SECURITIES
        AND EXCHANGE COMMISSION
 Washington,
        D.C. 20549
 
 **FORM
        10-K**
 (Mark
        One)
  x
              Annual
                  report pursuant to section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934 [*Fee
                  Required*]
                  for the fiscal year ended October 31, 2005
                  or
 o
              Transition
                  report pursuant to section 13 or 15(d) of the Securities Exchange
                  Act of
                  1934 [*No
                  Fee Required*]
                  for the transition period from _________ to
                  _________.
 
 Commission
        File No. 0-9143
 **HURCO
        COMPANIES, INC.**
 (Exact
        name of registrant as specified in its charter)
  **Indiana**
              
              **35-1150732**(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification Number)**One
                  Technology Way****Indianapolis,
                  Indiana**
              
              **46268**(Address
                  of principal executive offices)
              
              (Zip
                  code)
 
 Registrant’s
                  telephone number, including area code
              
              **(317)
                  293-5309**
 
 Securities
                  registered pursuant to Section 12(b) of the Act:
              
              NoneSecurities
                  registered pursuant to Section 12(g) of the Act:
              
              Common
                  Stock, No Par Value(Title
                  of Class)
 Indicate
          by check mark if the registrant is a well-known seasoned issuer, as defined
          in
          Rule 405 of the Securities
          Act.
 Yeso
                Nox
 
 Indicate
          by check mark if the registrant is not required to file reports pursuant
          to
          Section 13 or Section
          15(d).
 Yeso
                Nox
 
 Indicate
          by check mark whether the Registrant (1) has filed all reports required
          to be
          filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during
          the
          preceding 12 months, and (2) has been subject to the filing requirements
          for at
          least the past 90 days.
 Yesx
                Noo
 
 Indicate
          by check mark if disclosure of delinquent filers pursuant to Rule 405 of
          Regulation S-K is not contained herein, and will not be contained, to the
          best
          of Registrant's knowledge, in definitive proxy or information statements
          incorporated by reference in Part III of this Form 10-K or any amendment
          to this
          Form 10-K.  o
 
 Indicate
          by check mark whether the registrant is a large accelerated filer, an
          accelerated filer or a non- accelerated
          filer. See definition of “accelerated filer” in Rule 12b-2 of the Exchange
          Act.
 Large
                    accelerated filero
                Accelerated
                    filero
                Non-accelerated
                    filerx
 
 Indicate
          by check mark whether the registrant is a shell company (as defined in
          Rule
          12b-2 of the Exchange
          Act).
 Yeso
                Nox
 
 The
          aggregate market value of the Registrant’s voting stock held by non-affiliates
          as of April 30, 2005 (the last day of our most recently completed second
          quarter) was $55,645,820.
 
 The
          number of shares of the Registrant’s common stock outstanding as of January 13,
          2006 was 6,338,020.
 
 DOCUMENTS
          INCORPORATED BY REFERENCE: Portions of the Registrant’s Proxy Statement for its
          2006 Annual Meeting of Shareholders (Part III).
 **Disclosure
        Concerning Forward-looking Statements**
 
 Certain
        statements made in this annual report on form 10-K may constitute
“forward-looking statements” within the meaning of the Private Securities
        Litigation Reform Act of 1995. These forward-looking statements involve known
        and unknown risks, uncertainties and other factors that may cause our actual
        results, performance or achievements to be materially different from any
        future
        results, performance or achievements expressed or implied by such
        forward-looking statements. These factors include, among others, changes
        in
        general economic and business conditions that affect market demand for machine
        tools and related computer control systems, software products, and replacement
        parts, changes in manufacturing markets, adverse currency movements, innovations
        by competitors, performance of our contract manufacturers, governmental actions
        and initiatives, including import and export restrictions and tariffs, and
        developments in the relations among the U.S., China and Taiwan.
  **PART
        I**
 
 **Item****1.**
              **BUSINESS**
 
 **General**
 
 Hurco
        Companies, Inc. is an industrial technology company. We design and produce
        interactive, personal computer (PC) based, computer control systems and software
        and computerized machine tools for sale to the metal working industry through
        a
        worldwide sales, service and distribution network. Our proprietary computer
        control systems and software products are sold primarily as integral components
        of our computerized machine tool products.
 
 We
        pioneered the application of microprocessor technology and conversational
        programming software for application on computer controls for machine tools
        and,
        since our founding in 1968, have been a leader in the introduction of
        interactive computer control systems that automate manufacturing processes
        and
        improve productivity in the metal parts manufacturing industry. We have
        concentrated on designing "user-friendly" computer control systems that can
        be
        operated by both skilled and unskilled machine tool operators and yet are
        capable of instructing a machine to perform complex tasks. The combination
        of
        microprocessor technology and patented interactive, conversational programming
        software in our computer control systems enables operators on the production
        floor to quickly and easily create a program for machining or forming a
        particular part from a blueprint or computer-aided design (CAD) and immediately
        begin production of that part.
 
 Our
        executive offices and principal design, engineering, and manufacturing
        management operations are headquartered in Indianapolis, Indiana. Sales,
        application engineering and service offices are located in Indianapolis,
        Indiana; High Wycombe, England; Munich, Germany; Paris, France; Milan, Italy;
        Singapore and Taichung, Taiwan. We also have a representative sales office
        in
        Shanghai, China and a technical center in Shenzhen, China. Distribution
        facilities are located in Los Angeles, California and Venlo, the Netherlands;
        a
        manufacturing facility is located in Taichung, Taiwan.
 
 Our
        strategy is to design, develop, produce and sell to the global metalworking
        market a comprehensive line of computerized machine tools that incorporate
        our
        proprietary interactive computer control technology. This technology is designed
        to enhance the machine tool user's productivity through ease of operation
        and
        higher levels of machine performance (speed, accuracy and surface finish
        quality). We use an open system software architecture that permits our computer
        control systems and software to be used with standard PC hardware and have
        emphasized an operator friendly design that employs both interactive
        conversational and graphical programming software.
 
 **Products**
 
 Our
        core
        products consist of general purpose computerized machine tools for the metal
        cutting industry (principally vertical machining centers) into which our
        proprietary Ultimax ® and/or MAX ® software
        and computer control systems have been fully integrated. In December 2004,
        we
        introduced a new turning center product line (lathes), which is also powered
        by
        Hurco’s MAX ® control.
        We also produce computer control systems and related software for press brake
        applications that are sold as retrofit control systems. In addition, we produce
        and distribute software options, control upgrades, hardware accessories and
        replacement parts related to our machine tool product lines and provide operator
        training and support services to our customers.
  2
 
 The
        following table sets forth the contribution of each of our product groups
        to our
        total sales and service fees during each of the past three fiscal
        years:
 
 **Net
                  Sales and Service Fees by Product Category**(Dollars
                  in thousands)
              
              **Year
                  ended October 31,****2005**
              
              **2004**
              
              **2003****Continuing
                  Products and Services**Computerized
                  Machine Tools
              
              $
              107,313
              
              
              85.5
              %
              $
              83,663
              
              
              84.0
              %
              $
              61,412
              
              
              81.3
              %Computer
                  Control Systems and Software *
              
              
              4,129
              
              
              3.3
              %
              
              3,604
              
              
              3.6
              %
              
              3,044
              
              
              4.0
              %Service
                  Parts
              
              
              9,991
              
              
              8.0
              %
              
              8,696
              
              
              8.8
              %
              
              7,616
              
              
              10.1
              %Service
                  Fees
              
              
              4,076
              
              
              3.2
              %
              
              3,609
              
              
              3.6
              %
              
              3,460
              
              
              4.6
              %Total
              
              $
              125,509
              
              
              100
              %
              $
              99,572
              
              
              100
              %
              $
              75,532
              
              
              100.0
              %
  
 ***
              *Amounts
                  shown do not include computer control systems sold as integrated
                  components of computerized machine
                  tools.*
 
 ***Computerized
        Machine Tools - Machining Centers***
 
 We
        design, manufacture and sell computerized machine tools equipped with a fully
        integrated interactive Ultimax ® computer
        control system. Our Ultimax ® twin
        screen "conversational" computer control system is sold solely as a fully
        integrated feature of our computerized machine tools. This computer control
        system enables a machine tool operator to create a complex two-dimensional
        machining program directly from a blue print or CAD geometry file. An operator
        with little or no programming experience can successfully create a program
        and
        begin the machining of a part in a short time with minimal special training.
        Since the initial introduction of the Ultimax ® computer
        control system, we have added enhancements related to operator programming
        productivity, CAD compatibility, data processing throughput and motion control
        speed and accuracy. Our current Ultimax ® 4
        programming station features an operator console with a liquid crystal display
        screens and incorporates a personal computer (PC) platform that includes
        a
        Pentium* class processor. This upgradeable computer control product offers
        enhanced performance with ready access to cost effective computing hardware
        and
        software. Our current line of Ultimax ® metal
        cutting machine tools consists of the following three product
        lines:
 
 *VM
        Product Line*
 
 The
        VM
        product line consists of moderately priced vertical machining centers for
        the
        entry-level market. The VM line features a large work cube but, very small
        footprint that optimizes available floor space. The VM line consists of four
        models with x-axis travel of 26, 40 and 50 inches. The base price of VM machines
        ranges from $36,000 to $67,000.
 
 *VMX
        Product Line*
 
 The
        VMX
        product line consists of higher performing vertical machining centers and
        is our
        signature product line. The VMX line consists of five base models with x-axis
        travel of 24, 30, 42, 50 and 64 inches. The maximum spindle speed on these
        machines ranges from 8,000 to 15,000 rpm. The base price of VMX machines
        ranges
        from $60,000 to $135,000.
 
 *  Pentium is a
        registered trademark of Intel Corporation
  3
 
 *VTX/HTX
        Product Line*
 
 The
        VTX/HTX product line consists of our highest performing machining centers
        and is
        designed for 5-axis positioning work on complex, multisided parts. The VTX/HTX
        product line consists of three models, two vertical cutting machines and
        one
        horizontal cutting machine. The base price of the VTX/HTX machines ranges
        from
        $160,000 to $170,000.
 
 ***Computerized
        Machine Tools - Turning Centers***
 
 In
        December 2004, we introduced a new line of turning centers (lathes) designated
        as our TM Series. The TM Series is powered by Hurco’s MAX ® control
        and consists of three models with chuck sizes of 6, 8 and 10 inches. The
        TM
        Series is designed for job shops and contract manufacturers seeking efficient
        processing of small to medium lot sizes. The base price of the TM Series
        ranges
        from $40,000 to $60,000.
 
 ***Computer
        Control Systems and Software***
 
 The
        following machine tool computer control systems and software products are
        sold
        directly to end-users and/or to original equipment manufacturers.
 
 ·
              *Autobend**®*
 
 Autobend ® computer
        control systems are applied to metal bending press brake machines that form
        parts from sheet metal and steel plate. They consist of a microprocessor-based
        computer control and back gauge (an automated gauging system that determines
        where the bend will be made). We have manufactured and sold the Autobend ® product
        line since 1968. We currently market two models of our Autobend ® computer
        control systems for press brake machines, in combination with six different
        back
        gauges, through distributors to end-users as retrofit units for installation
        on
        existing or new press brake machines, as well as to original equipment
        manufacturers and importers of such equipment.
 
 ·
              *CAM
                  and Software Products*
 
 In
        addition to our standard computer control features, we offer software option
        products for two and three-dimensional programming. These products are sold
        to
        users of our computerized machine tools equipped with our Ultimax ® and/or MAX ® computer
        control systems. Our Advanced
        Velocity Control (AVC) and Adaptive
        Surface Finish (ASF), high
        performance machining software options enable a customer to increase machine
        throughput using higher cutting feed rates. The ASF software
        option facilitates optimized surface finishes on complex parts using faster
        high-resolution part data transfers.
 
 Other
        products in this line are WinMax ® ,
        a Windows * * based
        desktop programming system; DXF ,
        a data
        file transfer software option; and UltiNet Ô ,
        a
        networking software option. The DXF software
        option eliminates manual data entry of part features by transferring AutoCAD TM
drawing
        files directly into an Ultimax ® or MAX ® computer
        control, or into our desktop programming software, substantially increasing
        operator productivity. UltiNet Ô is a
        networking software option used by our customers to transfer part design
        and
        manufacturing information to computerized machine tools at high speeds and
        to
        network computerized machine tools within the customer's manufacturing
        facility.
 
 We
        also
        offer conversational part and tool dimension probing options for Ultimax ® and MAX ® based
        machines. These options permit the computerized dimensional measurement of
        machined parts and the associated cutting tools. This “on-machine” technique
        significantly improves the throughput of the measurement process when compared
        to traditional “off-machine” approaches.
  **  Windows is a
          registered trademark of Microsoft Corporation.
 4
 
 **Parts
        and Service**
 
 Our
        service organization provides installation, warranty, operator training and
        customer support for our products on a worldwide basis. In the United States,
        our principal distributors have primary responsibility for machine installation
        and warranty service and support for new product sales. We also service and
        support a substantial installed base of existing customers. Our service
        organization also sells software options, computer controls upgrades,
        accessories and replacement parts for our products. Our after-sale parts
        and
        service business helps strengthen our customer relationships and provides
        continuous information concerning the evolving requirements of
        end-users.
 
 **Marketing
        and Distribution**
 
 We
        sell
        our products through approximately 230 independent agents and distributors
        in
        approximately 50 countries throughout North America, Europe and Asia. We
        also
        have our own direct sales personnel in England, France, Germany, Italy,
        Singapore and China, which are among the world's principal machine tool
        consuming countries. During fiscal 2005, no distributor accounted for more
        than
        5% of our sales and service fees. Approximately ---89% of the worldwide demand
        for computerized machine tools and computer control systems comes from outside
        the U.S. In fiscal 2005, approximately two-thirds of our revenues were from
        overseas customers and no single end-user of our products accounted for more
        than 5% of our total sales and service fees.
 
