------------------------------

FORM 20-F

| |  ̈ | REGISTRATION
STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | ----------------------------------------------------------------------------------------------

or

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

For the Fiscal Year
Ended December 31, 2004

or

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

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-Lamartine4/6, rue du Dauphine69120 Vaulx-en-Velin, France(Address of
principal executive offices)

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

|Title of each class
None | Name of each exchange
on which registeredNone
|------------------------ | ---------------------------------------------

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, 2004:

7,781,731 Ordinary
Shares

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    ̈

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

Item 17   
 ̈
     Item 18   X

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TABLE OF CONTENTS

|                                                                                       | Page
|-------------------------------------------------------------------------------------- | ----
|                                                                                      
|Presentation of Financial and Other Information                                        | 1   
|Forward-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 5.  Operating and Financial Review and Prospects                                  | 20  
|Item 6.  Directors, Senior Management and Employees                                    | 32  
|Item 7.  Major Shareholders and Related Party Transactions                             | 37  
|Item 8.  Financial Information                                                         | 37  
|Item 9.  The Offer and Listing                                                         | 38  
|Item 10.  Additional Information                                                       | 40  
|Item 11.  Quantitative and Qualitative Disclosures about Market Risk                   | 52  
|Item 12.  Description of Securities Other than Equity Securities                       | 53  
|                                                                                      
|PART II                                                                               
|Item 13.  Defaults, Dividend Arrearages and Delinquencies                              | 53  
|Item 14.  Material Modifications to the Rights of Security Holders and Use of Proceeds | 53  
|Item 15.  Controls and Procedures                                                      | 53  
|Item 16A.  Audit Committee Financial Expert                                            | 54  
|Item 16B.  Code of Ethics                                                              | 54  
|Item 16C.  Principal Accounting Fees and Services                                      | 54  
|Item 16D.  Exemptions from the Listing Standards for Audit Committees                  | 55  
|Item 16E.  Purchases of Equity Securities by the Issuer and Affiliated Purchasers      | 55  
|                                                                                      
|PART III                                                                              
|Item 17.  Financial Statements                                                         | 56  
|Item 18.  Financial Statements                                                         | 56  
|Item 19.  Exhibits                                                                     | 56  

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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, 2004.

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 =  0.7387, 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, 2004. 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 and Praktis. 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 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, 2002, 2003 and 2004
and the income statement data for the years ended December 31, 2002, 2003 and 2004 set
forth below have been derived from the Consolidated Financial Statements. The balance
sheet data as of December 31, 2000 and 2001 and the income statement data for the year
ended December 31, 2000 and 2001 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)                
|                                                                |  | 2000                          
|                                                                |  |                               
|                                                                |  |                              
|                                                                |  |                               
|INCOME STATEMENT DATA                                           |  |                               
|Total revenues                                                  |  | 27,252                        
|Net sales                                                       |  | 24,809                        
|Gross profit                                                    |  | 13,060                        
|Operating expenses                                              |  | (16,795                       
|Income (loss) from operations                                   |  | (3,735                        
|Income (loss) before income taxes                               |  | 12,032                        
|Income taxes                                                    |  | (323                          
|Net income (loss)                                               |  | 11,709                        
|Net income (loss) per Share                                     |  | 1.5                           
|Dividends per Share(2)                                          |  |                              
|Weighted average shares outstanding
used in diluted calculation |  | 8,266,361                     
|Diluted earnings per Share                                      |  | 1.42                          
|BALANCE SHEET DATA                                              | 
|Total current assets                                            |  | 39,881                        
|Property, plant and equipment, net                              |  | 1,825                         
|Total current liabilities(4)                                    |  | 10,185                        
|Total assets                                                    |  | 50,287                        
|Long-term debt, less current portion(3)                         |  | 3,478                         
|Total shareholders equity                                      |  | 34,679                        

2

---

|(1) | Translated
for the convenience of the reader at the Noon Buying Rate on December 31, 2004  of $1 =
0.7387. See Presentation of Financial and Other Information elsewhere
in this Annual Report.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | No
dividends were paid with respect to fiscal years 2000 through 2003 and subject to
approval of the annual shareholders meeting to be held in June 2005, the Company
does not anticipate paying any dividend with respect to fiscal year 2004. See Item 8,
Financial Information  Dividends and Dividend Policy.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Long-term
debt includes the long-term portion of capital lease obligations.
|--- | ---------------------------------------------------------------------------

|(4) | Certain
prior years amounts have been reclassified to conform the current years presentation.
|--- | -----------------------------------------------------------------------------------------------

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 ofYear
|----------------------- | ---- | ---- | ---------- | ----------
|                        |      |      |            |           
|                        |     |     |           |          
|                        |      |      |            |           
|2004                    | 0.85 | 0.73 | 0.80       | 0.74      
|2003                    | 1.12 | 0.79 | 0.88       | 0.79      
|2002                    | 1.16 | 0.95 | 1.05       | 0.95      
|2001                    | 1.19 | 1.05 | 1.12       | 1.12      
|2000                    | 1.21 | 0.97 | 1.08       | 1.07      

|(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 
|-------- | ---- | ----
|         |      |     
|         |     |    
|         |      |     
|October  | 0.81 | 0.78
|November | 0.79 | 0.75
|December | 0.76 | 0.73
|January  | 0.77 | 0.74
|February | 0.78 | 0.75
|March    | 0.78 | 0.74

On May 12, 2005, the
latest practicable date before the filing of this Annual Report with the U.S. Securities
and Exchange Commission (the Commission), the Noon Buying Rate was U.S.$1.00 =
0.7870.

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. In October 2000, EDAP TMS
sold its Prostatron business to Urologix, Inc. (Urologix). The Prostatron, a
medical device using transurethral microwave thermotherapy (TUMT) for the
minimally invasive treatment of Benign Prostatic Hyperplasia (BPH), a
non-cancerous urological condition, was one of the Companys three principal lines
of  medical devices. Although the Company continued to manufacture the Prostatron on
behalf of  Urologix after the sale, it only derived approximately 1% of its total
revenues for the  year ended December 31, 2004 and 2% of total revenues for the year
ended December 31, 2003  from these sales. The Company does not expect to generate any
additional revenues from the  supply of machines to Urologix for the year ended December
31, 2005 and beyond, as the  agreements between the Company and Urologix to manufacture
the devices have expired. In  addition, the Companys Extracorporeal Shockwave
Lithotripsy (ESWL) line  of products

3

---

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. Consequently, 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. 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, as occurred in the United States in
connection with the Companys December 2001 request for an additional IDE enabling
the Company to conduct clinical trials for the Ablatherm as a primary therapy. 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. 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. 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.

| | 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 and Germany, and evidence of
the cost-effectiveness of a therapy as compared to existing therapies. Patient acceptance
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.

4

---

| | 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 2004, 2003 and 2002, 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, 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
charge-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 2004, the Company registered an operating income in
both divisions, reflecting its efforts in restructuring the Company and reducing 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 alternative 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 HIFU, 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. Finally, St. Jude Medical Inc. has developed a device using HIFU to treat atrial
fibrillation. 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. With respect to ESWL product, the Company
is currently experiencing declining revenues in its maintenance and service contract
business and may not be able to offset these decreases with increases in other businesses.

| | 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 and Germany, and
there is no assurance that such reimbursement will be obtained.

| | 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 products 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 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 for several components of its products, relies on a single source. 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.

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

7

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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 know-how 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
2004,  approximately 70% of the Companys selling and general and administrative
expenses  and approximately 94% of the Companys research and development expenses
were  denominated in euro, while approximately 51% 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

8

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hedging activities
will limit  the effect of movements in exchange rates on the Companys results of
operations. As  of December 31, 2004, the Company had two foreign exchange sale
contracts, one for  Japanese yen which expires on December 28, 2005 and one for U.S.
dollars which expires on  May 27, 2005. As of March 31, 2005, the Company had five new
foreign exchange sale  contracts, three 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.

| | 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.

| | Passive
Foreign Investment Company Status
| | -----------------------------------------

Unfavorable
U.S. tax rules apply to a U.S. holder of shares in a company that is considered a passive
foreign  investment  company (PFIC)  for any taxable  year during any part of
which the U.S.  holder owns such  shares.  The  unfavorable  consequences  of the rules
can be  alleviated  by  making the  mark-to-market  election  described in Item 10,
Additional  InformationTaxation  of U.S.  InvestorsPassive  Foreign  Investment
Company  Rules.  Although the Company  believes that it was not a PFIC in 2004 and
does not anticipate being a PFIC in 2005, the Company believes that it was a  PFIC in
prior  years.  If a U.S.  holder  held Shares or ADSs during any year in which the
Company  was a PFIC,  such U.S.  holder  generally  would be  subject to unfavorable
U.S. tax rules applicable to PFICs.  Such U.S.  holders,  therefore,  should consider
making a  mark-to-market  election.  U.S.  holders should consult their own tax advisors
regarding the potential  applicability  and  consequences of PFIC treatment to them and
the implications  of the mark-to-market election.

Item  4.  Information
on the Company

History and
Development of the Company

Founded
in 1979, the Company originally specialized in the manufacturing and distribution of
lithotripters and produced the first piezo-electric lithotripter 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 in 1986 and the Prostatron, a medical device using 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 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. As a result of the transaction,
the Company held securities that represented approximately 12.7% of Urologixs total
share capital (assuming the Companys warrants had been exercised) on the date of the
closing of the transaction. On December 31, 2003 the Company sold all of its shares in
Urologix, and it no longer holds any Urologix shares. Additionally, the Company and
Urologix entered into a supply agreement, which expired October 1, 2003, for certain
components of the Prostatron unit (the Supply Agreement), as well as a
distribution agreement for the Prostatron in Japan and Italy (the Distribution
Agreement).

9

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In
July 2002, the shareholders of the Company approved the reorganization of the
Companys management structure and the creation of two separate operating divisions.
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. Additionally, two separate, fully consolidated operating
divisions were created: the HIFU division and the UDS division.

In
December 2003, in consideration of the economic situation prevailing at the time and in
order to maintain competitiveness, the Company had to restructure its organization and
implemented a headcount reduction in its two French operational divisions.

In
December 2003, the Company also entered into a letter of intent with a subsidiary of
HealthTronics Inc. (HealthTronics) granting it the right to begin clinical
trials with the Ablatherm, which utilizes HIFU to provide minimally invasive treatment of
prostate cancer, to obtain Pre-Market Approval (PMA) from the FDA, and
granting HealthTronics exclusive distribution rights in the United States for the
Ablatherm, when and if a PMA is granted. Certain aspects of the letter of intent required
the approval of the shareholders of the Company, which approval was obtained at an
extraordinary shareholder meeting held on January 29, 2004.

On
February 25, 2004, the Company and HealthTronics finalized a distribution agreement based
on the terms outlined in the letter of intent. On January 28, 2005, 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 US.

The
Companys legal name is EDAP TMS S.A. 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.

| | 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 26 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 ofEstablishment | 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

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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 6.9 million during the fiscal
year ended December 31, 2004

| | 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 are to
begin soon, with the assistance of the Companys U.S. partner, HealthTronics. The
HIFU division had a fixed installed base of 27 Ablatherm machines worldwide and 67
clinical sites were using this technology as of March 31, 2005.

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 charge-per-procedure
(CPP) 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 many
of the large 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. 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 Europe, through the
distribution platform of the UDS division in Asia and selected distributors in key
countries, 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11

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| |  | 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 lowered spending on research
and development (R&D) projects in 2004 so that it could utilize those
resources in expanding the acceptance of HIFU for the treatment of localized prostate
cancer. The division is considering increasing R&D spending in 2005 and onwards to develop HIFU
applications beyond urology in order to strengthen its technological leadership in HIFU
and expand it beyond prostate cancer.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 and Russia. Clinical trials will
soon be 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. 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, 2005, the HIFU divisions patent portfolio contained 53 patents
(consisting of 27 in the United States, 20 in the European Union and Japan and 6 in
Israel) covering key technologies relating to HIFU systems and associated software.
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.
During 2004, two patents (one covering obsolete technology and one continuation in
part) were abandoned in the United States. An additional patent covering HIFU
transducer design was obtained in Israel. In Europe one patent covering the disposable
Ablapack has been obtained and one patent covering obsolete technology was abandoned.

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
cervico-facial 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

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| | 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 application is still under review. The
process of requesting approval to market the Ablatherm in Japan has been ongoing for a
significant period of time, 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.  Site selection is underway and patient enrollment is
expected to begin in late third quarter.

| | HIFU
Division Manufacturing
| | ---------------------------

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

| | HIFU
Division Quality and Design Control
| | ----------------------------------------

The
HIFU division has obtained the ISO 9001 (V2000) and ISO 13485 (V1996) certifications which
indicate compliance with international standards for quality and design control.

13

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| | 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 230,110 new cases of prostate cancer were diagnosed in 2004 and that there
will be approximately 232,090 new cases of prostate cancer diagnosed in 2005.
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 R&D 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, 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. Finally, St. Jude Medical has developed a
device using HIFU to treat atrial fibrillation. Certain existing and potential competitors
of the HIFU division may have substantially greater financial, R&D, 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 R&D in advancing
the technology beyond the treatment of prostate cancer. This future investment is wholly
dependent on the successful acceptance of the device for the treatment of prostate cancer.

| | HIFU
Division Sales and Distribution of Products
| | ------------------------------------------------

The
HIFU division markets and sells its products through its own direct marketing and sales
organization as well as through third-party distributors and agents. The HIFU division
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.

14

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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.

Urology Devices and
Services (UDS) Division

The
UDS division consists of four wholly owned and fully consolidated subsidiaries of the
Company: Technomed Medical 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 17.4 million during the fiscal year ended December 31, 2004.

| | 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. During 2002, the UDS
division discontinued its production of the LT02 line of lithotripters. The UDS division
had an installed base of 423 ESWL lithotripters worldwide as of March 31, 2005.

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. 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
to produce the machines that had been ordered prior to the expiration of the Agreement.
Once the final machines have been manufactured, the UDS division does not expect to
generate any additional revenues from the supply of machines to Urologix. The UDS division
expects to derive only a small amount of revenues related to the sales of Prostatron
parts. The UDS division, as an additional part of its contract manufacturing business,
manufactures HIFU-related devices and accessories, including disposables, on behalf of the
HIFU division.

15

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| | 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
(V2000) and ISO  13485 (V1996) 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.

|Product                             | Procedure                                   | Development Stage    | Clinical and Regulatory Status                                                            
|----------------------------------- | ------------------------------------------- | -------------------- | ------------------------------------------------------------------------------------------
|SonolithPraktiscompact lithotripter | Electroconductivetreatment ofurinary stones | CommercialProduction | Approved for distribution:European UnionJapanUnited StatesCanadaRussiaSouth KoreaAustralia
|                                   
|Sonolith Vision                     | Electroconductivetreatment ofurinary stones | CommercialProduction | Approved for distribution:European UnionJapanCanadaSouth Korea                            

16

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The
Sonolith Praktis and the Sonolith Vision rely on an electroconductive technology for
shockwave generation. The electroconductive technology, which is derived from the
electrohydraulic technology on which the first ESWL lithotripters were based, permits
improved focusing of the shockwave, reduces the variability in the shockwave pressure and
allows a better transfer of energy to the calculus, 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, 2005, the UDS divisions patent portfolio contained 17 patents
(consisting of 7 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 2004, one patent older than 20 years expired in the United States, the European
Union and Japan. This patent covered in-line imaging for lithotripsy. Four other patents
covering obsolete technologies were abandoned in Europe and Japan. One patent covering a
new technology for shockwave generation, which was previously obtained in France, has been
also obtained in Europe.

The
UDS divisions patents in ESWL cover certain technologies relating to the association
of a piezo-electric 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 and Japan. The Sonolith Vision is available for commercial distribution
in the European Union, Canada 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
| | -----------------------------

Roughly
2% to 3% of the world population suffers from kidney or urethral stones during their
lifetime. Urinary calculi are responsible for 10% of urological hospital admissions
worldwide. Although urinary calculi may be eliminated naturally by the body, natural
elimination is frequently accompanied by considerable pain and very often by serious
complications, such as obstruction and infection of the urinary tract.

Since
its introduction in clinical practice nearly 20 years ago, ESWL has become the standard
treatment for urinary calculi. ESWL consists of fragmenting calculi within the body using
extracorporeal shockwaves without any surgery. 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.

17

---

| | 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 is
entitled to exercise part the warrants granted to them if they purchase a certain number
of lithotripters per year.

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, disposable and software 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 and
software development, 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.

| | 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 frequent quality
audits of suppliers manufacturing facilities. The UDS divisions principal
suppliers are located in France, Switzerland, Austria, the United Kingdom 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 and ISO 13485 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.

18

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Property, Plants 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, 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
effect utilization of the facility.

In
addition, the Company rents office and/or warehouse facilities in Kuala Lumpur (Malaysia),
Rome (Italy), Moscow (Russia), Seoul (South Korea), Fukuoka, Osaka 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.

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 (V2000) and ISO 13485 (V1996)
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.

19

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Pursuant
to the Medical Device Directive, medical devices are classified into four classes, Class
I, Class IIa, Class IIb and Class III, on the basis of their invasiveness and the duration
of their use. The classification serves as a basis for determining the conformity
assessment procedures 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 Japanese Pharmaceutical Affairs Law,
two types of licenses are required for the import and sale of medical devices, a general
license to engage in the import and sale of such devices by the importer and specific
approvals for each device. 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  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, 2004, 2003 and 2002 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.

20

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| | 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 charge-per-procedure
(CPP) 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s purchase of a specified number of lithotripters.

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 option and the risk-free interest rate of the warrants. A change in one or more of
these assumptions could result in a material change to the fair value of the
vested warrants.

| | 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.

21

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| | 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, 2002,
the Company determined that it had certain inventories that were in excess of its current
requirements based on forecasted demand for these inventories. As a result, the Company
recorded a reserve for inventory obsolescence of these inventories at December 31, 2002
with a charge of 0.6 million. 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.

| | 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.

| | Deferred
Tax Assets
| | -------------------

As
of December 31, 2004, the Company had approximately 0.1 million of deferred tax
assets principally related to the impact of temporary differences between the amounts of
assets and liabilities reported for financial reporting purposes and such amounts as
measured in accordance with tax laws.

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 includes 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 has historically been comprised of net sales of Prostatrons, ESWL
lithotripters and Ablatherms. With respect to lithotripter revenues, the Company books a
non-cash charge as a reduction in revenue if the warrants it has granted to HealthTronics
under the distribution agreement vest as a result of HealthTronics purchase of a
certain number of lithotripters. Net sales of lithotripters may therefore be reduced in
the future by the vesting of warrants to HealthTronics upon the purchase of a specified
number of lithotripters.

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.

22

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The
Company is developing its HIFU mobile treatment activity which enables it 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 charge-per-procedure (CPP) basis (i.e., on the basis of the
number of individual treatments provided). Net sales of treatments from this mobile
activity include only the revenues arising from the sale of Ablatherm treatments
themselves. The treatment 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 CPP revenue related to the HIFU mobile treatment
activity.

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 Japan. Net sales of medical
devices in Japan represented approximately 31.9% of such sales in 2004 and consisted
primarily of sales of ESWL lithotripters. Net sales of spare parts, supplies and services
in Japan represented approximately 25.8% of such sales in 2004 and related primarily to
ESWL lithotripters, reflecting the fact that approximately 24.8% of the installed base of
the Companys ESWL lithotripters is located in Japan. Sales in Japan are effected
through EDAP Technomed Co. Ltd., the Companys wholly owned Japanese subsidiary.

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 2004,
approximately 70% of the Companys selling and general and administrative expenses
and approximately 94% of the Companys research and development expenses were
denominated in euro, while approximately 51% 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.

Other
revenues consists principally of license fee and royalty payments from third parties with
respect to the Companys intellectual property and operating subsidies from French
governmental agencies. See Note 17 of the Notes to the Consolidated Financial Statements.

The
principal elements of cost of sales have historically been salaries and wages, component
and equipment costs and subcontracting costs. Also included in cost of sales are royalties
paid to third parties on product sales.

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.

Operating
expenses include research and development expenses, marketing, selling expenses, general
and administrative expenses, depreciation and amortization and non-cash charges for
impairment of long-lived assets.

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 R&D, marketing and manufacturing.

R&D
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. These machines are amortized over a
five-year period equivalent to the clinical trial period.

23

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R&D
expenses amounted to 1.5 million, 3.1 million and 3.2 million in 2004,
2003 and 2002, respectively, representing approximately 7%, 17% and 16% of total revenues
in 2004, 2003 and 2002, respectively. The decrease in R&D in 2004 was primarily due to
the suspension of funding on projects to expand the use of HIFU beyond the treatment of
prostate cancer. Beginning 2005, management expects the budget for R&D expenses to
increase to approximately 10% of total revenues, with the start of clinical trials in the U.S.,
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 books
a non-cash charge as an operating expense (specifically, an R&D clinical trial
expense) for warrants that 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.

Marketing
expenses amounted to 0.7 million in 2004, 1.3 million in 2003 and 1.4
million in 2002. The decline of 42% from 2003 to 2004 was primarily due to the
restructuring undertaken in December 2003. 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
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. In 2002, the Company recorded a
non-recurring operating expense of 1.2 million reflecting mainly the costs
associated with restructuring the Company into two separate operating units. See Note 18
of the Notes to the Consolidated Financial Statements.

In
accordance with Statement of Financial Accounting Standards No. 142 (SFAS No. 142),
Goodwill and Other Intangible Assets, 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 2002, 2003 or 2004 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 which will entitle
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. 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
lithotripters. 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
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.

24

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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 facilitate the penetration
of the U.S. lithotripsy market and 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.

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 2.1 million, or approximately 10% of total revenues, in 2002, further
decreasing in 2003 to 0.4 million or approximately 2% of total revenues and in 2004,
to 0.2 million or approximately 1% of total revenues. The Supply Agreement
terminated in 2003.

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.

HIFU
division. The HIFU divisions total revenues increased 136% from 3.0
million in 2003 to 7.0 million in 2004 (including 0.3 million and 0.1
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 3.5 times, from
1.1 million in 2003 to 4.0 million in 2004, with 9 Ablatherm units sold in
2004 versus 3 in 2003.

Net
sales of CPPs 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 an 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 (which more than offset 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.

25

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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 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. See
Operating ResultsOverview.

UDS
division R&D expenses remained stable at 0.3 million in 2003 and 2004 See
 Operating ResultsOverview.

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.

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 (expense), net. Interest income (expense), 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.

26

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Currency
exchange gains, net. Net currency exchange gains increased from a loss of 0.9
million in 2003 to a loss of 38,000 in 2004.

Other
income, net. Other income, 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 161,000
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.

Net
income. 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.

Fiscal Year Ended
December 31, 2003 Compared to Fiscal Year Ended December 31, 2002

Total
revenues. The Companys total revenues decreased 7.5% from 20.0 million in
2002 to 18.5 million in 2003, principally due to a decrease in the average selling
of price of those Ablatherm units sold, a decrease in the average selling price of those
lithotripsy units sold, and the strength of the euro during the year, which reduced the
value of sales denominated in other currencies once converted into euro.

HIFU
division. The HIFU divisions total revenues decreased 11.8% from 3.4
million in 2002 to 3.0 million in 2003 (including 0.3 million and 0.1
million of internal segment revenues in 2002 and 2003, respectively), principally due to a
decrease in the number of Ablatherm units sold.

The
HIFU divisions net sales of medical devices decreased 42.1% from 1.9 million
in 2002 to 1.1 million in 2003, primarily due to the fact that the HIFU division was
unable to sell any Ablatherm units in the second half of 2003.

Net
sales of HIFU-related spare parts, supplies and services increased 41.7% from 1.2
million in 2002 to 1.7 million in 2003, primarily due to a 34% increase in the
number of patients treated and an increase in services provided on the divisions
increased installed base.

Other
HIFU-related revenue increased 182.9% from 35 thousand in 2002 to 99 thousand
in 2003, primarily related to an increase in subsidies received.

UDS
division. The UDS divisions total revenues decreased 5.1% from 18.4
million in 2002 to 17.5 (including 1.6 million and 2.0 million of
internal segment revenues in 2002 and 2003, respectively), principally due to the decrease
in the average sales price of lithotripsy units in 2003 compared to 2002, partially offset
by an increase in the number of units sold. Decreases in revenues were also related to the
strength of the euro during 2003, which reduced the value of sales denominated in other
currencies once converted into euro.

The
UDS divisions net sales of medical devices decreased 13.2% from 8.5 million in
2002 to 7.4 million in 2003, primarily due to a decrease in the average sales price
of lithotripsy units in 2003 compared to 2002, partially offset by an increase in the
number of units sold, and a decrease of 77% in the number of Prostatron units sold to
Urologix in 2003 compared to 2002. Decreases in revenues were also related to the strength
of the euro during 2003, which reduced the value of sales denominated in other currencies
once converted into euro. The increase in the number of lithotripters sold in 2003
resulted principally from the continued successful penetration of the Japanese market with
the Companys Sonolith Praktis, a compact lithotripter launched in the European Union
in October 1998. The decrease in the number of units sold to Urologix during 2003 under
the Supply Agreement was a result of a lower total number of orders from Urologix during
the year and the expiration of the Supply Agreement during the year.

Net
sales of UDS-related spare parts, supplies and services decreased 4.3% from 8.2
million in 2002 to 7.8 million in 2003, 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, and due to the strength of the
euro during 2003, which reduced the value of sales denominated in other currencies once
converted into euro. A substantial portion of the UDS divisions maintenance services
are derived from its Japanese operations. See Operating
ResultsOverview.

27

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Other
UDS-related revenue increased 70.1% from 201 thousand in 2002 to 342 thousand
in 2003, primarily related to an increase in royalties received. See Note 1-4 of the Notes
to the Consolidated Financial Statements.

Cost
of sales. Cost of sales increased 13.8% from 11.5 million in 2002 to 13.1
million in 2003, and as a percentage of net sales increased from 58.3% in 2002 to 72.6% in
2003, due to a decrease in gross margin on sales of ESWL lithotripters, as the Company
needed to sell more units at the lower average sales prices to keep revenues stable, fewer
sales of higher-margin Ablatherms and, a charge against inventory valuation in the fourth
quarter of 2003, due to a revaluation of work-in-progress inventories into finished goods
inventories and cost of sales.

Operating
expenses. Operating expenses increased 2.0% from 13.2 million in 2002 to
13.5 million in 2003, mainly due to 2.1 million in one-time charges related to
the restructuring of the Companys two operating divisions at the end of 2003 and as
further described, by division, below. See Note 18 of the Notes to the Consolidated
Financial Statements.

HIFU
division R&D expenses remained at 1.5 million in 2002 and 2003. R&D spending
is primarily related to ongoing research into HIFU technologies. The Company anticipates
these expenses will decrease in the future as a result of the restructuring of the HIFU
division at the end of 2003. See Operating ResultsOverview.

UDS
division R&D expenses decreased 17.4% from 0.4 million in 2002 to 0.3
million in 2003. This decrease is primarily due to the termination of research and
development projects related to TUMT. The remaining expenses were related to the continued
research and development of ESWL technologies. The Company anticipates these expenses will
remain consistent in the future. See  Operating ResultsOverview.

HIFU
division selling expenses increased 44.4% from 0.7 million in 2002 to 1.1
million in 2003, primarily due to the increase in sales activities after the
commercialization of the divisions primary product, the Ablatherm, in the European
Union. The Company anticipates that these expenses will decrease in the future as a result
of the restructuring of the HIFU division at the end of 2003 and the mandate to focus on
current markets. As a percentage of net sales, HIFU division related selling expenses
increased from 24.3% in 2002 to 37.8% in 2003.

UDS
division selling expenses decreased 5.7% from 2.0 million in 2002 to 1.9
million in 2003, primarily due to continued control of expenses. The Company anticipates
that these expenses will remain consistent in the future. As a percentage of net sales,
selling expenses decreased from 13.4% in 2002 to 12.4% in 2003.

General
and administrative expenses, at the consolidated level, decreased 11.1% from 4.6
million in 2002 to 4.1 million in 2003, mainly as a result of continued cost cutting
measures. As a percentage of net sales, general and administrative expenses decreased from
23.6% in 2002 to 22.9% in 2003. 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 8.1 million in 2003, as compared to an operating loss of 4.8 million
in 2002.