 The
        end-users of our computerized machine tools are precision tool, die and mold
        manufacturers, independent metal parts manufacturers and specialized production
        application, or prototype shops within large manufacturing corporations.
        Industries served include aerospace, defense, medical equipment, energy,
        transportation and computer equipment.
 
 Our
        computerized machine tool software options and accessories are sold primarily
        to
        end-users. We sell our Autobend Ò computer
        control systems to original equipment manufacturers of new machine tools
        who
        integrate them with their own products prior to the sale of those products
        to
        their own customers; to retrofitters of used machine tools who integrate
        them
        with those machines as part of the retrofitting operation; and to end-users
        who
        have an installed base of machine tools, either with or without related computer
        control systems.
 
 We
        believe that advances in industrial technology and the related demand for
        automated process improvements drive demand for our products.
 
 Other
        factors affecting demand include:
 ·
              the
                  need to continuously improve productivity and shorten cycle time,
 ·
              an
                  aging machine tool installed base that will require replacement
                  with more
                  advanced and efficient technology created by shorter product life
                  cycles,
 ·
              the
                  industrial development of emerging countries in Asia and Eastern
                  Europe,
                  and
 ·
              the
                  declining supply of skilled machinists.
 
 However,
        demand for our products is highly dependent upon economic conditions and
        the
        general level of business confidence, as well as such factors as production
        capacity utilization and changes in governmental policies regarding tariffs,
        corporate taxation, and other investment incentives. By marketing and
        distributing our products on a worldwide basis, we seek to reduce the potential
        impact on our total sales and service fees of adverse changes in economic
        conditions in any particular geographic region.
 
 **Competition**
 
 We
        compete with many other companies in the United States and international
        markets. Several of our competitors are larger and have greater financial
        resources than we do. We strive to compete effectively by incorporating into
        our
        products unique, patented software and other proprietary features that offer
        enhanced productivity, greater technological capabilities and ease of use.
        We
        offer our products in a range of prices and capabilities to target a broad
        potential market. We also believe that our competitiveness is aided by our
        reputation for reliability and quality, our strong international sales and
        distribution organization and our extensive customer service
        organization.
  5
 
 In
        the
        United States and European metal cutting markets, major competitors include
        Haas
        Automation, Inc., Daewoo, Miltronics, Deckel, Maho Gildemeister Group (DMG),
        Bridgeport Machine, Hardinge Inc. and Fadal Engineering along with a large
        number of foreign manufacturers, including Okuma Machinery Works Ltd., Mori
        Seiki Co., Ltd., Masak and Matsuura Machinery Corporation.
 
 **Manufacturing**
 
 Our
        manufacturing strategy is based on global sourcing of components and a network
        of contract suppliers and sub-contractors who manufacture our products in
        accordance with our proprietary design, quality standards and cost
        specifications. This has enabled us to lower our production costs, reduce
        our
        working capital per sales dollar and increase our worldwide manufacturing
        capacity without significant incremental investment in capital equipment
        or
        personnel.
 
 Our
        computerized metal cutting machine tools are manufactured to our specifications
        primarily by our wholly owned subsidiary in Taiwan, Hurco Manufacturing Limited
        (HML), which we established in fiscal 2000. This subsidiary has increased
        our
        overall capacity and reduced or eliminated our dependence on other Taiwan
        contract manufacturers. In addition, we have a 24% ownership interest in
        a
        contract machine manufacturer in Taiwan that produces certain models included
        in
        our product line. Both of these manufacturers conduct final assembly operations
        and are supported by a network of sub-contract suppliers of components and
        sub-assemblies.
 
 We
        have a
        contract manufacturing agreement for computer control systems with another
        Taiwan based company in which we have a 35% ownership interest. This company
        manufactures our Ultimax ®, MAX ® and Autobend ® computer
        control systems to our specifications, and is engaged primarily in the sourcing
        of industry standard computer components and proprietary parts, as well as
        final
        assembly and test operations. We source one of the proprietary Ultimax ® computer
        components, printed circuit boards (PCB), from a sole domestic supplier with
        which markets its products to OEM machine builders on a global
        basis.
 
 We
        work
        closely with our wholly owned manufacturing subsidiary and our minority-owned
        affiliates to assure that their production capacity will be sufficient to
        meet
        the projected demand for our machine tool products. We continue to consider
        additional contract manufacturing resources that will increase our long-term
        capacity, and believe that, except for the sole-sourced PCB, alternative
        sources
        for standard and proprietary components are available. However, any prolonged
        interruption of operations or significant reduction in capacity or performance
        capability of any of our Taiwan-based manufacturers or the PCB supplier would
        have a material adverse effect on our operations.
 
 **Backlog**
 
 Backlog
        consists of firm orders received from customers and distributors but not
        yet
        shipped. Backlog was $10.0 million, $12.8 million and $8.2 million as of
        October
        31, 2005, 2004, and 2003, respectively. Backlog
        at October 31, 2005 will be filled in fiscal 2006. We do not believe backlog
        is
        a useful measure of past performance or indicative of future performance.
        As a
        result, we will not disclose backlog in future SEC filings.
 
 **Intellectual
        Property**
 
 We
        consider our products to be proprietary. Various features of our control
        systems
        and machine tools employ technologies covered by patents that are material
        to
        our business. We also own additional patents covering new technologies that
        we
        acquired or developed and that we are planning to ultimately incorporate
        in our
        control systems.
  6
 
 **Research
        and Development**
 
 Research
        and development expenditures for new products and significant product
        improvements, included as period operating expenses, were $2.4 million, $2.0
        million and $1.8 million in fiscal 2005, 2004, and 2003, respectively. In
        addition, we recorded expenditures of $1.2 million in 2005, $1.3 million
        in
        2004, and $679,000 in 2003 related to software development projects that
        were
        capitalized.
 
 **Employees**
 
 We
        had
        284 employees at the end of fiscal 2005, none of whom are covered by a
        collective-bargaining agreement or represented by a union. We have experienced
        no employee-generated work stoppages or disruptions and we consider our employee
        relations to be satisfactory.
 
 **Geographic
        Areas**
 
 Financial
        information about geographic areas is set forth in Note 14 to the Consolidated
        Financial Statements.
 
 We
        are
        subject to the risks of doing business on a global basis, including foreign
        currency fluctuation risks, changes in general economic and business conditions
        in the countries and markets that we serve and government actions and
        initiatives including import and export restrictions and tariffs.
 
 **Availability
        of Reports and Other Information**
 
 Our
        website is www.hurco.com .
        We make
        available on this website, free of charge, access to our annual, quarterly
        and
        current reports and other documents filed by us with the Securities and Exchange
        Commission as soon as reasonably practical after the filing date. These reports
        can also be obtained at the SEC’s Public Reference Room at 450 Fifth Street, NW
        Washington, DC 20549.
  7
  **Item
                  2.**
              **PROPERTIES**
 
 The
        following table sets forth the location, size and principal use of each of
        our
        facilities:
  Location
              
              Square
                  Footage
              
              
              Principal
                  UsesIndianapolis,
                  Indiana
              
              165,000
              (1)
              
              Corporate
                  headquarters, design andengineering,
                  product testing, computer control assembly, sales, application
                  engineering
                  and customer serviceLos
                  Angeles, California
              
              13,000
              
              
              Warehouse,
                  distribution, sales, application engineering and customer
                  serviceHigh
                  Wycombe, England
              
              12,000
              
              
              Sales,
                  application engineering andcustomer
                  serviceParis,
                  France
              
              4,800
              
              
              Sales,
                  application engineering andcustomer
                  serviceMunich,
                  Germany
              
              22,850
              
              
              Sales,
                  application engineering andcustomer
                  serviceMilan,
                  Italy
              
              4,850
              
              
              Sales,
                  application engineering andcustomer
                  serviceSingapore
              
              3,000
              
              
              Sales,
                  application engineering andcustomer
                  serviceShanghai,
                  China
              
              3,000
              
              
              Sales,
                  application engineering andcustomer
                  serviceTaichung,
                  Taiwan
              
              83,700
              
              
              Manufacturing
  
 (1)
              Approximately
                  50,000 square feet is leased to a third-party under a lease, which
                  expires
                  April 30, 2010.
 
 We
        own
        the Indianapolis facility and lease all other facilities. The leases have
        terms
        expiring at various dates ranging from March 2006 to March 2014. We believe
        that
        all of our facilities are well maintained and are adequate for our needs
        now and
        in the foreseeable future. We do not believe that we would experience any
        difficulty in replacing any of the present facilities if any of our leases
        were
        not renewed at expiration.
 
 **Item
                  3.**
              **LEGAL
                  PROCEEDINGS**
 
 We
        are
        involved in various claims and lawsuits arising in the normal course of
        business. We do not expect any of these claims, individually or in the
        aggregate, to have a material adverse effect on our consolidated financial
        position or results of operations.
  8
  
 **Item.
                  4.**
              **SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS**
 
 None.
 
 **Executive
        Officers of the Registrant**
 
 Executive
        officers are elected each year by the Board of Directors at the first board
        meeting following the Annual Meeting of Shareholders to serve during the
        ensuing
        year and until their respective successors are elected and qualified. There
        are
        no family relationships between any of our executive officers or between
        any of
        them and any of the members of the Board of Directors.
 
 The
        following information sets forth as of December 31, 2005, the name of each
        executive officer, his or her age, tenure as an officer, principal occupation
        and business experience for the last five years:
  Name
              
              Age
              
              Position(s)
                  with the CompanyMichael
                  Doar
              
              50
              
              Chairman
                  of the Board and Chief Executive OfficerJames
                  D. Fabris
              
              54
              
              President
                  and Chief Operating OfficerStephen
                  J. Alesia
              
              39
              
              Vice
                  President, Secretary, Treasurer and Chief Financial
                  OfficerDavid
                  E. Platts
              
              53
              
              Vice
                  President, TechnologySonja
                  K. McClelland
              
              34
              
              Corporate
                  Controller, Assistant Secretary
  Michael
        Doar was elected
        Chairman of the Board and Chief Executive Officer on
        November 14, 2001. Mr. Doar had held various management positions with Ingersoll
        Milling Machine Company from 1989 until 2001. Mr. Doar has been a director
        of
        Hurco since 2000.
 
 James
        D.
        Fabris was elected President and Chief Operating Officer on November 14,
        2001.
        Mr. Fabris served as Executive Vice President - Operations from November
        1997
        until his current appointment and previously served as a Vice President of
        Hurco
        since February 1995.
 
 Stephen
        J. Alesia was elected Vice President, Secretary, Treasurer and Chief Financial
        Officer in November 2004. Previously, Mr. Alesia served as Corporate Controller
        from June 1996 to November 2004 and was elected an executive officer in
        September 1996. Prior to joining Hurco, Mr. Alesia was employed for seven
        years
        by an international public accounting firm.
 
 David
        E.
        Platts has been employed by Hurco since 1982, and was elected Vice President,
        Technology in May 2000. Mr. Platts previously served as Vice President of
        Research and Development since 1989.
 
 Sonja
        K.
        McClelland has been employed by Hurco since September 1996 and was elected
        Corporate Controller, Assistant Secretary in November 2004. Ms. McClelland
        served as Corporate Accounting Manager from September 1996 to 1999, then
        as
        Division Controller for Hurco USA from September 1999 to November 2004.
  9
  **PART
        II**
 
 **Item
                  5.**
              **MARKET
                  FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
                  AND ISSUER
                  REPURCHES OF EQUITY SECURITIES**
 
 Our
        common stock is traded on the Nasdaq National Market under the symbol "HURC".
        The following table sets forth the high and low sales prices of the shares
        of
        our common stock for the periods indicated, as reported by the Nasdaq National
        Market.
 
 2005
              
              2004Fiscal
                  Quarter Ended:
              
              High
              
              Low
              
              High
              
              LowJanuary
                  31
              
              $
              19.40
              
              $
              12.65
              
              $
              5.82
              
              $
              2.52April
                  30
              
              
              19.38
              
              
              10.50
              
              
              10.70
              
              
              4.25July
                  31
              
              
              20.00
              
              
              10.25
              
              
              14.40
              
              
              7.83October
                  31
              
              
              19.09
              
              
              13.81
              
              
              17.37
              
              
              6.68
 
 At
        January 13, 2006, the closing price of our common stock on the Nasdaq National
        Market was $32.64.
  We
        do not
        currently pay dividends on our common stock and intend to continue to retain
        earnings for working capital, capital expenditures and debt
        reduction.
 
 There
        were approximately 218 holders of record of our common stock as of January
        13,
        2006.
 