As
a result of the factors discussed above, the Company realized an operating loss in its
HIFU division of 5.8 million in 2003, as compared to an operating loss of 3.4
million in 2002 and realized an operating loss in its UDS division of 0.7 million in
2003, as compared to operating income of 0.6 million in 2002.

Interest
income (expense), net. Interest income (expense), net decreased to income of 0.2
million in 2003 compared to an income of 0.5 million in 2002, 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.

Currency
exchange gains, net. Net currency exchange gains increased from a loss of 1.0
million in 2002 to a loss of 0.9 million in 2003, reflecting the continued weakness
of the U.S. dollar and the Japanese yen against the euro in 2003.

28

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Other
income, net. Other income, net decreased to a loss of 0.2 million in 2003
compared to 1.5 million in 2002. The loss in 2003 was attributable to net losses
incurred on the sale of Urologix common stock received as part of the sale of the
Prostatron business in 2000. The decrease between 2002 and 2003 was primarily due to a
decrease in value of the common shares of Urologix, Inc. on the open market.

Income
taxes. The Company recorded a corporate income tax benefit of 0.1 million in
2003, principally reflecting the variation in the deferred tax assets between December 31,
2002 and December 31, 2003.

Net
income. The Company realized consolidated net loss of 9.0 million in 2003
compared with consolidated net loss of 4.0 million in 2002, 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
income from operations in the three years ended December 31, 2004.

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, and may in the future experience, negative cash flows and
associated risks to liquidity. 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 the collection of current receivables. 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.

Cash
position as of December 31, 2004, 2003 and 2002, was 9.4 million, 10.4 million
and 15.7 million respectively. In 2004, 2003 and 2002, 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. As a result of two consecutive years of
significant negative cash flow (5.3 million in 2003 and 3.6 million in 2002)
and the associated risks to liquidity, the Company performed an extensive review of its
businesses in 2003, in the face of the prevailing economic situation and with the goal of
maintaining the competitiveness of the Company. The Company believes that is has
sufficiently reduced the risk of future illiquidity in the near term and continues to
monitor its liquidity in order to determine what future risks may occur.

In
2004, net cash used in operating activities was 1.1 million, compared with net cash
used in operating activities of 3.6 million and 8.0 million in 2003 and 2002,
respectively. 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 2002, net cash used in operating activities reflected principally a net loss
of 4.0 million, the elimination of 0.6 million of expenses and benefits
without effects on cash, an increase in trade accounts receivable of 0.3 million, a
decrease in inventories of 0.4 million, a decrease in trade accounts payable of
1.4 million and a decrease in accrued expenses and other current liabilities of
1.2 million.

29

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In
2004, there was no net cash used in investing activities, compared with 0.5 million
in 2003 and net cash provided by investing activities of 5.1 million in 2002. During
2004, net cash flow 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 capitalized assets produced by the Company for 0.7 million, an investment
of 0.2 million in property, plant and equipment, net proceeds from sales of
lease-back assets for 0.3 million and a decrease in financial assets 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, an
investment of  0.4 million in property, plant, equipment, net proceeds from sales of
lease-back assets for 0.3 million and a decrease in financial assets for 0.4
million. In 2002, net cash provided by investing activities reflected principally net
proceeds from the sale of Urologix common stock of  5.5 million, a decrease of
 0.9 million in restricted cash equivalents and an investment of  1.5 million
in property, plant, equipment, the acquisition of intangible assets and capitalized assets
produced by the Company.

In
2004, net cash used in financing activities was 0.1 million, reflecting mainly
repayment of capital lease obligations totaling 0.3 million, an increase in short
term borrowing of 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 totaling 0.4
million, a decrease in short-term borrowings of 0.2 million and repayments of
obligations under a capital lease totaling 0.1 million. In 2002, net cash used in
financing activities was 0.3 million, reflecting mainly scheduled long-term debt
repayment totaling 0.6 million, scheduled payments made under capital leases
totaling 0.3 million and offset by an increase in short-term borrowings totaling
0.7 million.

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 three years. The Companys expectation that cash flows from
operations, together with its current cash and cash equivalent balances, will sustain the
Company into the future and that significant negative cash flow will not continue are
based on the extensive review of the businesses conducted by the Company at the end of
2003. The Company continues to review its business to ensure that it will continue to have
enough liquidity to meet its goals, but to the extent that the Company is unsuccessful, 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 CPP 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,
charging them 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 without the expectation of future outside funding, except for the use of
short-term borrowing options and the minimal use of long-term borrowing options. The
treasury function currently adheres to this objective with the use of fixed-rate debt,
which normally consists of short-term borrowing from a Japanese bank and with certain
long-term options primarily consisting of promissory notes and sale-leaseback equipment
financing. Currently the majority of the Companys short-term and long-term debt is
at fixed interest rates. 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, 2005, the Company had seven
foreign exchange sale contracts, four for the Japanese yen and three for the U.S. dollar.

30

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|                          |  | Payments Due by Period
|------------------------- |  | ----------------------
|                          |  | Total                 
|                         
|Short-Term Debt           |  | 525                   
|Long-Term Debt            |  | 6                     
|Capital Lease Obligations |  | 998                   
|Operating Leases          |  | 1,050                 

New Accounting
Pronouncements

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 expects to adopt Statement 123(R) as of January 1, 2005, and the
performance stock plan approved by the shareholders in February 2005 will be booked in
accordance with the dispositions of FASB 123(R).

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.

31

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Off-Balance Sheet
Arrangements

The
Company has no off-balance sheet arrangements.

Item  6.  Directors,
Senior Management and Employees

Senior Executive
Officers

The
following table sets forth the name, age and position of each 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 totaling approximately
 0.4 million.

|Name              | Age | Position                                                                                        
|----------------- | --- | ------------------------------------------------------------------------------------------------
|                 
|Philippe Chauveau | 69  | Chairman of the Board of Directors                                                              
|                 
|Hugues de Bantel  | 35  | Chief Executive Officer of EDAP TMS S.A. and President of the HIFU Division and the UDS Division
|                 
|Thierry Turbant   | 44  | Chief Financial Officer                                                                         

|Philippe Chauveau | In 1997, Philippe
Chauveau was named chairman of EDAP-TMS S.A.s Supervisory  Board, involving a two-tier
board structure overseeing a Management Board. In 2002, both  these boards were replaced
by a single Board of Directors, which Philippe Chauveau headed  as Chairman and CEO.
While remaining Chairman of the Board, he was succeeded by Hugues de  Bantel as CEO in
2004. Since 2002, Philippe Chauveau has also served as Chairman of the  Board of Scynexis
Inc., funded by private equity, which is an innovative drug discovery  company based in
the United States, partnering with major pharmaceutical companies  worldwide. He is also
personal executive coach to senior research leaders at Hoffmann  LaRoche in 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 as
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
Gatefosse,  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).
|--------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

32

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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.

|Pierre BeyssonAge: 63 | 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). His background also includes Industrial Project & Distribution  Network
Management with Computervision (Computer Aided Design) and Customer Service & Distribution
Network Management with Siemens-Nixdorf International. Pierre Beysson was  trained as a
CPA, has auditing experience and holds an MBA from Harvard Business School.
|--------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Karim FizaziAge: 39 | 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 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 MissoffeAge: 48 | 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: 39 | Siemens France S.A.
was appointed as a member of the Companys  Supervisory Board in January 1997 and became
a member of the  Companys Board of Directors in July 2002.
|---------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Guy VallancienAge: 58 | 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 March 30, 2005, the Board of Directors decided to review the composition of the
Compensation Committee and nominated three members out of the six Directors Mr. Olivier
Missoffe, Mr. Pierre Beysson and Mr. Philippe Chauveau, to act as the Compensation
Committee. Mr. Philippe Chauveau 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 2004 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 2004.

33

---

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 options 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 options is equivalent to the higher of either (a) the share value
of the capital of each company or (b) the net account 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 options 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 subscription options 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 options begin vesting three years after their date of grant, but
can be exercised earlier in the event of a change in control of the relevant company.
These options to subscribe to shares expire on the earlier of December 18, 2007 or when
employment with the Company ceases.

As
of December 31, 2004, 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 to, among other things,
review the Companys annual and interim reports and accounts and monitor the
Companys auditors involvement in that process. The ultimate responsibility for
reviewing the Companys annual and interim accounts lies with the Board of Directors.
On March 30, 2005, the Board of Directors approved an updated version of the Audit
Committee Charter.

Employees

As
of December 31, 2002, the Company employed 150 individuals on a full-time basis, of whom
30 were employed in sales and marketing, 26 in manufacturing, 37 in service, 16 in
R&D, 9 in regulatory, 4 in clinical affairs and 28 in administration. Of the
Companys employees, 104 were located in France, 30 in Japan, 1 in the United States,
7 in Malaysia, 6 in Italy and 2 in South Korea.

As
of December 31, 2003, the Company employed 148 individuals on a full-time basis, of whom
31 were employed in sales and marketing, 26 in manufacturing, 41 in service, 14 in
R&D, 6 in regulatory, 4 in clinical affairs and 26 in administration. Of the
Companys employees, 102 were located in France, 30 in Japan, 1 in the United States,
7 in Malaysia, 6 in Italy and 2 in South Korea. 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, of whom
26 were employed in sales and marketing, 21 in manufacturing, 38 in service, 8 in R&D,
5 in regulatory, 1 in clinical affairs and 23 in administration. Of the Companys
employees, 80 were located in France, 28 in Japan, 7 in Malaysia, 5 in Italy and 2 in
South Korea.

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, 2005, 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) 12.9% 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.

34

---

As
of March 31, 2005, the Board of Directors and the Senior Executive Officers of the Company
hold a total of 1,236,400 Shares representing 14.8% of the total share capital and (after
subtracting treasury stock which under French law carries no voting rights) 15.9% of the
voting rights of the Company.

Options to Purchase
or Subscribe for Securities

As
of March 31, 2005, the Company had sponsored eight 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 to newly issued Shares at a fixed exercise price of  6.97 per Share.

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

On
June 24, 1999, the shareholders of EDAP TMS S.A. authorized the Board of Directors to
grant up to 68,540 options to purchase pre-existing Shares and 86,885 options to subscribe
to new Shares, at a fixed exercise price to be set by the Supervisory Board.

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 sShares, 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. 501,600 rights to subscribe to free shares were granted by the Board of
Directors on March 30, 2005; 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, 2004, the duration of stock option contracts was as follows:

|Years until expiration |  | Number ofShares | 
|---------------------- |  | --------------- | 
|                      
|0-3                    |  | 0               | 
|3                      |  | 33,625          | 
|4                      |  | 93,000          | 
|5                      |  | 1,212           | 
|7                      |  | 113,000         | 
|7.5                    |  | 14,425          | 
|9.2                    |  | 325,000         | 

35

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

|                                                          | 2004      | 2003                            | 2002     
|--------------------------------------------------------- | --------- | ------------------------------- | ---------
|                                                          |          
|                                                          | Options   | Weightedaverageexerciseprice() | Options  
|                                                          |          
|Outstanding on January 1,                                 | 391,262   | 2.68                            | 654,341  
|Granted                                                   | 325,000   | 2.19                            | 0        
|Exercised                                                 | 0         | -                               | 0        
|Forfeited                                                 | (136,000) | 2.34                            | (263,079)
|Expired                                                   | -         | -                               | -        
|                                                          |          
|Outstanding on December 31,                               | 580,262   | 2.49                            | 391,262  
|                                                          |          
|Exercisable on December 31,                               | 219,547   | 2.99                            | 272,442  
|                                                          |          
|                                                         
|Share purchase options available for grant on December 31 | 15,000    | -                               | 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, 2004:

|                   | Outstanding options | Exercisable options                    
|------------------ | ------------------- | ---------------------------------------
|                   |                    
|Exercise price () | Options             | Weightedaverageremainingcontractuallife
|                   |                    
|3.81               | 117,625             | 3.5                                    
|2.60               | 225,000             | 9.2                                    
|2.08(1)            | 113,000             | 7.0                                    
|2.02(2)            | 14,425              | 7.5                                    
|1.83               | 10,212              | 4.5                                    
|1.28               | 100,000             | 9.2                                    
|                   |                    
|1.28 to 3.81       | 580,262             | 5.3                                    
|                   |                    

|(1) | All
the 113,000 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:

| |  | 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
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

36

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| | 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, 2005, 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) 12.9% of voting rights and Wells Capital Management, Inc., formerly Benson
Associates LLC, owned 1,667,975 Shares representing 19.9% of the total share capital of
the Company and (after subtracting treasury stock, which under French law carries no
voting rights) 21.4% 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, 2005, 8,362,821 Shares were issued, including 7,781,731 outstanding and
581,090 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
2004, EDAP TMS Korea paid Dae You 63,000 for its services under service maintenance
contracts, and Dae You purchased 401,000 of medical devices from the Company.

Item  8.  Financial
Information

Consolidated
Financial Statements

See
Item 18, Financial Statements.

Export Sales

As
of December 31, 2004, total export sales, which the Company defines as sales made outside
of France, amounted to 17 million, which represented 76% of total sales.

37

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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 2000 through 2003. Subject to the
approval of the shareholders meeting to be held on or before June 30, 2005, the
Company does not anticipate paying any dividends with respect to fiscal year 2004.

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, 2004.
As from January 2005, EDAP Technomed Inc is still registered in the Delaware, but it has
no business activity in the United States, it will not be consolidated.

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.

Trading Markets

The
following tables set forth, for the years 1999 through 2004, the reported high and low
sales prices of the ADSs on Nasdaq and Nasdaq Europe (through to April 25, 2002 for Nasdaq
Europe).