 During
        the period covered by this report, we did not sell any equity securities
        that
        were not registered under the Securities Act of 1933, as amended.
  The
        disclosure under the caption “Equity Compensation Plan Information” is included
        in Item 12 of this report.
  10
  **Item
                  6.**
              **SELECTED
                  FINANCIAL DATA**
  The
        Selected Financial Data presented below have been derived from our Consolidated
        Financial Statements for the years indicated and should be read in conjunction
        with the Consolidated Financial Statements and related notes set forth elsewhere
        herein.
 Year
                      Ended October 312005
                  
                  2004
                  
                  2003
                  
                  2002
                  
                  2001Statement
                      of Operations Data:
                  
                  (In
                      thousands, except per share amounts)Sales
                      and service fees
                  
                  $
                  125,509
                  
                  $
                  99,572
                  
                  $
                  75,532
                  
                  $
                  70,486
                  
                  $
                  92,267Gross
                      profit
                  
                  
                  42,558
                  
                  
                  30,298
                  
                  
                  20,822
                  
                  
                  15,246
                  (1)
                  
                  23,262Selling,
                      general and administrative expenses
                  
                  
                  26,057
                  
                  
                  21,401
                  
                  
                  18,749
                  
                  
                  19,658
                  
                  
                  24,040Restructuring
                      expense (credit) and other expense, net
                  
                  
                  --
                  
                  
                  465
                  
                  
                  (124
                  )
                  
                  2,755
                  
                  
                  143Operating
                      income (loss)
                  
                  
                  16,501
                  
                  
                  8,432
                  
                  
                  2,197
                  
                  
                  (7,167
                  )
                  
                  (921
                  )Interest
                      expense
                  
                  
                  355
                  
                  
                  468
                  
                  
                  658
                  
                  
                  634
                  
                  
                  790License
                      fee income and litigation settlement fees, net
                  
                  
                  --
                  
                  
                  --
                  
                  
                  --
                  
                  
                  163
                  
                  
                  723Net
                      income (loss)
                  
                  
                  16,443
                  
                  
                  6,269
                  
                  
                  462
                  
                  
                  (8,263
                  )
                  
                  (1,597
                  )Earnings
                      (loss) per common share-diluted
                  
                  
                  2.60
                  
                  
                  1.04
                  
                  
                  0.08
                  
                  
                  (1.48
                  )
                  
                  (.28
                  )Weighted
                      average common shares outstanding-diluted
                  
                  
                  6,336
                  
                  
                  6,026
                  
                  
                  5,582
                  
                  
                  5,583
                  
                  
                  5,670
 (1)
                Includes
                    $1,083 of inventory write-down
                    provision.
  As
                    of October 312005
                
                2004
                
                2003
                
                2002
                
                2001Balance
                    Sheet Data:
                
                (Dollars
                    in thousands)Current
                    assets
                
                $
                73,818
                
                $
                56,472
                
                $
                42,390
                
                $
                41,535
                
                $
                49,510Current
                    liabilities
                
                
                30,761
                
                
                30,125
                
                
                20,154
                
                
                21,185
                
                
                18,217Working
                    capital
                
                
                43,057
                
                
                26,347
                
                
                22,236
                
                
                20,350
                
                
                31,293Current
                    ratio
                
                
                2.4
                
                
                1.9
                
                
                2.1
                
                
                2.0
                
                
                2.7Total
                    assets
                
                
                94,114
                
                
                73,446
                
                
                57,958
                
                
                57,152
                
                
                66,217Non-current
                    liabilities
                
                
                4,409
                
                
                4,866
                
                
                9,063
                
                
                7,950
                
                
                12,532Total
                    debt
                
                
                4,136
                
                
                4,600
                
                
                9,222
                
                
                8,885
                
                
                12,000Shareholders’
                    equity
                
                
                58,944
                
                
                38,455
                
                
                28,741
                
                
                28,017
                
                
                35,468
 11
 **Item
                  7.**
              **MANAGEMENT'S
                  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                  OPERATIONS**
 
 
 EXECUTIVE
        OVERVIEW
 
 Hurco
        Companies, Inc. is an industrial technology company operating in a single
        segment. We design and produce computerized machine tools, featuring our
        proprietary computer control systems and software, for sale through our own
        distribution network to the worldwide metal cutting market. We also provide
        software options, control upgrades, accessories and replacement parts for
        our
        products, as well as customer service and training support.
 
 Our
        computerized metal cutting machine tools are manufactured in Taiwan to our
        specifications by our wholly owned subsidiary, Hurco Manufacturing Limited
        (HML), and an affiliate. We sell our products through approximately 230
        independent agents and distributors in approximately 50 countries throughout
        North America, Europe and Asia. We also have our own direct sales and service
        organizations in England, France, Germany, Italy, Singapore and China.
 
 The
        primary drivers of our improved performance in the last three years are improved
        worldwide demand for our products, our expanded product line and the impact
        of
        changes in foreign currency.
  The
        machine tool industry is highly cyclical and changes in demand can occur
        abruptly. There was a significant decline in global demand that continued
        through the fourth quarter of fiscal 2003. During the downturn, we took actions
        to discontinue the production and sale of underperforming products, refocused
        on
        our core product lines and significantly reduced our operating costs. We
        also
        began introducing new product models in late fiscal 2002 and have continued
        this
        process since then. Our new models, together with an increase in worldwide
        demand for machine tools, are largely responsible for the continuing increase
        in
        our sales during the last two fiscal years.
 
 Approximately
        89% of worldwide demand for machine tools comes from outside the United States.
        During fiscal 2004 and 2005, approximately two-thirds of our sales and service
        fees were attributable to customers located abroad. Our sales to foreign
        customers are denominated, and payments by those customers are made, in the
        prevailing currencies—primarily the Euro and Pound Sterling—in the countries in
        which those customers are located, and our product costs are incurred and
        paid
        primarily in the New Taiwan Dollar and U.S. Dollars. Changes in currency
        exchange rates can have a material effect on our operating results as reported
        under generally accepted accounting principles. For example, when a foreign
        currency increases in value relative to the U.S. Dollar, sales made (and
        expenses incurred) in that currency, when translated to U.S. Dollars for
        reporting in our financial statements, are higher than would be the case
        when
        that currency has a lower value relative to the U.S. Dollar. In our comparison
        of period-to-period results, we discuss not only the increases or decreases
        in
        those results as reported in our financial statements (which reflect translation
        to U.S. Dollars at prevailing exchange rates), but also the effect that changes
        in exchange rates had on those results.
 
 Our
        high
        levels of foreign manufacturing and sales also subject us to cash flow risks
        due
        to fluctuating currency exchange rates. We seek to mitigate those risks through
        the use of various hedging instruments - principally foreign currency forward
        exchange contracts.
 
 The
        volatility of demand for machine tools can significantly impact our working
        capital requirements and, therefore, our cash flow from operations and our
        operating profits. Because our products are manufactured in Taiwan,
        manufacturing and ocean transportation lead times require that we schedule
        machine tool production based on forecasts of customer orders for a future
        period of four or five months. We continually monitor order activity levels
        and
        adjust future production schedules to reflect changes in demand, but a
        significant unexpected  decline
        in customer orders from forecasted levels can temporarily increase our finished
        goods inventories and our use of working capital.
  12
 
 **Results
        of Operations**
 
 The
        following table presents, for the fiscal years indicated, selected items
        from
        the Consolidated Statements of Income expressed as a percentage of worldwide
        sales and service fees and the year-to-year percentage changes in the dollar
        amounts of those items.
 
 Percentage
                  of Revenues
              
              Year-to-Year
                  % Change2005
              
              2004
              
              2003
              
              Increase
                  (Decrease)05
                  vs. 04
              
              04
                  vs. 03Sales
                  and service fees
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
              
              26.0
              %
              
              31.8
              %Gross
                  profit
              
              
              33.9
              %
              
              30.4
              %
              
              27.6
              %
              
              40.5
              %
              
              45.5
              %Selling,
                  general and Administrative expenses
              
              
              20.7
              %
              
              21.5
              %
              
              24.8
              %
              
              21.8
              %
              
              14.1
              %Restructuring
                  expense and Other expenses, net
              
              
              --
              
              
              .05
              %
              
              (0.2
              %)
              
              N/A
              
              
              N/AOperating
                  income
              
              
              13.1
              %
              
              8.50
              %
              
              2.9
              %
              
              95.7
              %
              
              283.8
              %Interest
                  expense
              
              
              0.3
              %
              
              .05
              %
              
              0.9
              %
              
              (24.1
              %)
              
              (28.9
              %)Net
                  income
              
              
              13.1
              %
              
              6.30
              %
              
              0.6
              %
              
              162.3
              %
              
              1256.9
              %
 
 **Fiscal
        2005 Compared With Fiscal 2004**
 
 *Sales
        and Service Fees*  Sales
        and
        service fees for fiscal 2005 were the highest in our 37-year history, totaling
        $125.5 million, an increase of $25.9 million, or 26%, over fiscal 2004, of
        which
        $23.4 million was attributable to operational growth and approximately $2.5
        million was due to the effects of translating foreign sales to U.S. Dollars
        for
        financial reporting purposes. Computerized machine tool sales, which also
        were
        the highest in our history, totaled $107.3 million, an increase of 28% from
        the
        $83.6 million recorded in 2004, primarily driven by strong worldwide demand
        for
        our existing products. Approximately $6 million, or 25%, of the increase
        in
        sales of computerized machine tools was the result of sales of our new lathe
        machine line, which was introduced in December 2004.
 
 **Net
        Sales and Service Fees by Geographic Region**
 
 The
        following table sets forth net sales and service fees by geographic region
        for
        the years ended October 31, 2005 and 2004 (in thousands):
 **October
                    31,**
                
                **Increase****2005**
                
                **2004**
                
                **Amount**
                
                **%**Americas
                
                $
                43,194
                
                
                34.4
                %
                $
                32,423
                
                
                32.5
                %
                $
                10,771
                
                
                33
                %Europe
                
                
                75,225
                
                
                59.9
                %
                
                60,395
                
                
                60.7
                %
                
                14,830
                
                
                25
                %Asia
                    Pacific
                
                
                7,090
                
                
                5.7
                %
                
                6,754
                
                
                6.8
                %
                
                336
                
                
                5
                %Total
                
                $
                125,509
                
                
                100.0
                %
                $
                99,572
                
                
                100.0
                %
                $
                25,937
                
                
                26
                %
 In
        the
        Americas, sales and service fees increased $10.7 million, or 33%, due primarily
        to the growth of our VMX signature product line and sales of the lathe product
        line. Shipments of VMX units increased 35% in fiscal 2005 compared to fiscal
        2004 while shipments of our more moderately priced VM product line increased
        6%
        during that same period. Unit shipments of vertical machining centers (which
        exclude lathes) increased approximately 15% in fiscal 2005 compared to 9%
        for
        similar products in the United States as reported by the Association for
        Manufacturing Technology.
  In
        Europe, our sales and service fees increased by $14.8 million, or 25%, as
        a
        result of increased unit sales and the favorable effect of stronger European
        currencies. Approximately $2.3 million, or 16%, of the increase in our sales
        and
        service fees was attributable to changes in currency exchange rates. The
        increase in sales and service fees was consistent in all of our European
        markets.
  13
 
 Sales
        and
        service fees in the Asia Pacific region were not significantly affected by
        currency rates, but did reflect improved activity in Asian markets.
 
 **Net
        Sales and Service Fees by Product Category**
 
 The
        following table sets forth net sales and service fees by product category
        for
        years ended October 31, 2005 and 2004 (in thousands):
 
 **October
                  31,**
              
              **Increase****2005**
              
              **2004**
              
              **Amount**
              
              **%**Computerized
                  Machine Tools
              
              $
              107,313
              
              
              85.5
              %
              $
              83,663
              
              
              84.0
              %
              $
              23,650
              
              
              28
              %Service
                  Fees, Parts and Other
              
              
              18,196
              
              
              14.5
              %
              
              15,909
              
              
              16.0
              %
              
              2,287
              
              
              14
              %Total
              
              $
              125,509
              
              
              100.0
              %
              $
              99,572
              
              
              100.0
              %
              $
              25,937
              
              
              26
              %
 
 Sales
        of
        computerized machine tools totaled $107.3 million in fiscal 2005, an increase
        of
        $23.7 million, or 28%, of which $ 2.5 million was attributable to the favorable
        effects of currency translation. Unit shipments of computerized machine tools
        increased 26%, fueled by a 19% increase in shipments of products in the VMX
        product line and the release of the lathe product line. The average net selling
        price per unit of computerized machine tool models increased 2% in fiscal
        2005
        compared to fiscal 2004, as a result of a greater number of units of higher
        priced VMX models in the total product mix. The average net selling price
        per
        unit, when measured in local currencies, was substantially unchanged.
 
 *Orders
        and Backlog* .
        New
        order bookings for fiscal 2005 totaled $122.9 million, an increase of $19.4
        million, or 19%, as compared to $103.5 million recorded in fiscal 2004. The
        increase in orders was attributable primarily to the VMX and lathe product
        lines. Unit orders for the VMX product line increased by 15% in fiscal 2005
        compared to the prior year, while unit orders of the VM product increased
        3%
        during that same period. Orders were strong at all Hurco locations in fiscal
        2005 and unit orders increased 18%, 15% and 13% in North America, Europe
        and
        Asia Pacific, respectively. Approximately $2.4 million, or 13%, of the increase
        was attributable to changes in currency exchange rates. Backlog was $10.0
        million at October 31, 2005 compared to $12.8 million at October 31, 2004.
        We do
        not believe backlog is a useful measure of past performance or indicative
        of
        future performance. As a result, we will not disclose backlog in future SEC
        filings.
 
 *Gross
        Margin* .
        Gross
        margin for fiscal 2005 was 33.9%, an increase over the 30.4% margin realized
        in
        the corresponding 2004 period, due principally to the increased sales
        volume.
 
 *Operating
        Expenses* .
        Selling, general and administrative expenses for fiscal 2005 of $26.1 million
        increased $4.7 million, or 21.8%, from those of fiscal 2004. The increase
        was
        primarily due to a $1.8 million increase in sales and marketing expenditures,
        a
        $1.6 million increase in general and administrative expenses, a $400,000
        increase in product development spending, a $500,000 increase in European
        agents
        commissions and a $300,000 increase from the translation of foreign currencies
        to U.S. Dollars for financial reporting purposes.
 
 *Operating
        Income* .
        Operating income for fiscal 2005 totaled $16.5 million, or 13.1% of sales,
        compared to $8.4 million or 8.5% of sales, in the prior year. Operating income
        in fiscal 2004 was net of a $465,000 severance charge.
  14
 
 *Other
        Income (Expense)* .
        Other
        income (expense), net in fiscal 2005 relates primarily to currency exchange
        losses on inter-company receivables and payables denominated in foreign
        currencies, net of gains or losses on related forward contracts.
 
 *Provision
        (Benefit) for Income Taxes* .  At
        the
        end of fiscal 2004, we had deferred tax assets of approximately $7.0 million
        that were primarily attributable to net operating losses and tax credits
        in the
        United States and certain foreign jurisdictions.  Because of the highly
        cyclical nature of our industry, competitive pressures that could impact
        pricing
        and the risks associated with new product introductions, we believed there
        was
        uncertainty as to the future realization of the benefits from these deferred
        tax
        assets and, therefore, we maintained a 100% valuation allowance against those
        assets.
 