38

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|                        | Nasdaq
|----------------------- | ------
|                        |       
|                        | High  
|                        |       
|                        | $     
|                        |       
|2000                    | 3.13  
|2001                    | 3.43  
|2002                    | 2.49  
|2003                    | 1.99  
|2004                    | 3.92  
|2005 (through March 31) | 5.50  

The
following tables set forth, for the years 2003 and 2004 and the first quarter of 2005, the
reported high and low sales prices of the ADSs on Nasdaq for each full financial quarter
and on Nasdaq Europe for 2003 and 2004:

|               | Nasdaq
|-------------- | ------
|               |       
|               | High  
|               |       
|               | $     
|               |       
|2003          
|First Quarter  | 2.49  
|Second Quarter | 1.92  
|Third Quarter  | 1.88  
|Fourth Quarter | 1.82  
|2004          
|First Quarter  | 2.12  
|Second Quarter | 3.61  
|Third Quarter  | 2.51  
|Fourth Quarter | 3.92  
|2005          
|First Quarter  | 5.50  

|        | Nasdaq Europe
|------- | -------------
|        |              
|        | High         
|        |              
|        | $            
|        |              
|2003(1) | Not traded   
|2004    | Not traded   

|(1) | The
Company voluntarily delisted from Nasdaq Europe effective April, 25, 2002.
|--- | ------------------------------------------------------------------------------

The
following table sets forth, for the most recent six months (from October 2004 through
March 2005), the reported high and low sale prices of the ADSs on Nasdaq for each month:

|         | Nasdaq
|-------- | ------
|         |       
|         | High  
|         |       
|         | $     
|         |       
|2004    
|October  | 2.89  
|November | 2.91  
|December | 3.92  
|2005    
|January  | 5.50  
|February | 5.24  
|March    | 4.95  

39

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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.

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.

40

---

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.

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.

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.

| | 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.

41

---

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.

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.

42

---

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.

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

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

43

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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.

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.

44

---

| | 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 déclaration administrative, or
administrative notice, with French authorities in connection with the acquisition of a
controlling interest in any French company. Under existing administrative rulings,
ownership, by a non-resident of France or a French corporation which is itself controlled
by a foreign national, of 33 1/3% or more of a companys share capital or voting
rights is regarded as a controlling interest, but a lower percentage may be held to be a
controlling interest in certain circumstances (depending upon such factors as the
acquiring partys intentions, its ability to elect directors or financial reliance by
the French company on the acquiring party).

| | Certain
Exemptions (French Law)
| | -------------------------------

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

| | Enforceability
of Civil Liabilities (French Law)
| | ------------------------------------------------

EDAP
TMS is a société 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.

45

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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.

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.

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, 2005.

46

---

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.

| | Taxation
of Dividends on Shares or ADSs  Withholding Tax
| | ---------------------------------------------------------

| | Elimination
of the avoir fiscal mechanism
| | -----------------------------------------

The
French Finance Law of 2004 implemented a new tax treatment of dividends. Prior to
enactment of this law, certain qualifying French resident shareholders were entitled to a
tax credit, known as the avoir fiscal, on dividends received from French companies.
The French Finance Law of 2004 eliminated the avoir fiscal mechanism with respect
to distributions made on or after January 1, 2005.

Dividends
paid to non-residents were not normally eligible for the avoir fiscal. However,
France has entered into tax treaties with certain countries under which qualifying
residents of those countries that complied with the procedures for claiming benefits under
an applicable tax treaty were entitled, in addition to a reduced rate of withholding tax,
to a refund of the avoir fiscal, net of applicable withholding tax. As a result of
the French Finance Law of 2004, qualifying non-resident individuals will no longer be
entitled to avoir fiscalrefunds with respect to distributions made on or after
January 1, 2005 and qualifying non-resident shareholders other than individuals are no
longer entitled to avoir fiscalrefunds with respect to distributions made from
2004.

| | New
Tax Credit
| | --------------

Beginning
January 1, 2005, French resident individuals will only be taxed on half of the dividends
they receive and, in addition to the annual allowance that is already applicable, will be
entitled to a tax credit equal to 50% of the dividend (the Tax Credit). The
Tax Credit will have a cap of  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. French resident individuals
will not be entitled to the avoir fiscalwith respect to distributions made on or
after January 1, 2005.

Dividends
paid to non-residents are not normally eligible for the Tax Credit described above.
However, qualifying non-resident individuals who were previously entitled to a refund of
the avoir fiscal(net of applicable withholding tax) under a tax treaty entered
into between France and their country of residence, may benefit from a refund of the Tax
Credit (net of applicable withholding tax) under the same conditions as for the avoir
fiscal, 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 refund of the Tax Credit to non-resident individuals. If it is possible to claim
this refund, the claims process may entail compliance with cumbersome formalities.

| | Elimination
of the précompte  25% equalization tax
| | ---------------------------------------------------

Until
December 31, 2004, dividends paid out of profits that had not been taxed at the ordinary
corporate tax rates or were earned and taxed more than five years before the distribution,
were subject to an equalization tax called the précompte. Non-resident
shareholders entitled to the benefits of the tax treaty but not to a refund of the
avoir fiscal were generally able to obtain a refund of the précompte(net of applicable withholding tax).As a result of the reform of the tax
treatment of dividends, distributions made on or after January 1, 2005 will no longer give
rise to any précompte.

A
temporary equalization tax will apply to distributions made in 2005 out of profits that
have not been taxed at the ordinary corporate tax rate, or which were earned and taxed
more than five years before the distribution. This equalization tax will be equal to 25%
of the amount of the dividends paid to the shareholder. This equalization tax will not be
refundable to non-resident shareholders, as it will be refunded to the distributing
corporation in three installments of one third each with respect to the three fiscal years
closed after the distribution, either as a credit against its corporate tax liability or
in cash, if the corporate tax liability is insufficient to offset the entire tax credit.

Distributions
made on or after January 1, 2006 will not give rise to any equalization tax liability.

47

---

| | 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% ad valorem registration duty (subject to a maximum of 3,049 per transfer)
applies to certain transfers of shares or ADSs in French companies. As from January 1,
2006, the rate of this registration duty will increase to 1.10% (subject to a maximum of
4,000 per transfer). This duty does not apply to transfers of shares or ADSs in
listed companies that are not evidenced by a written agreement, or if any such agreement
is executed outside France.

| | Estate
and Gift Tax
| | -------------------

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

| | Wealth
Tax
| | ----------

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

Taxation of U.S.
Investors

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

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

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

| |  | not
also a resident of France for French tax purposes; and
| | - | ----------------------------------------------------------

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

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

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

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

48

---

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, 2005.

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

| | Dividends
| | ---------

As discussed in more
detail above, the French Finance Law of 2004 implemented a reform of the French tax
treatment of distributions and dividends paid by French companies. Generally, dividend
distributions to non-residents of France are subject to French withholding tax at a 25%
rate and are not eligible for the benefit of the Tax Credit available to French resident
individuals, as described above. However, under the Treaty, holders can claim the benefit
of a reduced dividend withholding tax rate of 15%.

In
addition, individual U.S. holders, subject to the discussion of the Tax Credit above, may
be entitled to a refund of the Tax Credit, less a 15% withholding tax, provided that they
are subject to U.S. federal income tax on the Tax Credit and the dividend to which it
relates. The French tax authorities have not yet issued guidance with respect to the
refund of the Tax Credit to non-resident individuals. If it is possible to claim this
refund, the claims process may entail compliance with cumbersome formalities.

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

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

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

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) the issuer is eligible for the benefits of a comprehensive
income tax treaty with the United States that the IRS has approved for the purposes of the
qualified dividend rules and (ii) the Company was not, in the year prior to the year in
which the dividend was paid, and is not, in the year in which the dividend is paid, (a) a
passive foreign investment company (PFIC) or (b) for dividends paid prior to
the 2005 tax year, a foreign personal holding company (FPHC) or foreign
investment company (FIC). 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, FPHC or FIC for U.S. federal income tax purposes with respect to its 2004 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 2005 taxable year. Accordingly, dividends paid by the Company in
2005 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).

49

---

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 February 2005 that significantly changed
the formalities to be complied with by non-resident shareholders, including U.S. holders,
in order to obtain the reduced withholding tax rate on distributions made on or after
January 1, 2005.

Pursuant
to 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.

In
order to benefit from the lower rate of withholding tax applicable under the Treaty before
the payment of the dividend, you must use the simplified procedure and are no longer
allowed to file a Form RF 1 A EU-No. 5052 or a Form RF 1 B EU-No. 5053.

The
simplified procedure entails completing and delivering to the French tax authorities a
certificate stating that:

| |  | you
are a U.S. resident within the meaning of the Treaty;
| | - | ---------------------------------------------------------

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

| |  | the
dividend received is subject to tax in the United States.
| | - | -------------------------------------------------------------

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.

50

---

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 an application for refund no later than December 31 of the
second year following the year in which the dividend is paid.

The
applicable forms to claim a refund under the normal procedure are currently Form RF 1 A
EU-No. 5052 or Form RF 1 B EU-No. 5053. These forms will likely be replaced by new forms
in the near future.

Copies
of the simplified certificate and of the forms to be used in the normal procedure 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 refund of the Tax Credit to non-resident individuals.

| | Capital
Gains
| | -------------

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

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

| | Passive
Foreign Investment Company Rules
| | ----------------------------------------

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

| |  | 75%
or more of the Companys gross income is treated as passive income for purposes  of
the PFIC rules; or
| | - | ----------------------------------------------------------------------------------------------------------

| |  | the
average percentage of the value of the Companys assets that produce or are held
for the production of passive income is at least 50%.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------

As
discussed above (see Dividends) the Company believes that it was not a
PFIC in 2004 and does not anticipate being a PFIC in 2005. 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.

51

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| | 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.

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, 2004, the Company had two foreign
exchange sale contracts, one for the Japanese yen which expires on December 28, 2005 and
one for U.S. dollar which expires on May 27, 2005. As of March 31, 2005, the Company had
five new foreign exchange sale contracts, three 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
2004, approximately 70% of the Companys selling and general and administrative
expenses and approximately 94% of the Companys R&D expenses were denominated in
euro. During the same period, only 49% of the Companys sales were denominated in
euro, the remainder being denominated primarily in U.S. dollars and Japanese yen.

52

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A
uniform 10% strengthening in the value of the euro as of December 31, 2004 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 43,000 for the year ended December 31, 2004,
compared to an increase of approximately 38,000 for the year ended December 31,
2003. 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, 2004 will
be effective as from January 2005. 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 March 31, 2005, the Company had five new foreign exchange sale
contracts, three 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 U.S. dollars and Japanese yen. Approximately
0.5 million, 0.3 million and 0.9 million of the outstanding indebtedness
of the Company at December 31, 2004, 2003 and 2002, 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
1.2 million, 0.4 million and 0.7 million of financial assets denominated
in U.S. dollars at December 31, 2004, 2003 and 2002, respectively, and 1.3 million,
0.7 million and 1.4 million of financial assets denominated in Japanese yen at
December 31, 2004, 2003 and 2002, respectively. These assets principally represented
investments available for sale and the cash balances of its U.S. and Japanese subsidiaries
at such dates.

Item  12.  Description
of Securities Other than Equity Securities

Not
Applicable.

PART II

Item  13.  Defaults,
Dividend Arrearages and Delinquencies

Not
Applicable.

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

Not
Applicable.

Item  15.  Controls
and Procedures

Within
the 90 days 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 2004 fiscal year that has materially affected, or is reasonably likely
to materially affect, the Companys internal control over financial reporting.

53

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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 2004,
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 December
21, 2004. 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 2004 financial year:

|Nature of the Fees | 2003(in ) | 2004(in )
|------------------ | ---------- | ----------
|                  
|Audit fees         | 121,865    | 143,265   
|Audit-related fees | 9,000      | 8,010     
|Tax fees           | 23,348     | 0         
|All other fees     | 31,689     |           
|                   |           
|Total              | 185,902    | 151,275   
|                   |           

| | Audit
Fees
| | ----------

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

| | Audit-Related
Fees
| | ------------------

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

| | Tax
Fees
| | --------

Tax
services consisted of services relating to issues of domestic and international taxation
(adherence to tax law, tax planning and tax consulting). Furthermore, services were
commissioned for the review of tax returns, assistance with tax audits, as well as
assistance relating to tax law. No tax services were rendered over 2004 fiscal year.

54

---

| | 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
2004, neither the Company nor affiliated purchasers made purchases of equity securities of
the Company registered pursuant to Section 12 of the Exchange Act.

55

---

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.

56

---

INDEX TO EXHIBITS

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

Exhibit Description

Number:

|1.1 | By-laws (statuts) of
EDAP TMS S.A. as amended as of July 30, 2002 (together with an English
translation thereof).(1)
|--- | --------------------------------------------------------------------------------------------------------------------

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

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

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

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

|8.1 | List
of subsidiaries of EDAP TMS S.A. as of March 31, 2005.
|--- | -----------------------------------------------------------

|11.1 | Code
of Ethics of the Company, approved by the Board of Directors on March 30, 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.
|--- | ------------------------------------------------------------------------------------------------------------------------

57

---

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: May 20, 2005 | Hugues
de BantelChief Executive Officer
|------------------- | ---------------------------------------

| | 
| | 

|Dated: May 20, 2005 | Thierry
TurbantChief Financial Officer
|------------------- | --------------------------------------

58

---

INDEX TO FINANCIAL
STATEMENTS

|Audited Consolidated Financial Statements for EDAP TMS S.A. and Subsidiaries for the Years Ended December 31, 2004, 2003 and 2002
|---------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                 
|Report of Independent Auditors                                                                                                   
|                                                                                                                                 
|Consolidated Balance Sheets as of December 31, 2004 and 2003                                                                     
|                                                                                                                                 
|Consolidated Statements of Income for the years ended December 31, 2004, 2003 and 2002                                           
|                                                                                                                                 
|Consolidated Statements of Comprehensive Income for the years ended December 31, 2004, 2003 and 2002                             
|                                                                                                                                 
|Consolidated Statements of Shareholders Equity for the years ended December 31, 2004, 2003 and 2002                             
|                                                                                                                                 
|Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002                                       
|                                                                                                                                 
|Notes to Consolidated Financial Statements                                                                                       



---

Report of
Independent Auditors

| | To
the Board of Directorsand 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, 2004 and 2003, 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, 2004. 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, 2004 and 2003, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2004 in conformity
with U.S. generally accepted accounting principles.

| | ERNST
& YOUNG Audit
| | -------------------

| | 
| | 

| | Represented
byJean-Luc Desplat
| | ------------------------------

April 27, 2005Lyon,
France

F-1

---

EDAP TMS S.A. AND
SUBSIDIARIES

CONSOLIDATED
BALANCE SHEETS
As of December 31,
2004 and 2003
(in thousands of
euro unless otherwise noted)

|ASSETS                                                                                                                                                   | Notes |  | 2004   |   | 2003   |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------- | ----- |  | ------ | - | ------ | -
|                                                                                                                                                        
|Current assets                                                                                                                                           |       |  |        |   |        |  
|Cash and cash equivalents                                                                                                                                | 2     |  | 9,398  |   | 10,429 |  
|Trade accounts and notes receivable, net of allowance of 705 in 2004                                                                                    |       | 
|and 526 in 2003                                                                                                                                         | 3     |  | 7,722  |   | 8,000  |  
|Other receivables                                                                                                                                        | 4     |  | 473    |   | 1,419  |  
|Inventories                                                                                                                                              | 5     |  | 3,939  |   | 5,267  |  
|Deferred income taxes                                                                                                                                    | 21-3  |  | 77     |   | 332    |  
|Prepaid expenses                                                                                                                                         |       |  | 432    |   | 423    |  
|                                                                                                                                                         |      
|Total current assets                                                                                                                                     |       |  | 22,041 |   | 25,870 |  
|Property, plant and equipment, net                                                                                                                       | 6     |  | 2,807  |   | 2,903  |  
|Intangible assets                                                                                                                                        | 7     |  | 119    |   | 176    |  
|Goodwill, net of accumulated amortization of 2,359 in 2004 and 2003                                                                                     | 7     |  | 2,412  |   | 2,412  |  
|Deposits and other non-current assets                                                                                                                    |       |  | 522    |   | 549    |  
|                                                                                                                                                         |      
|Total assets                                                                                                                                             |       |  | 27,901 |   | 31,910 |  
|                                                                                                                                                         |      
|LIABILITIES AND SHAREHOLDERS EQUITY                                                                                                                     |       | 
|Current liabilities                                                                                                                                      |       | 
|Short-term borrowings                                                                                                                                    | 12    |  | 525    |   | 222    |  
|Trade accounts and notes payable                                                                                                                         | 8     |  | 3,675  |   | 3,855  |  
|Deferred revenues, current portion                                                                                                                       | 9     |  | 843    |   | 1,693  |  
|Social security and other payroll withholdings taxes                                                                                                     |       |  | 513    |   | 708    |  
|Employee absences compensation                                                                                                                           |       |  | 424    |   | 541    |  
|Income taxes payable                                                                                                                                     |       |  |       |   | 51     |  
|Accruals for restructuring                                                                                                                               | 18    |  | 136    |   | 1,986  |  
|Other accrued liabilities                                                                                                                                | 10    |  | 1,816  |   | 1,727  |  
|Current portion of capital lease obligations                                                                                                             | 11    |  | 334    |   | 211    |  
|Current portion of long-term debt                                                                                                                        | 13    |  | 6      |   | 80     |  
|                                                                                                                                                         |      
|Total current liabilities                                                                                                                                |       |  | 8, 272 |   | 11,074 |  
|Deferred revenues, long term portion                                                                                                                     | 9     |  | 442    |   | 633    |  
|Capital lease obligations, less current portion                                                                                                          | 11    |  | 663    |   | 581    |  
|Long-term debt                                                                                                                                           | 13    |  |       |   | 7      |  
|Other long-term liabilities                                                                                                                              | 14    |  | 560    |   | 654    |  
|Total liabilities                                                                                                                                        |       |  | 9,937  |   | 12,949 |  
|Shareholders equity                                                                                                                                     |       | 
|Common stock, 0.13 par value, 9,318,875 shares authorized;   8,362,821
     shares issued; 7,781,731 shares outstanding at December 31,   2004 and 2003 |       |  | 1,087  |   | 1,087  |  
|Additional paid-in capital                                                                                                                               |       |  | 19,999 |   | 19,811 |  
|Retained earnings                                                                                                                                        |       |  | 1,662  |   | 2,811  |  
|Cumulative other comprehensive loss                                                                                                                      |       |  | (2,987 | ) | (2,951 | )
|Treasury stock, at cost; 581,090 shares at December 31, 2004 and 2003                                                                                    |       |  | (1,797 | ) | (1,797 | )
|Total shareholders equity                                                                                                                               | 15    |  | 17,964 |   | 18,961 |  
|                                                                                                                                                         |      
|Total liabilities and shareholders equity                                                                                                               |       |  | 27,901 |   | 31,910 |  
|                                                                                                                                                         |      

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, 2004, 2003 and 2002
(in thousands of
euro unless otherwise noted)

|                                                                | Notes |  | 2004      |   | 2003      |   | 2002      |  
|--------------------------------------------------------------- | ----- |  | --------- | - | --------- | - | --------- | -
|                                                                |      
|Sales of medical devices                                        |       |  | 11,922    |   | 8,512     |   | 10,527    |  
|Sales of disposables, CPPs, leases, spare parts and services    |       |  | 10,207    |   | 9,518     |   | 9,198     |  
|                                                                |      
|Total sales                                                     | 16    |  | 22,129    |   | 18,030    |   | 19,725    |  
|Warrants granted                                                |       |  | (174      | )
|                                                                |      
|Total net sales                                                 | 16    |  | 21,955    |   | 18,030    |   | 19,725    |  
|                                                                |      
|Other revenues                                                  | 17    |  | 208       |   | 443       |   | 236       |  
|                                                                |      
|Total revenues                                                  |       |  | 22,163    |   | 18,473    |   | 19,961    |  
|Cost of sales                                                   |       |  | (13,676   | ) | (13,094   | ) | (11,503   | )
|                                                                |      
|Gross profit                                                    |       |  | 8,487     |   | 5,379     |   | 8,458     |  
|                                                               
|Research and development expenses                               |       |  | (1,523    | ) | (3,069    | ) | (3,186    | )
|Selling expenses                                                |       |  | (3,402    | ) | (4,228    | ) | (4,023    | )
|General and administrative expenses                             |       |  | (4,074    | ) | (4,106    | ) | (4,784    | )
|                                                               
|Non recurring operating expenses                                | 18    |  | (318      | ) | (2,097    | ) | (1,241    | )
|                                                                |      
|Operating loss                                                  |       |  | (830      | ) | (8,121    | ) | (4,776    | )
|Interest income (expense), net                                  | 19    |  | 71        |   | 177       |   | 455       |  
|Currency exchange gains (loss), net                             |       |  | (38       | ) | (928      | ) | (1,027    | )
|Other income (loss), net                                        | 20    |  | (74       | ) | (218      | ) | 1,475     |  
|                                                                |      
|Income (loss) before taxes                                      |       |  | (871      | ) | (9,090    | ) | (3,873    | )
|Income tax (expense) benefit                                    | 21    |  | (278      | ) | 114       |   | (167      | )
|                                                                |      
|Net (loss) income                                               |       |  | (1,149    | ) | (8,976    | ) | (4,040    | )
|                                                                |      
|Basic earnings (loss) per share                                 | 1-18  |  | (0.15     | ) | (1.15     | ) | (0.52     | )
|Weighted average shares outstanding used in basic calculation   | 1-18  |  | 7,781,731 |   | 7,781,731 |   | 7,771,467 |  
|Diluted earnings (loss) per share                               | 1-18  |  | (0.15     | ) | (1.15     | ) | (0.52     | )
|Weighted average shares outstanding used in diluted calculation | 1-18  |  | 8,074,210 |   | 7,817,303 |   | 7,833,514 |  

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, 2004, 2003 and 2002
(in thousands of
euro unless otherwise noted)

|                                         |  | 2004   |   | 2003   |   | 2002   |  
|---------------------------------------- |  | ------ | - | ------ | - | ------ | -
|                                         | 
|Net (loss) income                        |  | (1,149 | ) | (8,976 | ) | (4,040 | )
|Other comprehensive income:              | 
|Unrealized (loss) gain on investments    |  |        |   |       |   | (109   | )
|Foreign currency translation adjustments |  | (36    | ) | (547   | ) | (442   | )
|                                         | 
|Comprehensive (loss) income, net of tax  |  | (1,185 | ) | (9,523 | ) | (4,591 | )
|                                         | 

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, 2004, 2003 and 2002
(in thousands of
euro unless otherwise noted)

|                                                                 |  | Number ofShares |  | CommonStock |  | AdditionalPaid-inCapital |  | RetainedEarnings |   | Cumula-tive OtherCompre-hensiveIncome(loss) |   | TreasuryStock |   | Total  |  
|---------------------------------------------------------------- |  | --------------- |  | ----------- |  | ------------------------ |  | ---------------- | - | ------------------------------------------- | - | ------------- | - | ------ | -
|                                                                 | 
|Balance as of December 31, 2001                                  |  | 7,734,310       |  | 1,081       |  | 19,811                   |  | 15,827           |   | 3,987                                       |   | (1,797        | ) | 38,909 |  
|                                                                 | 
|Net loss                                                         |  |                 |  |             |  |                          |  | (4,040           | ) |                                             |   |               |   | (4,040 | )
|Translation adjustment                                           |  |                 |  |             |  |                          |  |                  |   | (442                                        | ) |               |   | (442   | )
|Increase of shares/Capital increase                              |  | 47,421          |  | 6           |  |                          |  |                  |   |                                             |   |               |   | 6      |  
|Change in unrealized gain/loss on investments available for sale |  |                 |  |             |  |                          |  |                  |   | (6,058                                      | ) |               |   | (6,058 | )
|                                                                 | 
|Balance as of December 31, 2002                                  |  | 7,781,731       |  | 1,087       |  | 19,811                   |  | 11,787           |   | (2,513                                      | ) | (1,797        | ) | 28,375 |  
|                                                                 | 
|Net loss                                                         |  |                 |  |             |  |                          |  | (8,976           | ) |                                             |   |               |   | (8,976 | )
|Translation adjustment                                           |  |                 |  |             |  |                          |  |                  |   | (547                                        | ) |               |   | (547   | )
|Change in unrealized gain/loss on investments available for sale |  |                 |  |             |  |                          |  |                  |   | 109                                         |   |               |   | 109    |  
|                                                                 | 
|Balance 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                      |  |                  |   |                                             |   |               |   | 188    |  
|                                                                 | 
|Balance as of December 31, 2004                                  |  | 7,781,731       |  | 1,087       |  | 19,999                   |  | 1,662            |   | (2,987                                      | ) | (1,797        | ) | 17,964 |  
|                                                                 | 

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, 2004, 2003 and 2002
(in thousands of
euro unless otherwise noted)

|                                                                                             |  | 2004   |   | 2003   |   | 2002   |  
|-------------------------------------------------------------------------------------------- |  | ------ | - | ------ | - | ------ | -
|                                                                                             |  |       
|Cash flows from operating activities                                                         |  |        |   |        |   |        |  
|Net (loss) income                                                                            |  | (1,149 | ) | (8,976 | ) | (4,040 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities:    | 
|Depreciation and amortization                                                                |  | 1,049  |   | 983    |   | 1,116  |  
|Change in allowances for doubtful accounts & slow-moving inventories                         |  | (834   | ) | (147   | ) | (595   | )
|Change in long-term provisions                                                               |  | (94    | ) | 46     |   | 36     |  
|                                                                                            
|Deferred tax expense/(benefit)                                                               |  | 255    |   | (226   | ) | 6      |  
|Net loss (gain) on sale of assets                                                            |  | (389   | ) | (9     | ) | 384    |  
|Net loss (gain) on sale of investments available for sale                                    |  |        |   | 123    |   | (1,535 | )
|                                                                                             |  |       
|                                                                                             |  | (13    | ) | 770    |   | (588   | )
|Increase/Decrease in operating assets and liabilities, net of effects from sale of business: | 
|Decrease/(Increase) in trade accounts and notes and other receivables                        |  | 20     |   | 3,076  |   | (306   | )
|Decrease/(Increase) in inventories                                                           |  | 2,341  |   | 1,110  |   | (428   | )
|Decrease/(Increase) in prepaid expenses                                                      |  | (9     | ) | (36    | ) | (50    | )
|(Decrease)/Increase in trade accounts and notes payable                                      |  | (439   | ) | (1,025 | ) | (1,382 | )
|(Decrease)/Increase in accrued expenses, other current liabilities                           |  | (1,884 | ) | 1,432  |   | (1,168 | )
|                                                                                             |  |       
|                                                                                             |  | 29     |   | 4,557  |   | (3,334 | )
|                                                                                             |  |       
|Net cash (used in) provided by operating activities                                          |  | (1,133 | ) | (3,649 | ) | (7,962 | )
|Cash flows from investing activities:                                                        | 
|Acquisitions of property, plant and equipment                                                |  | (247   | ) | (400   | ) | (859   | )
|Acquisitions of intangible assets                                                            |  | (18    | ) | (27    | ) | (210   | )
|Capitalized assets produced by the Company                                                   |  | (750   | ) | (780   | ) | (377   | )
|Net proceeds from sale of assets                                                             |  | 722    |   | 10     |   | 15     |  
|Net proceeds from sale of leased back assets                                                 |  | 342    |   | 250    |   |       |  
|Proceeds from sale of investments available for sale                                         |  |       |   | 55     |   | 5,521  |  
|Change in restricted cash equivalents                                                        |  |       |   |       |   | 890    |  
|Increase in deposits and guarantees                                                          |  | (108   | ) |        |   |        |  
|Reimbursement of deposits and guarantees                                                     |  | 75     |   | 350    |   | 105    |  
|                                                                                             |  |       
|Net cash (used in) provided by investing activities                                          |  | 16     |   | (542   | ) | 5,086  |  
|Cash flow from financing activities:                                                         | 
|Repayment of long term borrowings                                                            |  | (77    | ) | (370   | ) | (624   | )
|Repayment of obligations under capital leases                                                |  | (316   | ) | (77    | ) | (331   | )
|Increase/(decrease) in bank overdrafts and short-term borrowings                             |  | 310    |   | (222   | ) | 699    |  
|                                                                                             |  |       
|Net cash (used in) provided by financing activities                                          |  | (83    | ) | (669   | ) | (256   | )
|Net effect of exchange rate changes on cash and cash equivalents                             |  | 169    |   | (466   | ) | (474   | )
|                                                                                             |  |       
|Net increase/(decrease) in cash and cash equivalents                                         |  | (1,031 | ) | (5,326 | ) | (3,606 | )
|Cash and cash equivalents at beginning of year                                               |  | 10,429 |   | 15,755 |   | 19,361 |  
|                                                                                             |  |       
|Cash and cash equivalents at end of year                                                     |  | 9,398  |   | 10,429 |   | 15,755 |  
|                                                                                             |  |       

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 euro 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  majority-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 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 Charge-Per-Procedure
(CPP) 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 euro unless otherwise noted, except per share data)

The
Company receives royalty revenues under a license agreement with a third party that sells
products using the Companys patented technology. There are no future performance
obligations on the part of the Company under this license agreement. The license agreement
provides for the payment of royalties to the Company based on sales of the licensed
product. The Company records these revenues based on actual sales that occurred during the
relevant period.

| | 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. Cash equivalents consist of money market funds.

| | 1-7
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 inventory first based on detailed comparison
between quantity in inventory and historical consumption and an additional case-by-case
analysis equal to the difference between the cost of inventory and estimated market value
based upon assumptions about future demand, technology change and market conditions.

| | 1-8
Property, plant and equipment
| | ---------------------------------

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

|Buildings                               | 20 years  
|--------------------------------------- | ----------
|Equipment                               | 3-10 years
|Furniture, fixtures, fittings and other | 2-10 years

Equipment includes
industrial equipment and research equipment that has alternative future uses. Equipment
also includes machines that are leased to customers through operating leases related to
charge- per-procedure transactions. This equipment is depreciated over a period of five
years.

| | 1-9
Long-lived assets
| | ---------------------

Property,
plant and equipment and other long-lived assets are reviewed for impairment whenever
events or circumstances indicate that the carrying amount may not be recoverable. If
undiscounted expected future cash flows are less than the carrying value of the assets, an
impairment loss is recognized based on the excess of the carrying amount over the fair
value of the assets.

| | 1-10
Goodwill and other intangible assets
| | -----------------------------------------

Goodwill
represents the excess of purchase price over the fair value of identifiable net assets of
businesses acquired. The Company adopted Statement of Financial Accounting Standards No.
142 (SFAS 142) Goodwill and other intangible assets, effective January
1, 2002. Under SFAS 142, goodwill is no longer amortized but is tested for impairment on
an annual basis, or more frequently, as impairment indicators arise.