 During
        fiscal 2005, due to the substantial improvement in our operating results,
        especially in the fourth quarter of the year, we utilized approximately $3.7
        million of the net operating loss carryforwards, all of which were subject
        to a
        valuation allowance.  After examining a number of factors, including our
        operating results for fiscal 2005, and particularly the fourth quarter of
        the
        year, which exceeded our internal projections, and our projections of near
        term
        future operating results, we determined that it was more likely than not
        that we
        would ultimately realize the benefits of all our remaining domestic deferred
        tax
        assets and a significant portion of our foreign deferred tax assets.
 Accordingly, we reduced our remaining valuation allowance to $221,000, all
        of which related to foreign net operating losses for which there remains
        uncertainty as to the future realization of the related tax
        benefits.
 
 As
        a
        result of our utilization in fiscal 2005 of net operating losses against
        which
        we had previously maintained a 100% valuation allowance and the reduction
        of all
        but $221,000 of the valuation allowance on our remaining deferred tax assets
        at
        the end of fiscal 2005, we recorded a tax benefit of approximately $2.3 million,
        which is net of approximately $1.1 million recorded as additional
        paid-in-capital for the tax effects of the exercise by employees of stock
        options during both fiscal 2005 and 2004. The fiscal 2005 income tax provision,
        excluding the recorded tax benefit of $2.3 million, was $2.0 million compared
        to
        $1.3 million in fiscal 2004.
 
 *Net
        Income.* Net
        income for fiscal 2005 was $16.4 million, or $2.60 per share, compared to
        $6.3
        million, or $1.04 per share in the prior year. The improvement in net income
        was
        primarily due to a substantial increase in sales of our computerized machine
        tools, improved gross margin and a favorable tax benefit partially offset
        by an
        increase in operating expenses.
 
 **Fiscal
        2004 Compared With Fiscal 2003**
 
 Net
        income for fiscal 2004 was $6.3 million, or $1.04 per share, compared to
        $462,000, or $.08 per share in the prior year. The improvement in net income
        was
        primarily due to a substantial increase in sales of our computerized machine
        tools, which was attributable to demand for our newer models introduced in
        2003
        and 2004, and improving market conditions, and also reflected the benefit
        of
        stronger European currencies in relation to the U.S. Dollar.
 
 We
        introduced the VM product line in the fourth quarter of fiscal 2002 to improve
        our competitiveness in the entry-level machining center market. The VM product
        line has been successful in both the domestic and international markets.
        In the
        United States, we believe we have an approximate 15% market share in the
        entry-level machining center market. In fiscal 2004 and 2003, we shipped
        522 and
        310 VM units, respectively, worldwide, which resulted in approximately $18
        million and $11 million, respectively, of incremental computerized machine
        tool
        sales.
 
 Our
        operating results for fiscal 2004 were favorably impacted by further
        strengthening of foreign currencies, particularly the Euro, in relation to
        the
        U.S. Dollar, when translating foreign sales and service fees into U.S. Dollars
        for financial reporting purposes. As noted in the following table, approximately
        61% of our net sales and service fees in fiscal 2004 were derived from European
        markets. The weighted average exchange rate between the U.S. Dollar and the
        Euro
        during fiscal 2004 was $1.2248, as compared to $1.0981 for fiscal 2003, an
        increase of 11.5%.
  15
  **Net
        Sales and Service Fees by Geographic Region**
 
 The
        following tables set forth net sales and service fees by geographic region
        for
        the years ended October 31, 2004 and 2003 (in thousands):
 
 
 **October
                  31,**
              
              **Increase****2004**
              
              **2003**
              
              **Amount**
              
              **%**Americas
              
              $
              32,423
              
              
              32.5
              %
              $
              24,313
              
              
              32.2
              %
              $
              8,110
              
              
              33
              %Europe
              
              
              60,395
              
              
              60.7
              %
              
              48,277
              
              
              63.9
              %
              
              12,118
              
              
              25
              %Asia
                  Pacific
              
              
              6,754
              
              
              6.8
              %
              
              2,942
              
              
              3.9
              %
              
              3,812
              
              
              130
              %Total
              
              $
              99,572
              
              
              100.0
              %
              $
              75,532
              
              
              100.0
              %
              $
              24,040
              
              
              32
              %
 
 Total
        sales and service fees on a worldwide basis were $99.6 million in fiscal
        2004,
        compared to $75.5 million in the prior fiscal year, a $24.0 million, or 32%,
        increase. However, $6.4 million, or 27%, of the increase in total sales and
        service fees was due to changes in currency exchange rates.
 
 In
        the
        Americas, sales and service fees increased $8.1 million, or 33%, due primarily
        to the continued growth of the VM product line. Shipments of VM units increased
        61% in fiscal 2004 compared to fiscal 2003 while shipments of our higher
        priced
        VMX product line increased 29% during that same period. The increase in our
        sales and service fees in the United States reflects a 73% increase in unit
        orders for our vertical machining centers in fiscal 2004 compared to fiscal
        2003. That percentage increase was substantially greater than the industry-wide
        increase of 46% for unit orders for vertical machining centers in the United
        States, as reported by The Association for Manufacturing Technology.
 
 In
        Europe, our sales and service fees increased by $12.1 million, or 25%, as
        a
        result of increased unit sales and the favorable effect of stronger European
        currencies. Approximately $6.3 million, or 52%, of the increase in our sales
        and
        service fees was attributable to changes in currency exchange
        rates.
 
 Sales
        and
        service fees in the Asia Pacific region were not significantly affected by
        currency rates, but did reflect improved activity in Asian markets.
 
 **Net
        Sales and Service Fees by Product Category**
 
 The
        following table sets forth net sales and service fees by product category
        for
        years ended October 31, 2004 and 2003 (in thousands):
 
 **October
                  31,**
              
              **Increase****2004**
              
              **2003**
              
              **Amount**
              
              **%**Computerized
                  Machine Tools
              
              $
              83,663
              
              
              84.0
              %
              $
              60,977
              
              
              80.7
              %
              $
              22,686
              
              
              37
              %Service
                  Fees, Parts and Other
              
              
              15,909
              
              
              16.0
              %
              
              14,555
              
              
              19.3
              %
              
              1,354
              
              
              9
              %Total
              
              $
              99,572
              
              
              100.0
              %
              $
              75,532
              
              
              100.0
              %
              $
              24,040
              
              
              32
              %
 
 Hurco
        established new records for computerized machine tool sales and new order
        bookings in fiscal 2004. Sales of computerized machine tools totaled $83.7
        million, an increase of $22.7 million, or 37%, of which $ 5.7 million was
        attributable to the favorable effects of currency translation. Unit shipments
        of
        computerized machine tools increased 35%, fueled by a 68% increase in shipments
        of products in the VM product line. The average net selling price per unit
        of
        computerized machine tool models was substantially unchanged in fiscal 2004
        compared to fiscal 2003, notwithstanding the disproportionate increase in
        shipments of our lower-priced VM models, due primarily to the beneficial
        effects
        of currency translation. However, the average net selling price per unit,
        measured in local currencies, declined approximately 7.0% due primarily to
        the
        greater portion of those VM products in the total product mix.
  16
 
 New
        order
        bookings for fiscal 2004 totaled $103.5, an increase of $25.7 million, or
        33%,
        as compared to $77.9 million recorded in fiscal 2003. Approximately $6.3
        million, or 25% of the increase, was attributable to changes in currency
        exchange rates. The increase in constant U.S. Dollars was attributable primarily
        to orders for the VM product line. Unit orders for the VM product line increased
        by 83% in fiscal 2004 compared to the prior year, while unit orders of the
        VMX
        product increased 18% during that same period. Backlog was $12.8 million
        at
        October 31, 2004 compared to $ 8.2 million at October 31, 2003.
 
 Gross
        margin for fiscal 2004 was 30.4%, an increase over the 27.6% margin realized
        in
        the corresponding 2003 period, due principally to increased sales volume
        and the
        favorable effects of stronger European currencies.
 
 Selling,
        general and administrative expenses for fiscal 2004 of $21.4 million increased
        $2.7 million, or 14.1%, from those of the corresponding 2003 period primarily
        due to currency translation effects, increased commissions to European selling
        agents associated with the increase in European sales and increased sales
        and
        marketing expenditures.
 
 Operating
        income for fiscal 2004 totaled $8.4 million, or 8.5% of sales, compared to
        $2.2
        million, or 2.9% of sales, in the prior year. Operating income in fiscal
        2004
        was net of a $465,000 one-time severance charge.
 
 Variable
        option expense of $322,000 is related to certain stock options, which were
        subject to variable plan accounting as described in Note 8 to the Consolidated
        Financial Statements. These stock options have all been exercised so no
        additional variable option expense is expected.
 
 Other
        income (expense), net, in fiscal 2004 includes currency exchange losses on
        inter-company receivables and payables denominated in foreign currencies,
        net of
        gains or losses on related forward contracts, profits of subsidiaries accounted
        for using the equity method, and other non-operating income and expense items.
 
 The
        provision for income taxes is related to the earnings of two foreign
        subsidiaries. In the United States and certain other foreign jurisdictions,
        we
        have net operating loss carryforwards for which we have a 100% valuation
        reserve
        at October 31, 2004 because the significant size of those carry forwards
        relative to our current rate of earnings creates uncertainty about the
        realization of the tax benefits in future years. The provision for income
        tax
        increased in fiscal 2004 solely because of increased earnings from our taxable
        foreign subsidiaries.
 
 **Liquidity
        and Capital Resources**
 
 At
        October 31, 2005, we had cash and cash equivalents of $17.6 million compared
        to
        $8.5 million at October 31, 2004. Cash generated from operations totaled
        $12.0
        million and $6.8 million at October 31, 2005 and 2004, respectively. We also
        generated cash of approximately $800,000 and $2.1 million in fiscal 2005
        and
        2004, respectively, from the sale of common stock to employees upon the exercise
        of common stock options.
 
 Working
        capital, excluding cash and short-term debt, was $25.6 million at October
        31,
        2005 compared to $18.1 million at October 31, 2004. Accounts receivable
        increased by $2.8 million in fiscal 2005 due to the increase in sales and
        deferred tax assets increased by $3.0 due to the reversal of the valuation
        allowance. We expect our operating working capital requirements to increase
        in
        fiscal 2006 as our sales and service fees increase. We expect to fund any
        such
        increase with cash flow from operations and borrowings under our bank credit
        facilities.
  17
 
 Capital
        investments during the year consisted of an integrated computer system and
        normal expenditures for software development projects and purchases of
        equipment. We funded these expenditures with cash flow from
        operations.
 
 Total
        debt at October 31, 2005 was $4.1 million representing 7% of total
        capitalization, which aggregated $63.1 million, compared to $4.6 million,
        or 11%
        of total capitalization, at October 31, 2004. We believe that cash flow from
        operations and borrowings available to us under our credit facilities will
        be
        sufficient to meet our anticipated cash requirements in fiscal
        2006.
 
 **Contractual
        Obligations and Commitments**
 
 The
        following is a table of contractual obligations and commitments as of October
        31, 2005 (all amounts in thousands):
 **Payments
                  Due by Period**Total
              
              Less
                  than 1 Year
              
              1-3
                  Years
              
              3-5
                  Years
              
              More
                  than 5 YearsLong-Term
                  Debt
              
              $
              4,136
              
              $
              126
              
              $
              4,010
              
              $
              --
              
              $
              --Operating
                  Leases
              
              
              4,201
              
              
              1,543
              
              
              2,173
              
              
              291
              
              
              194Deferred
                  Credits and Other
              
              
              399
              
              
              --
              
              
              --
              
              
              --
              
              
              399Total
              
              $
              8,736
              
              $
              1,669
              
              $
              6,183
              
              $
              291
              
              $
              593
 
 In
        addition to the contractual obligations and commitments disclosed above,
        we also
        have a variety of other obligations for the procurement of materials and
        services, none of which subject us to any material non-cancellable commitments.
        While some of these obligations arise under long-term supply agreements,
        we are
        not committed under these agreements to accept or pay for requirements that
        are
        not needed to meet our production needs. We have no material minimum purchase
        commitments or “take-or-pay” type agreements or arrangements.
 
 With
        respect to capital expenditures, we expect capital spending in fiscal 2006,
        exclusive of capitalized software development costs, to be approximately
        $2.0
        million, which includes discretionary items.
 
 **Off
        Balance Sheet Arrangements**
 
 From
        time
        to time, our European subsidiaries guarantee third party lease financing
        residuals in connection with the sale of certain machines in Europe. At October
        31, 2005, we had outstanding 38 third party guarantees totaling approximately
        $1.8 million. A retention of title clause allows our European subsidiaries
        to
        repossess a machine that is the subject of a lease guarantee if the customer
        defaults on its lease. We believe that the proceeds obtained from liquidation
        of
        the machine would cover any payments required by the guarantee.
 
 **Critical
        Accounting Policies**
 
 Our
        accounting policies, including those described below, require management
        to make
        significant estimates and assumptions using information available at the
        time
        the estimates are made. Such estimates and assumptions significantly affect
        various reported amounts of assets, liabilities, revenues and expenses. If
        our
        future experience differs materially from these estimates and assumptions,
        our
        results of operations and financial condition could be affected.
 
 *Revenue
        Recognition -* We
        recognize revenue from sales of our machine tool systems upon delivery of
        the
        product to the customer, which is normally at the time of shipment, because
        persuasive evidence of an arrangement exists, delivery has occurred, the
        selling
        price is fixed and determinable and collectibility is reasonably assured.
        In
        certain foreign locations, we retain title after shipment under a “retention of
        title” clause solely to protect collectibility. The retention of title is
        similar to UCC filings in the United States and provides the creditor with
        additional rights to the machine if the customer fails to pay. Revenue
        recognition at the time of shipment is appropriate in this instance as long
        as
        all risks of ownership have passed to the buyer. Our computerized machine
        tools
        are general-purpose computer controlled machine tools that are typically
        used in
        stand-alone operations. Transfer of ownership and risk of loss are not
        contingent upon contractual customer acceptance. Prior to shipment, we test
        each
        machine to ensure the machine’s compliance with standard operating
        specifications as listed in our sales literature.
  18
 
 Depending
        upon geographic location, after shipment a machine may be installed at the
        customer’s facilities by a distributor, independent contractor or Hurco service
        technician. In most instances where a machine is sold through a distributor,
        Hurco has no installation involvement. If sales are direct or through sales
        agents, Hurco will typically complete the machine installation, which consists
        of the reassembly of certain parts that were removed for shipping and the
        re-testing of the machine to ensure that it is performing within the standard
        specifications. We consider the machine installation process to be
        inconsequential and perfunctory.
 