F-8

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

Other
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 other
intangible assets is calculated by the straight-line method over the shorter of the
contractual or estimated useful life of the assets concerned, as follows:

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

| | 1-11
Warranty costs
| | -------------------

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 amounts to 592 thousand,
897 thousand and 714 thousand for the years ended December 31, 2004, 2003 and
2002, respectively.

| | 1-12
Deferred income taxes
| | --------------------------

The
Company accounts for deferred 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. 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.

| | 1-13
Research and development costs
| | -----------------------------------

Research
and development costs are recorded as an expense in the period in which they are incurred.

| | 1-14
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, 2004, 2003 and 2002 were not material to the
consolidated financial statements.

| | 1-15
Translation of transactions denominated in foreign currencies
| | ------------------------------------------------------------------

| | 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.
| | - | ------------------------------------------------------------------------------------------

F-9

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

| | Translation
of balance sheet items denominated in foreign currencies
| | --------------------------------------------------------------------

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.

| | 1-16
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.

A
reconciliation of the numerators and denominators of the basic and diluted EPS
calculations for the years ended December 31, 2004, 2003 and 2002 is as follows:

|                                                                       |  | For the year ended Dec. 31, 2004 |   | For the year ended Dec. 31, 2003 |  | For the year ended Dec. 31, 2002 |  
|---------------------------------------------------------------------- |  | -------------------------------- | - | -------------------------------- |  | -------------------------------- | -
|                                                                       |  |                                 
|                                                                       |  | Income ineuro(Numerator)         |   | Shares(Denomin-ator)             |  | Per-ShareAmount                  |  
|                                                                       |  |                                 
|Basic EPS                                                              |  |                                  |   |                                  |  |                                  |  
|Income available to common Shareholders                                |  | (1,148,792                       | ) | 7,781,731                        |  | (0.15                            | )
|Effect of dilutive securities:                                         | 
|                                                                      
|Stock options                                                          |  |                                  |   | 292,479                          |  |                                  |  
|                                                                       |  |                                 
|Diluted EPS                                                            | 
|Income available to common shareholders,
Including assumed Conversions |  | (1,148,792                       | ) | 8,074,210                        |  | (0.15                            | )
|                                                                       |  |                                 

| | 1-17
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.

F-10

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

The
Company adopted SFAS 133 on January 1, 2001. Given the Companys minimal use of
derivative Instruments, this standard does not have any effect on the Companys
financial position, results of operations or cash flows.

| | 1-18
Employee stock option plans
| | --------------------------------

At
December 31, 2004, the Company has seven 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,
|------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----------------------
|                                                                                                                                                 |  |                        
|                                                                                                                                                 |  | 2004                   
|                                                                                                                                                 |  |                        
|Net income (loss), as reported                                                                                                                   |  | (1,149                 
|Add: Stock-based employee compensation expense included in                                                                                       | 
|reported net income (loss), net of related tax effects                                                                                           |  | 14                     
|Deduct: Total stock-based employee compensation expense
Determined under fair value-based method for all awards, net
     of related tax effects |  | (44                    
|Pro forma net income (loss)                                                                                                                      |  | (1,179                 
|Earnings per share:                                                                                                                              | 
|Basic, as reported                                                                                                                               |  | (0.15                  
|Basic, pro forma                                                                                                                                 |  | (0.15                  
|Diluted, as reported                                                                                                                             |  | (0.15                  
|Diluted, pro forma                                                                                                                               |  | (0.15                  

The
fair value of each stock option granted during the year is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:

|                                                                   |  | Year Ended December 31,
|------------------------------------------------------------------ |  | -----------------------
|                                                                   |  |                        
|                                                                   |  | 2004                   
|                                                                   |  |                        
|Weighted-average expected life (years)                             |  | 3.08                   
|Expected volatility rates                                          |  | 85%                    
|Expected dividend yield                                            |  |                       
|Risk-free interest rate                                            |  | 3.3%                   
|Weighted-average exercise price ()                                |  | 2.19                   
|Weighted-average fair value of options granted during the year () |  | 0.51                   

225,000
share purchase options and 100,000 share subscription options were granted in 2004.

F-11

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

| | 1-19
New accounting pronouncements
| | ----------------------------------

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 expects to adopt Statement 123(R) as of January 1, 2005, and the
performance stock plan approved by the shareholders in February 2005 will be booked in
accordance with the dispositions of FASB 123(R).

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 euro unless otherwise noted, except per share data)

2CASH AND CASH
EQUIVALENTS

Cash
and cash equivalents are comprised of the following:

|                   |  | December 31,
|------------------ |  | ------------
|                   |  |             
|                   |  | 2004        
|                   |  |             
|Cash held at bank  |  | 5,659       
|Money market funds |  | 3,739       
|                   |  |             
|Total              |  | 9,398       
|                   |  |             

Gross
realized gains on sales of these available-for-sale securities amounted to 117 thousand,
214 thousand and 405 thousand for the years ended December 31, 2004, 2003 and
2002, respectively.

3TRADE ACCOUNTS
AND NOTES RECEIVABLE, NET

Trade
accounts and notes receivable, net, consist of the following:

|                                      |  | December 31,
|------------------------------------- |  | ------------
|                                      |  |             
|                                      |  | 2004        
|                                      |  |             
|Trade accounts                        |  | 8,335       
|Notes receivable                      |  | 92          
|Less: allowance for doubtful accounts |  | (705        
|                                      |  |             
|Total                                 |  | 7,722       
|                                      |  |             

Notes receivable
usually represent commercial bills of exchange (drafts) with initial maturities of 90 days
or less.

F-13

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

4OTHER RECEIVABLES

Other
receivables consist of the following:

|                                                                     |  | December 31,
|-------------------------------------------------------------------- |  | ------------
|                                                                     |  |             
|                                                                     |  | 2004        
|                                                                     |  |             
|Tax loss carryback receivable from the French State                  |  | 109         
|Value-added taxes receivable from the French State                   |  | 210         
|Research and development tax credit receivable from the French State |  | 0           
|Other receivables from the French State                              |  | 16          
|Others                                                               |  | 138         
|                                                                     |  |             
|Total                                                                |  | 473         
|                                                                     |  |             

The
receivable for tax losses carried back to prior years, which was recorded in 1998, can be
used to offset income taxes due during the years following the year in which the carryback
was recorded, or will be reimbursed by the French government.

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.

5INVENTORIES

Inventories
consist of the following:

|                                          |  | December 31,
|----------------------------------------- |  | ------------
|                                          |  |             
|                                          |  | 2004        
|                                          |  |             
|Components, spare parts                   |  | 3,491       
|Work-in-progress                          |  | 326         
|Finished goods                            |  | 826         
|                                          |  |             
|Total gross inventories                   |  | 4,643       
|Less: provision for slow-moving inventory |  | (704        
|                                          |  |             
|Total                                     |  | 3,939       
|                                          |  |             

The
allowance for slow moving inventory, which is classified as cost of sales
(COS), amounted to 252 thousand, 569 thousand and 626 thousand for the years
ended December 31, 2004, 2003 and 2002, respectively.

F-14

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

6PROPERTY, PLANT
AND EQUIPMENT, NET

Property,
plant and equipment, net, consist of the following:

|                                           |  | December 31,
|------------------------------------------ |  | ------------
|                                           |  |             
|                                           |  | 2004        
|                                           |  |             
|Equipment                                  |  | 4,647       
|Furniture, fixture, and fittings and other |  | 2,180       
|                                           |  |             
|Total gross value                          |  | 6,827       
|Less: accumulated depreciation             |  | (4,020      
|                                           |  |             
|Total                                      |  | 2,807       
|                                           |  |             

Amortization
expense related to property, plant and equipment amounted to 934 thousand, 867
thousand and 1,028 thousand for the years ended December 31, 2004, 2003 and 2002,
respectively.

Capitalized
costs of 1,058 thousand and 870 thousand are included in property, plant and equipment at December
31, 2004 and December 31, 2003, respectively. Accumulated amortization of these assets leased to third parties was 283
thousand and 66 thousand at December 31, 2004 and December 31, 2003, respectively.

Amortization
expense on assets held under capital leases is included in total amortization expense and
amounted to 217 thousand and 66 thousand for the years ended December 31, 2004
and 2003, respectively.

7GOODWILL AND
OTHER INTANGIBLE ASSETS

As
discussed in Note 1-10, 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, 2004.

The
Company completed the required annual impairment test in the fourth quarter of 2004. 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. 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.

F-15

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

Other
intangible assets consist of the following:

|                               |  | December 31,
|------------------------------ |  | ------------
|                               |  |             
|                               |  | 2004        
|                               |  |             
|Licenses                       |  | 419         
|Tradename and trademark        |  | 583         
|Patents                        |  | 412         
|Organization costs             |  | 363         
|                               |  |             
|Total gross value              |  | 1,777       
|Less: accumulated amortization |  | (1,658      
|                               |  |             
|Total                          |  | 119         
|                               |  |             

Amortization
expenses related to other intangible assets amounted to 71 thousand, 77
thousand and 88 thousand, for the years ended December 31, 2004, 2003 and 2002,
respectively.

For
the two coming years, the annual estimated amortization expense for intangible assets will
be approximately 70 thousand.

8TRADE ACCOUNTS
AND NOTES PAYABLE

Trade
accounts and notes payable consist of the following:

|                       |  | December 31,
|---------------------- |  | ------------
|                       |  |             
|                       |  | 2004        
|                       |  |             
|Trade accounts payable |  | 2,913       
|Notes payable          |  | 762         
|                       |  |             
|Total                  |  | 3,675       
|                       |  |             

Notes payable
represent commercial bills of exchange (drafts) with initial maturities of 90 days or
less.

F-16

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

9DEFERRED REVENUES

Deferred
revenues consist of the following :

|                                                     |  | December 31,
|---------------------------------------------------- |  | ------------
|                                                     |  |             
|                                                     |  | 2004        
|                                                     |  |             
|Deferred revenues on maintenance contracts           |  | 370         
|Deferred revenue on sale of devices                  |  | 676         
|Deferral of the gain on sale-lease-back transactions |  | 239         
|                                                     |  |             
|Total                                                |  | 1,285       
|                                                     |  |             
|Less long term portion(1)                            |  | 442         
|                                                     |  |             
|Current portion                                      |  | 843         
|                                                     |  |             

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

10OTHER ACCRUED
LIABILITIES

Other
accrued liabilities consist of the following:

|                                   |  | December 31,
|---------------------------------- |  | ------------
|                                   |  |             
|                                   |  | 2004        
|                                   |  |             
|Provision for warranty costs(1)    |  | 660         
|Value added tax payable            |  | 273         
|Accruals for social expenses       |  | 301         
|Advance subsidies to be reimbursed |  | 318         
|Advance to debtors                 |  | 28          
|Others                             |  | 236         
|                                   |  |             
|Total                              |  | 1,816       
|                                   |  |             

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

Changes
in the provision for warranty costs are as follows:

|                                       |  | December 31,
|-------------------------------------- |  | ------------
|                                       |  |             
|                                       |  | 2004        
|                                       |  |             
|Beginning of year                      |  | 694         
|Amount used during the year (payments) |  | (592        
|New warranties                         |  | 558         
|                                       |  |             
|End of year                            |  | 660         
|                                       |  |             

F-17

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro 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, 2004, this
equipment consists of medical devices for an amount of 852 thousand and vehicles for
an amount of 146 thousand. Future minimum lease payments under capital leases for
the years ending December 31, are as follows:

|                                        |  | December 31,2004 |  
|--------------------------------------- |  | ---------------- | -
|                                        |  |                 
|2005                                    |  | 356              |  
|2006                                    |  | 355              |  
|2007                                    |  | 236              |  
|2008                                    |  | 87               |  
|2009                                    |  | 35               |  
|Total minimum lease payments            |  | 1,069            |  
|Less: amount representing interest      |  | (72              | )
|Present value of minimum lease payments |  | 997              |  
|Less: current portion                   |  | (334             | )
|                                        |  |                 
|Long-term portion                       |  | 663              |  
|                                        |  |                 

During
2002, the Company sold its administrative facility at Croissy-Beaubourg, France, which was
held under a 12-year capital lease expiring in 2005 for which a 797.3 thousand
impairment charge was recorded in the fourth quarter of 1998. The company recorded a
0.4 million gain on the transaction in 2002.

Interest
paid under capital lease obligations was 19 thousand, 4 thousand, and 17
thousand for the years ended December 31, 2004, 2003, and 2002, respectively.

| | 11-2
Operating leases
| | ---------------------

On
June 30, 2004, following the reduction in headcount implemented early 2004, the Company
reduced its rented office space and cancelled two lease contracts. As of December 31,
2004, 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.
This 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 this
operating lease will amount to 223 thousand per year until 2006 or 446
thousand in the aggregate, or until the lease is otherwise canceled by the lessee.

Total
rent expense under operating leases amounted to 899 thousand, 918 thousand and
1,290 thousand for the years ended December 31, 2004, 2003 and 2002, 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-18

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

12SHORT-TERM
BORROWINGS

As
of December 31, 2004, short-term borrowings consist of loans in Japanese yen amounting to
JPY20 million (143 thousand), JPY30 million (215 thousand) and JPY23 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,
|----------------------- |  | ------------
|                        |  |             
|                        |  | 2004        
|                        |  |             
|Japanese yen term loan  |  |             
|Other financial debts   |  | 6           
|                        |  |             
|Total                   |  | 6           
|Less current portion    |  | (6          
|                        |  |             
|Total long-term portion |  | 0           
|                        |  |             

Long-term debt
as at December 31, 2004 matures as follows:

|2005  |  |  |  | 6 | 
|----- |  |  |  | - | 
|2006  |  |  |  |   | 
|      |  |  |  |  
|Total |  |  |  | 6 | 
|      |  |  |  |  

14OTHER LONG-TERM
LIABILITIES

Other
long-term liabilities consist of the following:

|                                     |  | December 31,
|------------------------------------ |  | ------------
|                                     |  |             
|                                     |  | 2004        
|                                     |  |             
|Provision for retirement indemnities |  | 379         
|Other                                |  | 181         
|                                     |  |             
|Total                                |  | 560         
|                                     |  |             

F-19

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro 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, 2004 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.

The
actuarial assumptions as of year-end are as follows:

|                              |  | Pension Benefits
|----------------------------- |  | ----------------
|                              |  |                 
|                              |  | 2004            
|                              |  |                 
|Weighted average assumptions: |  |                 
|Discount rate                 |  | 4.50%           
|Rate of compensation increase |  | 2.00%           
|Retirement age                |  | 65              

15SHAREHOLDERS
EQUITY

| | 15-1
Common stock
| | -----------------

As
of December 31, 2004, 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 7,781,731 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 23,967
thousand and 24,517 thousand at December 31, 2004 and 2003, respectively. Dividend
distributions, if any, will be made in euros. The Company has no plans to distribute
dividends in the foreseeable future.

F-20

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

| | 15-4
Treasury stock
| | -------------------

As
of December 31, 2004, the 581,090 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) 50,540 shares acquired in
June and July 2001 for 153 thousand. All 581,090 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, 2004, EDAP TMS S.A. sponsored seven 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. 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.

F-21

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

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).
To conform to the terms of the 1998 option plan discussed above, on March 15, 1999, the Board of Directors
also amended the terms of 122,250 of certain options granted in 1997 and authorizing
certain employees to subscribe to new Shares, modifying their contract into options to
purchase Shares at an exercise price of 3.81 instead of 6.97; exercise and
vesting conditions remained the same. The Board also amended the terms of 20,125 Share
purchase options granted in 1997, modifying the exercise price to 3.81, without
modifying exercise and vesting conditions.

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 24, 1999, the shareholders of EDAP TMS S.A. authorized the Board of Directors to
grant up to 68,540 options to purchase pre-existing Shares and 86,885 options to subscribe
to new Shares, at a fixed exercise price to be set by the Supervisory Board. Conforming to
this plan, on February 21, 2000, the Board of Directors granted 26,000 options to French
employees meeting certain tenure criteria. The exercise price was fixed at U.S.$2.20
(2.39) per Share. Of the 26,000 options, 16,000 options were to begin vesting two
years after the date of grant and were fully vested as of March 1, 2003; shares acquired
pursuant to the options cannot be sold prior to five years from the date of grant. The
options expire on February 28, 2010 (i.e. ten years after the date of grant) or when
employment with the Company ceases, whichever occurs earlier. The 10,000 remaining options
granted on February 21, 2000, were to begin vesting on date of grant and were fully vested
on January 1, 2003; shares acquired pursuant to the options cannot be sold prior to five
years from the date of grant. The options expired on December 31, 2004 or when employment
with the Company ceased, whichever occured earlier.

On
April 2, 2001, the Board of Directors granted 86,885 options to subscribe to new Shares to
a Member of the Management Board meeting certain tenure criteria. The exercise price was
fixed at $1.561 (1.76) per share. Options began vesting at the date of grant and
expire on March 31, 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 euro unless otherwise noted, except per share data)

On
December 18, 2000, the Board of Directors decided to grant 9,000 options to one employee
of the Company at an exercise price of $2.20 (2.39) 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. Shares acquired pursuant to the options cannot be sold prior
to five years from the date of grant. The options expire on December 31, 2010 (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.

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.

F-23

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

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

|                                                          | 2004      | 2003                            | 2002     
|--------------------------------------------------------- | --------- | ------------------------------- | ---------
|                                                          |          
|                                                          | Options   | Weightedaverageexerciseprice() | Options  
|                                                          |          
|Outstanding on January 1, 2004                            | 391,262   | 2.68                            | 654,341  
|Granted                                                   | 325,000   | 2.19                            | 0        
|Exercised                                                 | 0         | -                               | 0        
|Forfeited                                                 | (136,000) | 2.34                            | (263,079)
|Expired                                                   | -         | -                               | -        
|                                                          |          
|Outstanding on December 31, 2004                          | 580,262   | 2.49                            | 391,262  
|                                                          |          
|Exercisable on December 31, 2004                          | 219,547   | 2.99                            | 272,442  
|                                                          |          
|                                                         
|Share purchase options available for grant on December 31 | 15,000    | -                               | 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, 2004:

|                   | Outstanding options | Exercisable options                    
|------------------ | ------------------- | ---------------------------------------
|                   |                    
|Exercise price () | Options             | Weightedaverageremainingcontractuallife
|                   |                    
|3.81               | 117,625             | 3.5                                    
|2.60               | 225,000             | 9.2                                    
|2.08(1)            | 113,000             | 7.0                                    
|2.02(2)            | 14,425              | 7.5                                    
|1.83               | 10,212              | 4.5                                    
|1.28               | 100,000             | 9.2                                    
|                   |                    
|1.28 to 3.81       | 580,262             | 5.3                                    
|                   |                    

|(1) | All
the 113,000 options were granted on September 25, 2001 with an exercise price  expressed
in U.S. dollars ($1.92) and converted here into 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 into 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 euro 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 2004, 2002 and 2001 did not result in recording any compensation
expense, additional compensation expense or reversal of compensation expense. Options
granted in 2004 recorded a compensation expense amounting 14 thousand.

16NET SALES

Net
sales consist of the following:

|                       |  | 2004   |   | 2003   |  | 2002   | 
|---------------------- |  | ------ | - | ------ |  | ------ | 
|                       |  |       
|Medical devices        |  | 11,922 |   | 8,557  |  | 10,527 | 
|Disposables            |  | 1,901  |   | 1,850  |  | 1,505  | 
|CPPs                   |  | 1,422  |   | 562    |  | 476    | 
|Leases                 |  | 1,564  |   | 1,462  |  | 1,233  | 
|Spare parts & services |  | 5,320  |   | 5,599  |  | 5,985  | 
|                       |  |       
|Total sales            |  | 22,129 |   | 18,030 |  | 19,725 | 
|                       |  |       
|Warrants granted       |  | (174   | ) |        |  |        | 
|                       |  |       
|Total net sales        |  | 21,955 |   | 18,030 |  | 19,725 | 
|                       |  |       

| | 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 which will entitle
HealthTronics to purchase a share of the Company at a price of U.S.$1.50 upon their
vestiture. 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. 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.

The
non-cash charge, amounting 174,000, was calculated at the fair value using the Black
& Scholes pricing model based on the following assumptions:

| | Risk-Free Interest Rate (%): 3.30,
Strike (U.S.$): 1.50,
Volatility (%): 85,
Assets (U.S.$): 3.00,
Dividend (%): 0.
| | -------------------------------------------------------------------------------------------------------------------

This
non-cash charge of 174,000 recorded for 2004 related to a series of warrants is
linked to HealthTronicss purchase of four lithotripters in 2004, in accordance with
the terms of the agreement.

F-25

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

17OTHER REVENUES

Other
revenues consists of the following:

|                  |  | 2004 |  | 2003 |  | 2002 | 
|----------------- |  | ---- |  | ---- |  | ---- | 
|                  |  |     
|Royalties         |  | 163  |  | 124  |  | 97   | 
|Grants and others |  | 45   |  | 319  |  | 139  | 
|                  |  |     
|Total             |  | 208  |  | 443  |  | 236  | 
|                  |  |     

TMS
S.A. and EDAP S.A.  received  grants of 25 thousand in 2004 and 75 thousand in
2003 and TMS S.A.  received  grants of 81 thousand in  2002, from the French
Ministry of Research and Development.

18OPERATING
EXPENSES

In
2004, following the Companys decision in 2003 to reduce headcount in both division
(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. The reductions represented
a decrease of 22% of the French-based workforce. The Company recorded non-recurring
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 in 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 amounted to
0.1 million as of December 31, 2004.

Operating
expenses also included an additional 0.1 million related to other non-recurring
expenses, not directly linked to the reorganization.

In
2002, following the Companys decision to restructure and reorganize its activities
into two operating divisions, the Company recorded non-recurring expenses of 1.2
million, including 0.8 million of employee termination expenses, 0.2 million
of legal expenses linked to this reorganization and 0.2 million related to various
non-recurring expenses.

19INTEREST
(EXPENSE) INCOME, NET

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

|                 |  | 2004 |   | 2003 |   | 2002 |  
|---------------- |  | ---- | - | ---- | - | ---- | -
|                 |  |     
|Interest income  |  | 146  |   | 284  |   | 502  |  
|Interest expense |  | (75  | ) | (107 | ) | (47  | )
|                 |  |     
|Total            |  | 71   |   | 177  |   | 455  |  
|                 |  |     

F-26

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

20OTHER INCOME
(LOSS), NET

Other
income (loss), net, consists of the following:

|                                                 |  | 2004 |   | 2003 |   | 2002  |  
|------------------------------------------------ |  | ---- | - | ---- | - | ----- | -
|                                                 |  |     
|Net gain (loss) on sale of Urologix common stock |  |     |   | (123 | ) | 1,669 |  
|Other (loss)/income, net                         |  | (74  | ) | (95  | ) | (194  | )
|                                                 |  |     
|Total                                            |  | (74  | ) | (218 | ) | 1,475 |  
|                                                 |  |     

The
net gain on sale of Urologix Common Stock in 2002 reflected the net gain on the sale of
Urologix Common Stock during the year.

21INCOME TAXES

| | 21-1
Income before income taxes
| | -------------------------------

Income
(loss) before income taxes is comprised of the following:

|                |  | 2004 |   | 2003   |   | 2002   |  
|--------------- |  | ---- | - | ------ | - | ------ | -
|                |  |     
|France          |  | (361 | ) | (8,509 | ) | (3,633 | )
|Other countries |  | (510 | ) | (581   | ) | (240   | )
|                |  |     
|Total           |  | (871 | ) | (9,090 | ) | (3,873 | )
|                |  |     

| | 21-2
Income tax expense
| | -----------------------

Income
tax (expense)/benefit consists of the following:

|                                                |  | 2004 |   | 2003 |   | 2002 |  
|----------------------------------------------- |  | ---- | - | ---- | - | ---- | -
|                                                |  |     
|Current income tax expense:                     | 
|France                                          |  | 6    |   | (22  | ) | (59  | )
|Other countries                                 |  | (29  | ) | (78  | ) | (91  | )
|                                                |  |     
|Sub-total current income tax expense            |  | (23  | ) | (100 | ) | (150 | )
|                                                |  |     
|Deferred income tax (expense) benefit:          | 
|France                                          |  | (255 | ) | 149  |   | (1   | )
|Other countries                                 |  |     |   | 65   |   | (16  | )
|                                                |  |     
|Sub-total deferred income tax (expense) benefit |  | (255 | ) | 214  |   | (17  | )
|                                                |  |     
|Total                                           |  | (278 | ) | 114  |   | (167 | )
|                                                |  |     

F-27

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

| | 21-3
Deferred income tax:
| | -------------------------

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,
|-------------------------------------------------- |  | ------------
|                                                   |  |             
|                                                   |  | 2004        
|                                                   |  |             
|Elimination of intercompany profit in inventory    |  | 199         
|Other items                                        |  | 413         
|Net operating loss carryforwards                   |  | 5,707       
|                                                   |  |             
|Total deferred tax assets                          |  | 6,319       
|Capital leases treated as operating leases for tax |  | (4          
|Exit tax                                           |  | (161        
|                                                   |  |             
|Other items                                        |  | (88         
|                                                   |  |             
|Total deferred tax liabilities                     |  | (253        
|Net deferred tax assets                            |  | 6,066       
|Valuation allowance for deferred tax assets        |  | (5,989      
|                                                   |  |             
|Deferred tax assets, net of allowance              |  | 77          
|                                                   |  |             

Base
net operating loss  carryforwards  of 1,826  thousand, 2,637  thousand, 1,910
thousand, 583 thousand and 9,585 thousand as of  December 31, 2004 are
available at EDAP Technomed Inc., TMS S.A., EDAP S.A., Edap Technomed  Italia S.R.L.  and
EDAP TMS S.A.,  respectively.  This net  operating  loss  generates  deferred  tax assets
of 5,707  thousand.  Realization  of these assets is  contingent  on future
taxable  earnings in the  applicable  tax  jurisdictions.  As of December 31, 2004, 5,283
thousand out of these 5,707  thousand net  operating  loss  carry-forwards  have no
expiration  date. The remaining tax loss  carry-forwards  expire in years 2005 through
2011. In accordance with SFAS No. 109, a valuation  allowance is  recorded as realization
of those amounts is not considered as 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.

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). 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.