 Service
        fees from maintenance contracts are deferred and recognized in earnings on
        a pro
        rata basis over the term of the contract. Sales related to software products
        are
        recognized when shipped in conformity with American Institute of Certified
        Public Accountants’ Statement of Position 97-2 Software Revenue Recognition. The
        software does not require production, modification or customization and at
        the
        time of shipment persuasive evidence of an arrangement exists, delivery has
        occurred, the selling price is fixed and determinable and collectibility
        is
        reasonably assured.
 
 *Inventories
        -* We
        determine at each balance sheet date how much, if any, of our inventory may
        ultimately prove to be unsaleable or unsaleable at its carrying cost. Reserves
        are established to effectively adjust the carrying value of such inventory
        to
        net realizable value. To determine the appropriate level of valuation reserves,
        we evaluate current stock levels in relation to historical and expected patterns
        of demand for all of our products. Management evaluates the need for changes
        to
        valuation reserves based on market conditions, competitive offerings and
        other
        factors on a regular basis.
 
 *Deferred
        Tax Asset Valuation* - As of
        October 31, 2005, we have deferred tax assets of $4.6 million for which we
        have
        recorded $221,000 valuation allowance. These deferred tax assets relate
        primarily to net operating loss carryforwards in the United States and certain
        foreign jurisdictions, as well as federal business tax credits carried forward
        in the United States. The benefit of some of these carryforwards expires
        at
        certain dates and utilization of certain others is limited to specific amounts
        each year. Realization of those benefits is entirely dependent upon generating
        sufficient future taxable earnings in the specific tax jurisdictions before
        the
        carryforwards expire. We regularly evaluate the realization of these benefits
        to
        determine if it is more likely than not that we will realize all of our net
        deferred tax assets.
 
 *Capitalized
        Software Development Costs* - Costs
        incurred to develop new computer software products and significant enhancements
        to software features of existing products are capitalized as required by
        SFAS
        No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased, or
        Otherwise Marketed”, and amortized over the estimated product life of the
        related software. The determination as to when in the product development
        cycle
        technological feasibility has been established, and the expected product
        life,
        require judgments and estimates by management and can be affected by
        technological developments, innovations by competitors and changes in market
        conditions affecting demand. We capitalized $1.2 million in fiscal 2005,
        $1.3
        million in fiscal 2004, and $679,000 in fiscal 2003 related to software
        development projects. At October 31, 2005 we have an asset of $3.7 million
        for
        capitalized software development projects, a significant portion of which
        relates to projects currently in process and subject to development risk
        and
        market acceptance. We periodically review the carrying values of these assets
        and make judgments as to ultimate realization considering the above-mentioned
        risk factors.
 
 *Derivative
        Financial Instruments* -
        Critical aspects of our accounting policy for derivative financial instruments
        include conditions that require that critical terms of a hedging instrument
        are
        essentially the same as a hedged forecasted transaction. Another important
        element of our policy demands that formal documentation be maintained as
        required by the Statement of Financial Accounting Standards (SFAS) No. 133,
        “Accounting for Derivative Instruments and Hedging Activities.” Failure to
        comply with these conditions would result in a requirement to recognize changes
        in market value of hedge instruments in earnings. We routinely monitor
        significant estimates, assumptions, and judgments associated with derivative
        instruments, and compliance with formal documentation
        requirements.
  19
 
 *Stock
        Compensation* - We
        apply Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to
        Employees” (APB No. 25), and related interpretations in accounting for the
        plans, and, except for certain shares subject to variable plan accounting,
        no
        compensation expense has been recognized for stock options issued under the
        plans. For companies electing to continue the use of APB No. 25, SFAS No.
        123R
“Accounting for Stock-Based Compensation”, requires pro forma disclosures
        determined through the use of an option-pricing model as if the provisions
        of
        SFAS No. 123R had been adopted.
 
 We
        intend
        to adopt SFAS 123R on November 1, 2005 using the prospective method. We believe
        that the adoption of SFAS 123R will not have a material effect on the
        Consolidated Financial Statements.
 
 **Item
                  7a.**
              **QUANTITATIVE
                  AND QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISKS**
 
 **Interest
        Rate Risk**
 
 We
        had no
        borrowings outstanding under our bank credit facilities at October 31, 2005
        and
        have not borrowed from our bank credit facilities since February 2005. Our
        only
        debt at October 31, 2005 is a first mortgage loan with a fixed interest rate
        of
        73⁄8%. As a result, a one percentage point (1%) increase in our variable borrowing
        interest rate would have had an immaterial impact on our fiscal 2005 results.
        Interest expense would have increased by approximately $25,000 in fiscal
        2004 as
        a result of the same 1% increase in interest rates. Note 4 of the Consolidated
        Financial Statements sets forth the interest rates related to our current
        credit
        facilities.
  20
  **Foreign
        Currency Exchange Risk**
 
 In
        fiscal
        2005, approximately two-thirds of our sales and service fees, including export
        sales, were derived from foreign markets. All of our computerized machine
        tools
        and computer control systems, as well as certain proprietary service parts,
        are
        sourced by our U.S.-based engineering and manufacturing division and re-invoiced
        to our foreign sales and service subsidiaries, primarily in their functional
        currencies.
 
 Our
        products are sourced from foreign suppliers or built to our specifications
        by
        either our wholly owned subsidiary in Taiwan, or overseas contract
        manufacturers. These purchases are predominantly in foreign currencies and
        in
        some cases our arrangements with these suppliers include foreign currency
        risk
        sharing agreements, which reduce (but do not eliminate) the effects of currency
        fluctuations on product costs. The predominant portion of our exchange rate
        risk
        associated with product purchases relates to the New Taiwan Dollar.
 
 We
        enter
        into foreign currency forward exchange contracts from time to time to hedge
        the
        cash flow risk related to forecasted inter-company sales and forecasted
        inter-company and third party purchases denominated in, or based on, foreign
        currencies (primarily the Euro, Pound Sterling and New Taiwan Dollar). We
        also
        enter into foreign currency forward exchange contracts to protect against
        the
        effects of foreign currency fluctuations on receivables and payables denominated
        in foreign currencies. We do not speculate in the financial markets and,
        therefore, do not enter into these contracts for trading purposes.
 
 Forward
        contracts for the sale or purchase of foreign currencies as of October 31,
        2005
        which are designated as cash flow hedges under SFAS No. 133 were as
        follows:
 Notional
                    Amount
                
                Weighted
                    Avg.
                
                Contract
                    Amount at Forward Rates inU.S.
                    DollarsForwardContracts
                
                in
                    ForeignCurrency
                
                ForwardRate
                
                ContractDate
                
                October
                    31,2005
                
                MaturityDates**Sale
                    Contracts:**Euro
                
                
                23,650,000
                
                $
                1.2976
                
                
                30,688,240
                
                
                28,645,047
                
                
                Nov
                    2005-Oct 2006Sterling
                
                
                2,550,000
                
                $
                1.8120
                
                
                4,620,600
                
                
                4,513,863
                
                
                Nov
                    2005-Aug 2006**Purchase
                    Contracts:**New
                    Taiwan Dollar
                
                
                770,000,000
                
                
                31.54*
                
                
                24,413,443
                
                
                23,295,292
                
                
                Nov
                    2005-Oct 2006
 *
                  NT
                      Dollars per U.S. Dollar
  
 Forward
        contracts for the sale of foreign currencies as of October 31, 2005 which
        were
        entered into to protect against the effects of foreign currency fluctuations
        on
        receivables and payables denominated in foreign currencies were as
        follows:
  Notional
                  Amount
              
              Weighted
                  Avg.
              
              Contract
                  Amount at Forward Rates inU.S.
                  DollarsForwardContracts
              
              in
                  ForeignCurrency
              
              ForwardRate
              
              ContractDate
              
              October
                  31,2005
              
              MaturityDates**Sale
                  Contracts:**Euro
              
              
              6,692,237
              
              $
              1.2054
              
              
              8,066,822
              
              
              8,042,396
              
              
              Nov
                  2005-Dec 2005Singapore
                  Dollar
              
              
              6,998,334
              
              $
              .5998
              
              
              4,198,167
              
              
              4,154,353
              
              
              Nov
                  2005-Apr 2006Sterling
              
              
              613,635
              
              $
              1.7827
              
              
              1,093,927
              
              
              1,086,008
              
              
              Nov
                  2005-Dec 2005**Purchase
                  Contracts:**New
                  Taiwan Dollar
              
              
              254,000,000
              
              
              33.17*
              
              
              7,657,522
              
              
              7,578,810
              
              
              Nov
                  2005-Dec 2005
 *
              NT
                  Dollars per U.S. Dollar
  21
  **Item
                  8.**
              **FINANCIAL
                  STATEMENTS AND SUPPLEMENTARY
                  DATA**
 
 
 **Report
        of Independent Registered Public Accounting Firm**
 
 
 To **** the
        Shareholders and
 Board
        of
        Directors
 of
        Hurco
        Companies, Inc. :
 
 
 In
        our
        opinion, the consolidated financial statements listed in the accompanying
        index  appearing
        under Item 15(a)(1) present fairly, in all material respects, the financial
        position of Hurco Companies, Inc. and its subsidiaries at October 31, 2005
        and
        2004, and the results of their **** operations
        and their **** cash
        flows for each of the three years in the period ended October 31, 2005 in
        conformity with accounting principles generally accepted in the United States
        of
        America. In addition, in our opinion, the financial statement schedule listed
        in
        the accompanying index appearing under Item 15(a) (2) presents fairly, in
        all
        material respects, the information set forth therein when read in conjunction
        with the related consolidated financial
        statements. These financial statements and financial statement schedule are
        the
        responsibility of the Company's management. Our responsibility is to express
        an
        opinion on these financial statements and financial statement schedule based
        on
        our audits. We conducted our audits of these statements 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. An audit includes examining, on a test basis, evidence supporting
        the amounts and disclosures in the financial statements, assessing the
        accounting principles used and significant estimates made by management,
        and
        evaluating the overall financial statement presentation. We believe that
        our
        audits provide a reasonable basis for our opinion.
 
 /s/PricewaterhouseCoopers
        LLP
 
 Indianapolis,
        Indiana
 January
        18, 2006
  22
  
 **HURCO
        COMPANIES, INC.**
 **CONSOLIDATED
        STATEMENTS OF INCOME**
 Year
                    Ended October 312005
                
                2004
                
                2003(Dollars
                    in thousands, except per share amounts)**Sales
                    and service fees**
                
                $
                125,509
                
                $
                99,572
                
                $
                75,532Cost
                    of sales and service
                
                
                82,951
                
                
                69,274
                
                
                54,710**Gross
                    profit**
                
                
                42,558
                
                
                30,298
                
                
                20,822Selling,
                    general and administrative expenses
                
                
                26,057
                
                
                21,401
                
                
                18,749Restructuring
                    expense (credit) and other expense, net (Note 15)
                
                
                --
                
                
                465
                
                
                (124
                )**Operating
                    income**
                
                
                16,501
                
                
                8,432
                
                
                2,197Interest
                    expense
                
                
                355
                
                
                468
                
                
                658Variable
                    options expense
                
                
                --
                
                
                322
                
                
                51Earnings
                    from equity investments
                
                
                418
                
                
                387
                
                
                202Other
                    income (expense), net
                
                
                (482
                )
                
                (461
                )
                
                (270
                )Income
                    before income taxes
                
                
                16,082
                
                
                7,568
                
                
                1,420Provision
                    (benefit) for income taxes (Note 6)
                
                
                (361
                )
                
                1,299
                
                
                958Net
                    income
                
                $
                16,443
                
                $
                6,269
                
                $
                462Earnings
                    per common share - basic
                
                $
                2.66
                
                $
                1.08
                
                $
                0.08Weighted
                    average common shares outstanding - basic
                
                
                6,171
                
                
                5,784
                
                
                5,582Earnings
                    per common share - diluted
                
                $
                2.60
                
                $
                1.04
                
                $
                0.08Weighted
                    average common shares outstanding - diluted
                
                
                6,336
                
                
                6,026
                
                
                5,582
 
 *The
        accompanying notes are an integral part of the Consolidated Financial
        Statements.*
  23
  
 **HURCO
        COMPANIES, INC.**
 **CONSOLIDATED
        BALANCE SHEETS**
 
 **ASSETS**
 **As
                      of October 31****2005**
                  
                  **2004****Current
                      assets:**
                  
                  (Dollars
                      in thousands, except per share amounts)Cash
                      and cash equivalents
                  
                  $
                  17,559
                  
                  $
                  8,249Cash
                      - restricted
                  
                  
                  --
                  
                  
                  277Accounts
                      receivable, less allowance for doubtful accounts of $842 in
                      2005 and $723
                      in 2004
                  
                  
                  20,100
                  
                  
                  17,337Inventories
                  
                  
                  29,530
                  
                  
                  28,937Deferred
                      tax assets
                  
                  
                  3,043
                  
                  
                  --Other
                  
                  
                  3,586
                  
                  
                  1,672Total
                      current assets
                  
                  
                  73,818
                  
                  
                  56,472Property
                      and equipment:Land
                  
                  
                  761
                  
                  
                  761Building
                  
                  
                  7,205
                  
                  
                  7,205Machinery
                      and equipment
                  
                  
                  13,170
                  
                  
                  12,106Leasehold
                      improvements
                  
                  
                  1,102
                  
                  
                  67622,238
                  
                  
                  20,748Less
                      accumulated depreciation and amortization
                  
                  
                  (13,187
                  )
                  