F-28

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

| | 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:

|                                                                    |  | 2004    |   | 2003    |   | 2002    |  
|------------------------------------------------------------------- |  | ------- | - | ------- | - | ------- | -
|                                                                    |  |        
|French statutory rate                                               |  | 34.30%  |   | 34.30%  |   | 34.30%  |  
|Income of foreign subsidiaries taxed at different tax rates         |  | 1.90%   |   | 0.10%   |   | 0.40%   |  
|Effect of net operating loss carryforwards and valuation Allowances |  | (31.4%  | ) | (23.50% | ) | (25.00% | )
|Non deductible entertainment expenses                               |  | (2.60%  | ) | (0.30%  | ) | (0.20%  | )
|Other                                                               |  | (34.10% | ) | (9.30%  | ) | (13.80% | )
|Effective tax rate                                                  |  | (31.9%  | ) | (1.30%  | ) | (4.30%  | )

22COMMITMENTS AND
CONTINGENCIES

| | 22-1
Commitments
| | ----------------

The
Company currently has commitments regarding its operating leases as described in Note 11-
2.

| | 22-2
Litigation
| | ---------------

The
Company is involved in a number of claims and lawsuits considered normal in its business,
including employee litigation and product liability matters. 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, 2004, and for the year then ended.

23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, 2004 and 2003.

F-29

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

|                                         |  | December 31,      |  | December 31,            | 
|---------------------------------------- |  | ----------------- |  | ----------------------- | 
|                                         |  |                  
|                                         |  | 2004RecordedValue |  | 2004EstimatedFair Value | 
|                                         |  |                  
|Assets:                                  |  |                   |  |                         | 
|Cash and cash equivalents                |  | 9,398             |  | 9,398                   | 
|Trade accounts and notes receivable, net |  | 7,722             |  | 7,722                   | 
|Liabilities:                             | 
|Short-term borrowings                    |  | 525               |  | 525                     | 
|Trade accounts payable                   |  | 2,913             |  | 2,913                   | 
|Notes payable                            |  | 762               |  | 762                     | 
|Long-term debt                           |  | 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.

24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 and 0.5 million as of December 31, 2004 and 2003. Ultimate
losses may vary from the current estimates, and any adjustments are reported in earnings
in the periods in which they become known.

In
2004 and 2003, the Company did not generate significant revenue with a single customer. As
of December 31, 2002, approximately 1.6 million or 17.3% of the Companys net
accounts receivable were attributable to a single customer.

F-30

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

25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, 2004, the Company had an option to hedge against Japanese
yen for an amount of JPY210 million (i.e. 1,550 thousand), expiring on December 2005
and an option to hedge against US$ for an amount of US$300 thousand (i.e. 220
thousand), expiring on May 2005. The fair value of these derivatives was not material as
of December 31, 2004.

26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 2004, 2003 and 2002 and the key balance sheet figures, by segment, for fiscal years
2004 and 2003.

The
business in which the Company operates is the development and production of minimally
invasive medical devices, primarily for the treatment of urological diseases.
Substantially all revenues result from the sale of medical devices and their related
license and royalty payments from third parties. The segments derive their revenues from
this activity.

Segment
operating profit or loss and segment assets are determined in accordance with the same
policies as those described in the summary of significant accounting policies except that
interest income and expense, current and deferred income taxes, and goodwill and its
related amortization are not allocated to individual segments. A reconciliation of segment
operating profit or loss to consolidated net income is as follows:

|                                      |  | 2004   |   | 2003   |   | 2002   |  
|------------------------------------- |  | ------ | - | ------ | - | ------ | -
|                                      |  |       
|Segment operating (loss) profit       |  | (830   | ) | (8,121 | ) | (4,776 | )
|Interest income (expense), net        |  | 71     |   | 177    |   | 455    |  
|Currency exchange (losses) gains, net |  | (38    | ) | (928   | ) | (1,027 | )
|Other income, net                     |  | (74    | ) | (218   | ) | 1,475  |  
|Income tax (expense) credit           |  | (278   | ) | 114    |   | (167   | )
|                                      |  |       
|Consolidated net income               |  | (1,149 | ) | (8,976 | ) | (4,040 | )
|                                      |  |       

F-31

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

A
summary of the Companys operations by business unit is presented below for years
ending December 31, 2004, 2003 and 2002:

|                                                    |  | HIFU Division |   | UDS Division |   | EDAP TMS |   | Consolidation |   | Totalconsolidated |  
|--------------------------------------------------- |  | ------------- | - | ------------ | - | -------- | - | ------------- | - | ----------------- | -
|                                                    |  |              
|2004                                                |  |               |   |              |   |          |   |               |   |                   |  
|External sales of medical devices                   |  | 3,733         |   | 8,189        |   |         |   |              |   | 11,922            |  
|External sales of spares parts, Supplies & services |  | 2,915         |   | 7,291        |   |         |   |              |   | 10,206            |  
|Internal segment revenues                           |  | 287           |   | 1,905        |   |         |   | (2,192        | ) |                  |  
|Total sales                                         |  | 6,935         |   | 17,385       |   |         |   | (2,192        | ) | 22,128            |  
|Warrants granted                                    |  |              |   | (174         | ) |         |   |              |   | (174              | )
|Total net sales                                     |  | 6,935         |   | 17,211       |   |         |   | (2,192        | ) | 21,954            |  
|Other revenues                                      |  | 34            |   | 174          |   |         |   |              |   | 208               |  
|Total revenues                                      |  | 6,969         |   | 17,385       |   |         |   | (2,192        | ) | 22,162            |  
|                                                    |  |              
|Total COS                                           |  | (3,749        | ) | (12,119      | ) |         |   | 2,192         |   | (13,676           | )
|                                                    |  |              
|Gross margin                                        |  | 3,220         |   | 5,266        |   |         |   |              |   | 8,486             |  
|                                                    |  |              
|R&D                                                 |  | (492          | ) | (329         | ) |         |   |              |   | (821              | )
|Clinical trials                                     |  | (325          | ) | (15          | ) |         |   |              |   | (340              | )
|Regulatory                                          |  |              |   | (362         | ) |         |   |              |   | (362              | )
|Marketing                                           |  | (279          | ) | (454         | ) |         |   |              |   | (733              | )
|Selling                                             |  | (996          | ) | (1,674       | ) |         |   |              |   | (2,670            | )
|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              | )
|                                                    |  |              
|Assets                                              |  | 7,162         |   | 20,334       |   | 6,645    |   | (6,256        | ) | 27,885            |  
|Capital expenditures                                |  | 287           |   | 844          |   | 2        |   |              |   | 1,133             |  
|Long-lived assets                                   |  | 969           |   | 1,816        |   | 22       |   |              |   | 2,806             |  
|Goodwill                                            |  | 645           |   | 1,767        |   |         |   |              |   | 2,412             |  

F-32

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

|                                                    |  | HIFU Division |   | UDS Division |   | EDAP TMS |   | Consolidation |   | Totalconsolidated |  
|--------------------------------------------------- |  | ------------- | - | ------------ | - | -------- | - | ------------- | - | ----------------- | -
|                                                    |  |              
|2003                                                | 
|External sales of medical devices                   |  | 1,148         |   | 7,364        |   |         |   |              |   | 8,512             |  
|External sales of spares parts, supplies & services |  |              |   | 1,709        |   | 7,809    |   |              |   | 9,518             |  
|Internal segment revenues                           |  | 3             |   | 1,967        |   |         |   | (1,970        | ) |                  |  
|Other revenues                                      |  | 99            |   | 342          |   | 2        |   |              |   | 443               |  
|Total revenues                                      |  | 2,959         |   | 17,482       |   | 2        |   | (1,970        | ) | 18,473            |  
|                                                    |  |              
|Total COS                                           |  | (2,056        | ) | (12,771      | ) |         |   | 1,733         |   | (13,094           | )
|                                                    |  |              
|Gross margin                                        |  | 903           |   | 4,711        |   |         |   | (237          | ) | 5,379             |  
|                                                    |  |              
|R&D                                                 |  | (1,523        | ) | (313         | ) |         |   |              |   | (1,836            | )
|Clinical trials                                     |  | (651          | ) |             |   |         |   |              |   | (651              | )
|Regulatory                                          |  | (171          | ) | (412         | ) |         |   |              |   | (583              | )
|Marketing                                           |  | (944          | ) | (322         | ) |         |   |              |   | (1,266            | )
|Selling                                             |  | (1,079        | ) | (1,883       | ) |         |   |              |   | (2,962            | )
|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   | ) |              |   | 13,500            |  
|                                                    |  |              
|Operating income (loss)                             |  | (5,802        | ) | (687         | ) | (1,395   | ) | (237          | ) | (8,121            | )
|                                                    |  |              
|Assets                                              |  | 9,432         |   | 21,050       |   | 5,238    |   | (3,810        | ) | 31,910            |  
|Capital expenditures                                |  | 635           |   | 1,138        |   | 25       |   |              |   | 1,798             |  
|Long-lived assets                                   |  | 1,334         |   | 1,541        |   | 28       |   |              |   | 2,903             |  
|Goodwill                                            |  | 645           |   | 1,767        |   |         |   |              |   | 2,412             |  

F-33

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

|                                                    |  | HIFU Division |   | UDS Division |   | EDAP TMS |   | Consolidation |   | Totalconsolidated |  
|--------------------------------------------------- |  | ------------- | - | ------------ | - | -------- | - | ------------- | - | ----------------- | -
|                                                    |  |              
|2002                                                | 
|External sales of medical devices                   |  | 1,890         |   | 8,486        |   |         |   |              |   | 10,376            |  
|External sales of spares parts, Supplies & services |  | 1,189         |   | 8,160        |   |         |   |              |   | 9,349             |  
|Internal segment revenues                           |  | 262           |   | 1,573        |   |         |   | (1,835        | ) |                  |  
|Other revenues                                      |  | 35            |   | 201          |   |         |   |              |   | 236               |  
|                                                    |  |              
|Total revenues                                      |  | 3,376         |   | 18,419       |   |         |   | (1,835        | ) | 19,961            |  
|                                                    |  |              
|Total COS                                           |  | (1,877        | ) | (11,461      | ) |         |   | (1,835        | ) | (11,503           | )
|                                                    |  |              
|Gross margin                                        |  | 1,499         |   | 6,959        |   |         |   |              |   | 8,458             |  
|                                                    |  |              
|R&D                                                 |  | (1,532        | ) | (379         | ) |         |   | 69            |   | (1,842            | )
|Clinical trials                                     |  | (550          | ) |             |   |         |   |              |   | (550              | )
|Regulatory                                          |  | (440          | ) | (518         | ) |         |   | 164           |   | (794              | )
|Marketing                                           |  | (690          | ) | (783         | ) |         |   | 63            |   | (1,410            | )
|Selling                                             |  | (747          | ) | (1,996       | ) |         |   | 129           |   | (2,614            | )
|G&A                                                 |  | (939          | ) | (2,236       | ) | (1,183   | ) | (426          | ) | (4,784            | )
|Non recurring                                       |  |              |   | (478         | ) | (762     | ) |              |   | (1,240            | )
|                                                    |  |              
|Total expenses                                      |  | (4,898        | ) | (6,390       | ) | (1,946   | ) |              |   | (13,234           | )
|                                                    |  |              
|Operating income (loss)                             |  | (3,399        | ) | 569          |   | (1,946   | ) |              |   | (4,776            | )
|                                                    |  |              
|Assets                                              |  | 13,712        |   | 25,859       |   | 5,656    |   | (5,439        | ) | 39,788            |  
|Capital expenditures                                |  | 440           |   | 787          |   | 8        |   |              |   | 1,235             |  
|Long-lived assets                                   |  | 1,024         |   | 954          |   | 7        |   |              |   | 1,985             |  
|Goodwill                                            |  | 645           |   | 1,767        |   |         |   |              |   | 2,412             |  

F-34

---

EDAP TMS S.A. AND
SUBSIDIARIES

NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS(in thousands of euro unless otherwise noted, except per share data)

27VALUATION
ACCOUNTS

|                                                             |  | Allowancefordoubtfulaccounts |   | Slow-movinginventory |  
|------------------------------------------------------------ |  | ---------------------------- | - | -------------------- | -
|                                                             |  |                             
|Restated balance as of December 31, 2001                     |  | 917                          |   | 2,068                |  
|Charges to costs and expenses                                |  | 51                           |   | 624                  |  
|Deductions: write-off of bad debts provided in prior periods |  | (106                         | ) | (1,144               | )
|Translation adjustment                                       |  |                             |   | (20                  | )
|                                                             |  |                             
|Restated balance as of December 31, 2002                     |  | 862                          |   | 1,528                |  
|Charges to costs and expenses                                |  | 41                           |   | 569                  |  
|Deductions: write-off of bad debts provided in prior periods |  | (377                         | ) | (380                 | )
|                                                             |  |                             
|Restated balance as of December 31, 2003                     |  | 526                          |   | 1,717                |  
|Charges to costs and expenses                                |  | 204                          |   | 252                  |  
|Deductions: write-off of bad debts provided in prior periods |  | (25                          | ) | (1,265               | )
|                                                             |  |                             
|Restated balance as of December 31, 2004                     |  | 705                          |   | 704                  |  

28SUPPLEMENTAL
DISCLOSURES OF CASH FLOW INFORMATION

Interest
and income taxes paid are as follows:

|                                     |  | 2004 |   | 2003 |   | 2002 | 
|------------------------------------ |  | ---- | - | ---- | - | ---- | 
|                                     |  |     
|Income taxes paid (refunds received) |  | (82  | ) | (560 | ) | 112  | 
|Interest paid                        |  | 19   |   | 21   |   | 2    | 
|Interest received                    |  | 120  |   | 223  |   | 278  | 
|Non-cash transactions:               | 
|                                     |  | 2004 |   | 2003 |   | 2002 | 
|                                     |  |     
|Capital lease obligations incurred   |  | 998  |   | 792  |   |     | 

29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 63 thousand, 33 thousand and
53 thousand, for 2004, 2003 and 2002 respectively.

F-35

---

Dae
You is also acting as an agent to promote the Companys medical devices in South
Korea, and receives commissions on sales.

Dae
You also purchased medical devices from the Company and operates them in partnership with
hospitals or clinics for an amount of 401 thousand, 309 thousand and 285
thousand in 2004, 2003 and 2002 respectively.

As
of December 31, 2004, there were no receivables nor payables recorded for Dae You. As of
December 31, 2003, receivables amounted to 104 thousand and there were no payables.

F-36