                  (12,512
                  )9,051
                  
                  
                  8,236Deferred
                      tax assets - long-term
                  
                  
                  1,346
                  
                  
                  --Software
                      development costs, less accumulated amortization
                  
                  
                  3,752
                  
                  
                  2,920Investments
                      and other assets
                  
                  
                  6,147
                  
                  
                  5,818$
                  94,114
                  
                  $
                  73,446**LIABILITIES
                      AND SHAREHOLDERS' EQUITY****Current
                      liabilities:**Accounts
                      payable
                  
                  $
                  17,051
                  
                  $
                  15,737Accounts
                      payable-related parties
                  
                  
                  2,087
                  
                  
                  2,624Accrued
                      expenses and other
                  
                  
                  9,879
                  
                  
                  9,697Accrued
                      warranty expenses
                  
                  
                  1,618
                  
                  
                  1,750Current
                      portion of long-term debt
                  
                  
                  126
                  
                  
                  317Total
                      current liabilities
                  
                  
                  30,761
                  
                  
                  30,125**Non-current
                      liabilities:**Long-term
                      debt
                  
                  
                  4,010
                  
                  
                  4,283Deferred
                      credits and other
                  
                  
                  399
                  
                  
                  5834,409
                  
                  
                  4,866**Commitments
                      and contingencies (Notes 10 and 11)****Shareholders'
                      equity:**Preferred
                      stock: no par value per share, 1,000,000 shares authorized,
                      no shares
                      issued
                  
                  
                  --
                  
                  
                  --Common
                      stock: no par value, $.10 stated value per share, 12,500,000
                      shares
                      authorized, 6,220,220 and 6,019,594 shares issued and outstanding
                      in 2005
                      and 2004, respectively
                  
                  
                  622
                  
                  
                  602Additional
                      paid-in capital
                  
                  
                  48,701
                  
                  
                  46,778Retained
                      earnings (deficit)
                  
                  
                  13,001
                  
                  
                  (3,442
                  )Accumulated
                      other comprehensive income (loss)
                  
                  
                  (3,380
                  )
                  
                  (5,483
                  )Total
                      shareholders’ equity
                  
                  
                  58,944
                  
                  
                  38,455$
                  94,114
                  
                  $
                  73,446
 
 *The
        accompanying notes are an integral part of the Consolidated Financial
        Statements.*
  24
  **HURCO
        COMPANIES, INC.**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 
 Year
                  Ended October 312005
              
              2004
              
              2003**Cash
                  flows from operating activities:**
              
              (Dollars
                  in thousands)Net
                  income
              
              $
              16,443
              
              $
              6,269
              
              $
              462Adjustments
                  to reconcile net income to Net cash provided by (used for) operating
                  activities:Provision
                  for doubtful accounts
              
              
              119
              
              
              286
              
              
              421Equity
                  in income of affiliates
              
              
              (418
              )
              
              (387
              )
              
              (202
              )Depreciation
                  and amortization
              
              
              1,331
              
              
              1,223
              
              
              1,429Restructuring
                  and other charges
              
              
              --
              
              
              465
              
              
              --Tax
                  benefit from exercise of stock options
              
              
              1,146
              
              
              --
              
              
              --Change
                  in assets/liabilities(Increase)
                  decrease in accounts receivable
              
              
              (3,606
              )
              
              (3,992
              )
              
              1,348(Increase)
                  decrease in inventories
              
              
              (660
              )
              
              (4,947
              )
              
              1,465Increase
                  (decrease) in accounts payable
              
              
              (1,191
              )
              
              8,623
              
              
              (687
              )Increase
                  (decrease) in accrued expenses
              
              
              2,653
              
              
              (197
              )
              
              (1,760
              )(Increase)
                  decrease in deferred tax asset
              
              
              (4,389
              )
              
              --
              
              
              --Other
              
              
              549
              
              
              (537
              )
              
              (200
              )**Net
                  cash provided by operating activities**
              
              
              11,977
              
              
              6,806
              
              
              2,276**Cash
                  flows from investing activities:**Proceeds
                  from sale of property and equipment
              
              
              --
              
              
              26
              
              
              14Purchase
                  of property and equipment
              
              
              (1,879
              )
              
              (762
              )
              
              (536
              )Software
                  development costs
              
              
              (1,161
              )
              
              (1,290
              )
              
              (679
              )Change
                  in restricted cash
              
              
              277
              
              
              345
              
              
              (622
              )Other
                  proceeds (investments)
              
              
              224
              
              
              (53
              )
              
              (25
              )**Net
                  cash used for investing activities**
              
              
              (2,539
              )
              
              (1,734
              )
              
              (1,848
              )**Cash
                  flows from financing activities:**Advances
                  on bank credit facilities
              
              
              4,977
              
              
              20,468
              
              
              55,731Repayments
                  on bank credit facilities
              
              
              (5,124
              )
              
              (24,520
              )
              
              (54,418
              )Repayments
                  of term debt
              
              
              (200
              )
              
              (538
              )
              
              (1,211
              )Repayment
                  of first mortgage
              
              
              (117
              )
              
              (108
              )
              
              (108
              )Proceeds
                  from exercise of common stock options
              
              
              797
              
              
              2,128
              
              
              --Purchase
                  of common stock
              
              
              --
              
              
              --
              
              
              (23
              )**Net
                  cash provided by (used for) financing activities**
              
              
              333
              
              
              (2,570
              )
              
              (29
              )**Effect
                  of exchange rate changes on cash**
              
              
              (461
              )
              
              458
              
              
              532**Net
                  increase in cash**
              
              
              9,310
              
              
              2,960
              
              
              931**Cash
                  and cash equivalents at beginning of year**
              
              
              8,249
              
              
              5,289
              
              
              4,358**Cash
                  and cash equivalents at end of year**
              
              $
              17,559
              
              $
              8,249
              
              $
              5,289Supplemental
                  disclosures:Cash
                  paid for:Interest
              
              $
              331
              
              $
              439
              
              $
              595Income
                  taxes
              
              $
              1,509
              
              $
              286
              
              $
              468
  *The
        accompanying notes are an integral part of the Consolidated Financial
        Statements.*
  25
  **HURCO
        COMPANIES, INC.**
 **CONSOLIDATED
        STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY**
  **Common
                      Stock**
                  
                  
                  
                  
                  
                  **Accumulated****Shares
                      Issued****&
                      Outstanding**
                  
                  **Amount**
                  
                  **Additional**
                    **Paid-In**
                    **Capital**
                  
                  **Retained**
                    **Earnings**
                    **(Deficit)**
                  
                  **Other**
                    **Comprehensive**
                    **Income
                      (Loss)**
                  
                  **Total****(Dollars
                      in thousands)****Balances,
                      October 31, 2002**
                  
                  
                  **5,583,158**
                  
                  **$**
                  **558**
                  
                  **$**
                  **44,717**
                  
                  **$**
                  **(10,173**
                  **)**
                  **$**
                  **(7,085**
                  **)**
                  **$**
                  **28,017**Net
                      income
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  462
                  
                  
                  **--**
                  
                  
                  462Translation
                      of foreign currency financial statements
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  1,454
                  
                  
                  1,454Unrealized
                      loss of derivative instruments
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **(1,169**
                  **)**
                  
                  (1,169
                  )Comprehensive
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  747Repurchase
                      of common stock
                  
                  
                  (7,171
                  )
                  
                  (1
                  )
                  
                  (22
                  )
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  (23
                  )**Balances,
                      October 31, 2003**
                  
                  
                  **5,575,987**
                  
                  **$**
                  **557**
                  
                  **$**
                  **44,695**
                  
                  **$**
                  **(9,711**
                  **)**
                  **$**
                  **(6,800**
                  **)**
                  **$**
                  **28,741**Net
                      income
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  6,269
                  
                  
                  **--**
                  
                  
                  6,269Translation
                      of foreign currency financial statements
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  1,227
                  
                  
                  1,227Unrealized
                      gain of derivative instruments
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  90
                  
                  
                  90Comprehensive
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  7,586Exercise
                      of common stock options
                  
                  
                  443,607
                  
                  
                  45
                  
                  
                  2,083
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  2,128**Balances,
                      October 31, 2004**
                  
                  
                  **6,019,594**
                  
                  **$**
                  **602**
                  
                  **$**
                  **46,778**
                  
                  **$**
                  **(3,442**
                  **)**
                  **$**
                  **(5,483**
                  **)**
                  **$**
                  **38,455**Net
                      income
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  16,443
                  
                  
                  **--**
                  
                  
                  16,443Translation
                      of foreign currency financial statements
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **(**838
                  )
                  
                  (838
                  )Unrealized
                      gain of derivative instruments
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  2,941
                  
                  
                  2,941Comprehensive
                      income
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  18,546Exercise
                      of common stock options
                  
                  
                  200,626
                  
                  
                  20
                  
                  
                  777
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  797Tax
                      benefit from exercise of stock options
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  1,146
                  
                  
                  **--**
                  
                  
                  **--**
                  
                  
                  1,146**Balances,
                      October 31, 2005**
                  
                  
                  **6,220,220**
                  
                  **$**
                  **622**
                  
                  **$**
                  **48,701**
                  
                  **$**
                  **13,001**
                  
                  **$**
                  **(3,380**
                  **)**
                  **$**
                  **58,944**
  *The
        accompanying notes are an integral part of the Consolidated Financial
        Statements.*
  26
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS**
 
 **1.**
              **SUMMARY
                  OF SIGNIFICANT ACCOUNTING
                  POLICIES**
 
 *Consolidation* .
        The
        consolidated financial statements include the accounts of Hurco Companies,
        Inc.
        (an Indiana corporation) and our wholly owned and controlled subsidiaries.
        We
        have a 35% and 24% ownership interest in two affiliates accounted for using
        the
        equity method. Our combined investments in affiliates are approximately $2.6
        million and are included in Investments and Other Assets on the accompanying
        Consolidated Balance Sheets. Intercompany accounts and transactions have
        been
        eliminated.
 
 *Statements
        of Cash Flows* .
        We
        consider all highly liquid investments purchased with maturity of three months
        or less to be cash equivalents. Cash flows from hedges are classified consistent
        with the items being hedged.
 
 *Restricted
        Cash.* Restricted
        cash results from hedging arrangements that require cash to be on deposit
        with
        an institution based on open positions.
 
 *Translation
        of Foreign Currencies* .
        All
        balance sheet accounts of non-U.S. subsidiaries are translated at the exchange
        rate as of the end of the year. Income and expenses are translated at the
        average exchange rates during the year. Cumulative foreign currency translation
        adjustments of $4.6 million are included in Accumulated Other Comprehensive
        Income in shareholders' equity. Foreign currency transaction gains and losses
        are recorded as income or expense as incurred.
 
 *Hedging.* We
        enter
        into foreign currency forward exchange contracts periodically to hedge certain
        forecast inter-company sales and forecast inter-company and third party
        purchases of product denominated in foreign currencies (primarily Pound
        Sterling, Euro and New Taiwan Dollar). The purpose of these instruments is
        to
        mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting
        from the sales and purchases denominated in foreign currencies will be adversely
        affected by changes in exchange rates. These forward contracts have been
        designated as cash flow hedge instruments, and are recorded in the Consolidated
        Balance Sheet at fair value in Other Current Assets and Accrued Expenses.
        Gains
        and losses resulting from changes in the fair value of these hedge contracts
        are
        deferred in Accumulated Other Comprehensive Income and recognized as an
        adjustment to cost of sales in the period that the sale of the related hedged
        item is recognized, thereby providing an offsetting economic impact against
        the
        corresponding change in the U.S. Dollar value of the inter-company sale or
        purchase item being hedged.
 
 At
        October 31, 2005, we had $1.2 million of gains related to cash flow hedges
        deferred in Accumulated Other Comprehensive Income. Of this amount, $1.0
        million
        represents unrealized gains related to future cash flow hedge instruments
        that
        remain subject to currency fluctuation risk. These deferred gains will be
        recorded as an adjustment to Cost of Sales in the periods through October
        31,
        2006, in which the sale of the related hedged item is recognized, as described
        above. At October 31, 2004, we had $1.7 million of losses related to cash
        flow
        hedges deferred in Accumulated Other Comprehensive Income. Net losses on
        cash
        flow hedge contracts which we reclassified from Other Comprehensive Income
        to
        Cost of Sales in the years ended October 31, 2005, 2004 and 2003 were $747,000,
        $2.8 million and $1.4 million, respectively.
  27
 
 **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 We
        also
        enter into foreign currency forward exchange contracts to protect against
        the
        effects of foreign currency fluctuations on receivables and payables denominated
        in foreign currencies. These derivative instruments are not designated as
        hedges
        under SFAS 133, “Accounting Standards for Derivative Instruments and Hedging
        Activities” (SFAS 133) and, as a result, changes in fair value are reported
        currently as Other Expense, Net in the Consolidated Statements of Income
        consistent with the transaction gain or loss on the related foreign denominated
        receivable or payable. Such net transaction losses were $476,000, $246,000,
        and
        $154,000 for the years ended October 31, 2005, 2004 and 2003, respectively.
 
 *Inventories* .
        Inventories are stated at the lower of cost or market, with cost determined
        using the first-in, first-out method.
 
 *Property
        and Equipment* .
        Property and equipment are carried at cost. Depreciation and amortization
        of
        assets are provided primarily under the straight-line method over the shorter
        of
        the estimated useful lives or the lease terms as follows:
 Number
                  of YearsBuilding
              40Machines
              10Shop
                  and office equipment
              5Leasehold
                  improvements
              5
 
 Total
        depreciation expense for the years ended October 31, 2005, 2004 and 2003
        was
        $1.0 million, $932,000, and $1.0 million, respectively. Any impairment would
        be
        recognized based on an assessment of future operations (including cash flows)
        to
        insure that assets are appropriately valued.
 
 *Revenue
        Recognition.* We
        recognize revenue from sales of our machine tool systems upon delivery of
        the
        product to the customer, which is normally at the time of shipment, because
        persuasive evidence of an arrangement exists, delivery has occurred, the
        selling
        price is fixed and determinable and collectibility is reasonably assured.
        In
        certain foreign locations, we retain title after shipment under a “retention of
        title” clause solely to protect collectibility. The retention of title is
        similar to UCC filings in the United States and provides the creditor with
        additional rights to the machine if the customer fails to pay. Revenue
        recognition at the time of shipment is appropriate in this instance as long
        as
        all risks of ownership have passed to the buyer. Our computerized machine
        tools
        are general-purpose computer controlled machine tools that are typically
        used in
        stand-alone operations. Transfer of ownership and risk of loss are not
        contingent upon contractual customer acceptance. Prior to shipment, we test
        each
        machine to ensure the machine’s compliance with standard operating
        specifications as listed in our sales literature.
 
 Depending
        upon geographic location, after shipment a machine may be installed at the
        customer’s facilities by a distributor, independent contractor or Hurco service
        technician. In most instances where a machine is sold through a distributor,
        Hurco has no installation involvement. If sales are direct or through sales
        agents, Hurco will typically complete the machine installation, which consists
        of the reassembly of certain parts that were removed for shipping and the
        re-testing of the machine to ensure that it is performing within the standard
        specifications. We consider the machine installation process inconsequential
        and
        perfunctory.
 
 Service
        fees from maintenance contracts are deferred and recognized in earnings on
        a pro
        rata basis over the term of the contract. Sales related to software products
        are
        recognized when shipped in conformity with American Institute of Certified
        Public Accountants’ Statement of Position 97-2 Software
        Revenue Recognition. The software does not require production, modification
        or
        customization and at the time of shipment persuasive evidence of an arrangement
        exists, delivery has occurred, the selling price is fixed and determinable
        and
        collectibility is reasonably assured.
  28
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
  *Product
        Warranty* .
        Expected future product warranty expense is recorded when the product is
        sold.
 
 *Research
        and Development Costs.* The
        costs associated with research and development programs for new products
        and
        significant product improvements are expensed as incurred and are included
        in
        Selling, General and Administrative expenses. Research and development expenses
        totaled $2.4 million, $2.0 million, and $1.8 million, in fiscal 2005, 2004,
        and
        2003, respectively.
 
 Costs
        incurred to develop computer software products and significant enhancements
        to
        software features of existing products to be sold or otherwise marketed are
        capitalized, after technological feasibility is established. Software
        development costs are amortized to Cost of Sales on a straight-line basis
        over
        the estimated product life of the related software, which ranges from three
        to
        five years. We capitalized $1,161,000 in 2005, $1,290,000 in 2004, and $679,000
        in 2003 related to software development projects. Amortization expense was
        $329,000, $291,000, and $361,000, for the years ended October 31, 2005, 2004,
        and 2003, respectively. Accumulated amortization at October 31, 2005 and
        2004
        was $2.6 million and $2.3 million, respectively. Any impairment of the carrying
        value of the capitalized software development costs could be recognized based
        on
        an assessment of future operations (including cash flows) to insure that
        assets
        are appropriately valued.
 
 Estimated
        amortization expense for the existing amortizable intangible assets for the
        years ending October 31, is as follows:
  Fiscal
                  Year
              
              Amortization
                  Expense2006
              
              $
              5352007
              
              
              7602008
              
              
              7142009
              
              
              7142010
              
              
              605
 
 *Earnings
        Per Share.* Basic
        and
        diluted earnings per common share are based on the weighted average number
        of
        our shares of common stock outstanding. Diluted earnings per common share
        give
        effect to outstanding stock options using the treasury method. The impact
        of
        stock options on weighted average shares for the years ended October 31,
        2005,
        2004 and 2003 was 165,000, 242,000, and zero respectively.
 
 *Income
        Taxes* .
        We
        record income taxes under SFAS 109 “Accounting for Income Taxes”. SFAS 109
        utilizes the liability method for computing deferred income taxes. It also
        requires that the benefit of certain loss carryforwards be recorded as an
        asset
        and that a valuation allowance be established against the asset when it is
“more
        likely than not” the benefit will not be realized.
 
 *Estimates.* The
        preparation of financial statements in conformity with generally accepted
        accounting principles requires us to make estimates and assumptions that
        affect
        the reported amounts of assets and liabilities, disclosure of contingent
        assets
        and liabilities at the date of the financial statements and the reported
        amounts
        of sales and expenses during the reporting period. Actual results could differ
        from those estimates.
  29
 
 **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 *Stock
        Based Compensation* - We
        apply Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to
        Employees” (APB No. 25), and related interpretations in accounting for the
        plans, and, except for certain shares subject to variable plan accounting,
        no
        compensation expense has been recognized for stock options issued under the
        plans. For companies electing to continue the use of APB No. 25, SFAS No.
        123R
“Accounting for Stock-Based Compensation”, requires pro forma disclosures
        determined through the use of an option-pricing model as if the provisions
        of
        SFAS No. 123R had been adopted. If we had adopted the provisions of SFAS
        No.
        123R, net income and earnings per share would have been as follows:
  2005
              
              2004
              
              2003Net
                  income (in thousands)
              
              $
              16,420
              
              $
              6,174
              
              $
              265Earnings
                  per share:Basic
              
              $
              2.66
              
              $
              1.07
              
              $
              0.05Diluted
              
              $
              2.59
              
              $
              1.02
              
              $
              0.05
 
 We
        intend
        to adopt SFAS 123R on November 1, 2005 using the prospective method. We believe
        that the adoption of SFAS 123R will not have a material effect on the
        Consolidated Financial Statements.
 
 *Reclassifications.* Certain
        reclassifications have been made to prior years’ financial statements to conform
        to the presentation used in fiscal 2005.
 
 **2.**
              **BUSINESS
                  OPERATIONS**
 
 *Nature
        of Business* .
        We
        design and produce computer control systems and software and computerized
        machine tools for sale through our own distribution system to the worldwide
        machine tool industry.
 
 The
        end
        market for our products consists primarily of precision tool, die and mold
        manufacturers, independent job shops and specialized short-run production
        applications within large manufacturing operations. Industries served include:
        aerospace, defense, medical equipment, energy, transportation and computer
        industries. Our products are sold through independent agents and distributors
        in
        countries throughout North America, Europe and Asia. We also maintain direct
        sales operations in England, France, Germany, Italy, Singapore and
        China.
 
 *Credit
        Risk* .
        We sell
        products to customers located throughout the world. We perform ongoing credit
        evaluations of customers and generally do not require collateral. Allowances
        are
        maintained for potential credit losses. Concentration of credit risk with
        respect to trade accounts receivable is limited due to the large number of
        customers and their dispersion across many geographic areas. Although a
        significant amount of trade receivables are with distributors primarily located
        in the United States, no single distributor or region represents a significant
        concentration of credit risk.
 
 *Manufacturing
        Risk* .
        Our
        computerized machine tools and integrated computer controls are manufactured
        primarily in Taiwan by our wholly owned subsidiary and our affiliated contract
        manufacturers. We also source one of the proprietary Ultimax ® computer
        components from a sole domestic supplier. Any interruption from these sources
        would restrict the availability of our computerized machine tool systems
        and
        would adversely affect operating results.
  30
 
 **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 **3.**
              **INVENTORIES**
 
 Inventories
        as of October 31, 2005 and 2004 are summarized below (in
        thousands):
 
 2005
              
              2004Purchased
                  parts and sub assemblies
              
              $
              6,561
              
              $
              6,888Work-in-process
              
              
              5,403
              
              
              5,148Finished
                  goods
              
              
              17,566
              
              
              16,901$
              29,530
              
              $
              28,937
 
 **4.**
              **DEBT
                  AGREEMENTS**
 
 Long-term
        debt as of October 31, 2005 and 2004, consisted of (in thousands):
 2005
                
                2004Domestic
                    bank revolving credit facility
                
                $
                --
                
                $
                --European
                    bank credit facility
                
                
                --
                
                
                147First
                    Mortgage
                
                
                4,136
                
                
                4,253Economic
                    Development Revenue Bonds, Series 1990
                
                
                --
                
                
                2004,136
                
                
                4,600Less
                    current portion
                
                
                126
                
                
                317$
                4,010
                
                $
                4,283
 
 As
          of
          October 31, 2005, long-term debt was payable as follows (in
          thousands):
 
 Fiscal
                    2006
                
                $
                126Fiscal
                    2007
                
                
                136Fiscal
                    2008
                
                
                145Fiscal
                    2009
                
                
                3,729Fiscal
                    2010
                
                
                --Thereafter
                
                
                --$
                4,136
 As
        of
        October 31, 2005 and 2004, we had $829,000 and $196,000, respectively, of
        outstanding letters of credit issued to non-U.S. suppliers for inventory
        purchase commitments. As of October 31, 2005, we had unutilized credit
        facilities of $10.7 million available for either direct borrowings or commercial
        letters of credit.
 
 *Domestic
        Bank Credit Facility.* We
        had no
        borrowings outstanding under our domestic credit facility at October 31,
        2005. Interest
        on the domestic bank credit facility was at rates ranging from 4.0% to 6.25%
        at
        October 31, 2005 and from 3.25% to 4.0% at October 31, 2004.
  31
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 Effective
        October 26, 2004, we amended our $8 million domestic bank credit agreement
        to
        extend the maturity date to January 31, 2008 and convert it to an unsecured
        facility except for a continuation of the pledge of stock of two subsidiaries.
        Borrowings may be made in U.S. Dollars, Euros or Pounds Sterling. Interest
        on
        all outstanding borrowings is payable at LIBOR for the respective currency
        plus
        an applicable margin, or, at our option, the bank’s prime rate plus a specified
        margin based on the ratio of our Total Funded Debt to EBITDA (earnings before
        interest, taxes, depreciation and amortization) ratio, as follows:
 
 Ratio
                  of Total Funded Debt/EBITDA ratio
              
              LIBOR
                  Margin
              
              Prime
                  MarginGreater
                  than 3.0
              
              
              2.75
              %
              
              0
              %Greater
                  than 2.5 and less than or equal to 3.0
              
              
              2.0
              %
              
              (.25
              %)Greater
                  than 2.0 and less than or equal to 2.5
              
              
              1.5
              %
              
              (.50
              %)Less
                  than or equal to 2.0
              
              
              1.0
              %
              
              (.75
              %)
 
 The
        ratio
        of our Total Funded Debt to EBITDA at October 31, 2005 was 0.23. The applicable
        margin is adjusted on the first day of the month following the month after
        each
        quarter end. The availability under the facility is not limited by a borrowing
        base, unless the ratio exceeds 3.0.
 
 The
        agreement requires that Maximum Consolidated Total Indebtedness to Consolidated
        Total Capitalization, as defined in the agreement, not exceed 0.275 to 1.0
        and
        our fixed charge coverage ratio not be less than 1.25 to 1.0. The agreement
        also
        requires that we have positive net income for the four previous quarters.
 
 *Promissory
        Note.* On
        October 24, 2002, we issued a secured promissory note for $1,350,000 to the
        seller of patented technology that we purchased. The final installment on
        the
        note was paid in December 2003.
 
 *First
        Mortgage.* On
        April
        30, 2002, we obtained a $4.5 million first mortgage loan on our Indianapolis
        corporate headquarters. The loan bears interest at a rate of 73⁄8% and matures in
        April 2009. We are required to make principal payments over the seven-year
        term
        of the loan, based on a twenty-year amortization schedule. The proceeds from
        the
        first mortgage loan, together with other available cash, were used to repay
        bank
        debt.
 
 *European
        Bank Credit Facilities.* The
        terms
        and conditions of the October 2004 amendment also apply to our revolving
        credit
        and overdraft facility for our U.K. subsidiary.
 
 On
        January 11, 2006, we renewed our credit facility with a European bank for
€1.5
        million. The termination date is unspecified. Interest on the facility is
        payable at a floating rate, 6% at January 11, 2006. Although the facility
        is
        uncollateralized, the bank reserves the right to require collateral in the
        event
        of increased risk evaluation. Borrowings outstanding under this facility
        at
        October 31, 2005 were $0.
 
 *Economic
        Development Revenue Bonds.* The
        remaining installment of the Economic Development Revenue Bonds was paid
        on
        September 1, 2005.
 
 Total
        debt at October 31, 2005 was $4.1 million representing 6.6% of total
        capitalization, which aggregated $63.1 million, compared to $4.6 million,
        or 11%
        of total capitalization, at October 31, 2004. We were in compliance with
        all
        loan covenants and had unused credit availability of $10.7 million at October
        31, 2005. We believe that cash flow from operations and borrowings available
        to
        us under our credit facilities will be sufficient to meet our anticipated
        cash
        requirements in fiscal 2006.
  32
 
 **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 **5.**
              **FINANCIAL
                  INSTRUMENTS**
 
 The
        carrying amounts for trade receivables and payables approximate their fair
        values. The fair value of long-term debt, including the current portion,
        is
        estimated based on quoted market prices for similar issues or on current
        rates
        offered to us for debt with the similar terms and maturities.
 
 We
        also
        have financial instruments in the form of foreign currency forward exchange
        contracts as described in Note 1 to the Consolidated Financial Statements.
        The
        U.S. Dollar equivalent notional amount of these contracts was $80.7 million
        at
        October 31, 2005. The net fair value of these derivative instruments recorded
        in
        Accrued Expenses at October 31, 2005 was $1.0 million. Current market prices
        were used to estimate the fair value of the foreign currency forward exchange
        contracts.
 
 The
        future value of the foreign currency forward exchange contracts and the related
        currency positions are subject to offsetting market risk resulting from foreign
        currency exchange rate volatility. The counterparties to these contracts
        are
        substantial and creditworthy financial institutions. We do not consider either
        the risk of counterparty non-performance or the economic consequences of
        counterparty non-performance as material risks.
  33
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
  **6.**
              **INCOME
                  TAXES**
  Deferred
        income taxes reflect the effect of temporary differences between the tax
        basis
        of assets and liabilities and the reported amounts of those assets and
        liabilities for financial reporting purposes. Our total deferred tax assets
        and
        corresponding valuation allowance at October 31, 2005 and 2004, consisted
        of the
        following (in thousands):
 
 October
                  312005
              
              2004Tax
                  effects of future tax deductible items related to:Current:Inter-company
                  profit in inventory
              
              $
              1,672
              
              $
              1,426Accrued
                  inventory reserves
              
              
              834
              
              
              404Accrued
                  warranty expenses
              
              
              164
              
              
              124Deferred
                  compensation
              
              
              151
              
              
              245Other
                  accrued expenses
              
              
              498
              
              
              390Total
                  current deferred tax assets
              
              
              3,319
              
              
              2,589Non-current:Goodwill
              
              
              61
              
              
              61Total
                  deferred tax assets
              
              
              3,380
              
              
              2,650Tax
                  effects of future taxable differences related to:Accelerated
                    tax deduction and other tax over book deductions related to property,
                    equipment and software
              
              
              (1,699
              )
              
              (1,377
              )Other
              
              
              --
              
              
              (604
              )Total
                  deferred tax liabilities
              
              
              (1,699
              )
              
              (1,981
              )Net
                  tax effects of temporary differences
              
              
              1,682
              
              
              669Tax
                  effects of carryforward benefits:U.S.
                  federal and state net operating loss carryforwards, expiring 2006-2023
              
              
              312
              
              
              3,592Foreign
                  tax benefit carryforwards, expiring 2005-2008
              
              
              --
              
              
              402Foreign
                  net operating loss carryforwards, with no expiration
              
              
              1,544
              
              
              1,301U.S.
                  federal general business tax credits, expiring 2005-2025
              
              
              882
              
              
              1,026U.S.
                  Alternative minimum tax credit with no expiration
              
              
              190
              
              
              --Tax
                  effects of carryforwards
              
              
              2,928
              
              
              6,321Tax
                  effects of temporary differences and carryforwards, net
              
              
              4,610
              
              
              6,990Less
                  valuation allowance
              
              
              221
              
              
              6,990Net
                  deferred tax asset
              
              $
              4,389
              
              $
              --
 
 Except
        as
        indicated above, our carryforwards and tax credits expire at specific future
        dates and utilization of certain carryforwards and tax credits are limited
        to
        specific amounts each year. Realization is entirely dependent upon generating
        sufficient future earnings in specific tax jurisdictions prior to the expiration
        of the loss carryforwards and tax credits.
  34
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 We
        operate in a highly cyclical industry and incurred significant operating
        losses
        in fiscal 2001 and 2002. At October 31, 2004, a $6,990,000 valuation allowance
        was maintained against our net deferred tax assets. This valuation allowance
        was
        maintained because we determined that it was more likely than not that all
        of
        the deferred tax assets might not be realized.
 
 During
        fiscal 2005, due to the substantial improvement in our operating results,
        especially in the fourth quarter of the year, we utilized approximately $3.7
        million of the net operating loss carryforwards, all of which were subject
        to a
        valuation allowance. During the fourth quarter of fiscal 2005, after examining
        a
        number of factors, including historical results and near term earnings
        projections, we determined that it was more likely than not that we would
        realize all of our remaining domestic net deferred tax assets and a significant
        portion of our deferred tax assets related to certain foreign tax
        jurisdictions.
 
 As
        a
        result of this analysis, we reduced our remaining valuation allowance to
        $221,000, all of which related to foreign net operating losses for which
        there
        remains uncertainty as to the future realization of the related tax benefits.
        As
        a result of our utilization in fiscal 2005 of net operating losses against
        which
        we had previously maintained a 100% valuation allowance and the reduction
        of all
        but $221,000 of the valuation allowance on our remaining deferred tax assets
        at
        the end of fiscal 2005, we recorded a tax benefit of approximately $2,342,000,
        which is net of approximately $1,146,000 recorded as additional paid-in-capital
        for the tax effects of the exercise by employees of stock options during
        both
        fiscal 2005 and 2004.
 
 Income
                  (loss) before income taxes (in thousands):
              
              Year
                  Ended October 312005
              
              2004
              
              2003Domestic
              
              $
              9,834
              
              $
              3,424
              
              $
              (875
              )Foreign
              
              
              6,248
              
              
              4,144
              
              
              2,295$
              16,082
              
              $
              7,568
              
              $
              1,420The
                  provision for income taxes consists of:Current:Federal
              
              $
              3,457
              
              $
              --
              
              $
              --State
              
              
              279
              
              
              11
              
              
              --Foreign
              
              
              2,259
              
              
              1,240
              
              
              1,1485,995
              
              
              1,251
              
              
              1,148Deferred:Federal
              
              
              (4,685
              )
              
              48
              
              
              (190
              )State
              
              
              (553
              )
              
              --
              
              
              --Foreign
              
              
              (1,118
              )
              
              --
              
              
              --(6,356
              )
              
              48
              
              
              (190
              )$
              (361
              )
              $
              1,299
              
              $
              958Differences
                  between the effective tax rate and U.S. federal income tax rate
                  were (in
                  thousands):Tax
                  at U.S. statutory rate
              
              $
              5,468
              
              $
              2,649
              
              $
              497Effect
                  of tax rates of international jurisdictionsIn
                  excess (less than) of U.S. statutory rates
              
              
              81
              
              
              8
              
              
              (130
              )State
                  income taxes
              
              
              279
              
              
              11
              
              
              --Effect
                  of losses without current year benefit
              
              
              --
              
              
              --
              
              
              591Deferred
                  tax asset valuation adjustment
              
              
              (2,342
              )
              
              --
              
              
              --Utilization
                  of net operating loss carryforwards
              
              
              (3,740
              )
              
              (1,369
              )
              
              --Permanent
                  items
              
              
              (155
              )
              
              --
              
              
              --Others
              
              
              48
              
              
              --
              
              
              --Provision
                  (benefit) for income taxes
              
              $
              (361
              )
              $
              1,299
              
              $
              958
  35
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 We
        have
        not provided any U.S. income taxes on the undistributed earnings of our foreign
        subsidiaries or equity method investments based upon our determination that
        such
        earnings will be indefinitely reinvested.
 
 **7.**
              **EMPLOYEE
                  BENEFITS**
 
 We
        have
        defined contribution plans that include a majority of our employees, under
        which
        our contributions are discretionary. The purpose of these plans is generally
        to
        provide additional financial security during retirement by providing employees
        with an incentive to save throughout their employment. Our contributions
        to the
        plans are based on employee contributions or compensation. Our contributions
        totaled $243,800, $253,900, and $228,076, for the years ended October 31,
        2005,
        2004 and 2003, respectively.
 
 We
        also
        have life insurance agreements with our executive officers. Beginning in
        fiscal
        2003, the premiums were borrowed from the cash value of the policies and
        will be
        repaid from the policies' cash surrender values when the policies are terminated
        in accordance with the provisions of the agreements. In fiscal 2005, we
        purchased the insurance policies from the executive officers. The insurance
        premiums paid by the Company will be repaid from the cash surrender value
        of the
        policies when the policies are terminated.
 
 **8.**
              **STOCK
                  OPTIONS**
 
 In
        March
        1997, we adopted the 1997 Stock Option and Incentive Plan (the 1997 Plan),
        which
        allows us to grant awards of options to purchase shares of our common stock,
        stock appreciation rights, restricted shares and performance shares. In March
        2005 an amendment to the plan increased the number of shares available for
        grant
        by 250,000 shares. Under the provision of the amended 1997 Plan, 1,000,000
        shares of common stock may be issued and the maximum number of shares of
        common
        stock that may be granted to any individual is 200,000 shares. Options granted
        under the 1997 Plan are exercisable for a period up to ten years after date
        of
        grant and vest in equal annual installments as specified by the Compensation
        Committee of our Board of Directors at the time of grant. The exercise price
        of
        options intended to qualify as incentive stock options may not be less than
        100%
        of the fair market value of a share of common stock on the date of grant.
        As of
        October 31, 2005, options to purchase 207,600 shares had been granted and
        remained unexercised under the 1997 Plan.
 
 In
        1990,
        we adopted the 1990 Stock Option Plan (the 1990 Plan), which allowed us to
        grant
        options to purchase shares of our common stock and related stock appreciation
        rights and limited rights to officers and our key employees. Under the
        provisions of the 1990 Plan, the maximum number of shares of common stock,
        which
        could be issued under options and related rights, was 500,000. There was
        no
        annual limit on the number of such shares with respect to which options and
        rights could be granted. Options granted under the 1990 Plan are exercisable
        for
        a period up to ten years after date of grant and vested in equal installments
        over a period of three to five years from the date of grant. The option price
        could not be less than 100% of the fair market value of a share of common
        stock
        on the date of grant and no options or rights could be granted under the
        1990
        Plan after April 30, 2001. As of October 31, 2005, options to purchase 7,800
        shares had been granted and remained unexercised under the 1990
        Plan.
  36
 
 **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 A
        summary
        of the status of the options under the 1990 and 1997 Plans as of October
        31,
        2005, 2004 and 2003 and the related activity for the year is as
        follows:
 
 Shares
                  Under Option
              
              Weighted
                  Average Exercise Price Per ShareBalance
                  October 31, 2002
              
              
              830,160
              
              $
              3.78Granted
              
              
              --
              
              
              --Cancelled
              
              
              (8,000
              )
              
              4.14Expired
              
              
              (33,500
              )
              
              5.85Exercised
              
              
              --
              
              
              --Balance
                  October 31, 2003
              
              
              788,660
              
              $
              3.69Granted
              
              
              --
              
              
              --Cancelled
              
              
              --
              
              
              --Expired
              
              
              (2,000
              )
              
              2.13Exercised
              
              
              (383,607
              )
              
              3.67Balance
                  October 31, 2004
              
              
              403,053
              
              $
              3.71Granted
              
              
              --
              
              
              --Cancelled
              
              
              --
              
              
              --Expired
              
              
              (2,000
              )
              
              2.15Exercised
              
              
              (185,653
              )
              
              3.82Balance
                  October 31, 2005
              
              
              215,400
              
              $
              3.63
 
 Stock
        options outstanding and exercisable on October 31, 2005 are as
        follows:
 
 Range
                  of Exercise Prices Per Share
              
              Shares
                  Under Option
              
              Weighted
                  Average Exercise Price Per Share
              
              Weighted
                  Average Remaining Contractual Life in YearsOutstanding$
              2.125
                  - 5.125
              
              
              151,500
              
              $
              2.62
              
              
              6.65.813
                  - 8.250
              
              
              63,900
              
              
              6.00
              
              
              4.0$
              2.125
                  - 8.250
              
              
              215,400
              
              $
              3.63
              
              
              5.8Exercisable$
              2.125
                  - 5.125
              
              
              142,420
              
              $
              2.65
              
              
              --5.813
                  - 8.250
              
              
              63,900
              
              
              6.00
              
              
              --$
              2.125
                  - 8.250
              
              
              206,320
              
              $
              3.69
              
              
              --
  37
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 We
        apply
        Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to
        Employees” (APB No. 25), and related interpretations in accounting for the
        plans, and, except for certain shares subject to variable plan accounting,
        no
        compensation expense has been recognized for stock options issued under the
        plans. For companies electing to continue the use of APB No. 25, SFAS No.
        123
“Accounting for Stock-Based Compensation”, requires pro forma disclosures
        determined through the use of an option-pricing model as if the provisions
        of
        SFAS No. 123 had been adopted.
 
 In
        December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment”, which is a
        revision to SFAS No. 123. SFAS 123R requires all share-based payments to
        employees, including stock options, to be expensed based on their fair values.
        We have disclosed the effect on net earnings and earnings per share under
        SFAS
        123. SFAS 123R contains three methodologies for adoption: (1) adopt SFAS
        123R on
        the effective date for interim periods thereafter, (2) adopt SFAS 123R on
        the
        effective date for interim periods thereafter and restate prior interim periods
        included in the fiscal year of adoption under the provisions of SFAS 123,
        or (3)
        adopt SFAS 123R on the effective date for interim periods thereafter and
        restate
        all prior interim periods under the provisions of SFAS 123. SFAS 123R must
        be
        adopted and in the first fiscal year beginning after June 15, 2005. We intend
        to
        adopt SFAS 123R on November 1, 2005 using the prospective method. We believe
        that the adoption of SFAS 123R will not have a material effect on the
        Consolidated Financial Statements.
 
 On
        November 11, 2001, our former CEO was granted 110,000 options at $2.11 and
        all
        of his previous option grants were cancelled. These options were subject
        to
        variable plan accounting, which resulted in a charge to expense in fiscal
        2004
        of $322,000 and in fiscal 2003 of $51,000. As of October 31, 2005, all options
        subject to variable plan accounting have been exercised.
  If
        we had
        adopted the provisions of SFAS No. 123, net income and earnings per share
        would
        have been as follows:
  2005
              
              2004
              
              2003Net
                  income (in thousands)
              
              $
              16,420
              
              $
              6,174
              
              $
              265Earnings
                  per share:Basic
              
              $
              2.66
              
              $
              1.07
              
              $
              0.05Diluted
              
              $
              2.59
              
              $
              1.02
              
              $
              0.05
  As
        of
        October 31, 2005, there were no outstanding non-qualified options that had
        been
        granted outside of the 1990 and 1997 plans to current members of the Board
        of
        Directors.
  **9.**
              **RELATED
                  PARTY TRANSACTIONS**
 
 We
        own
        approximately 24% of one of our Taiwanese-based contract manufacturers. This
        investment of $975,000 is
        accounted for using the equity method and is included in Investments and
        Other
        Assets on the Consolidated Balance Sheet. Purchases of product from this
        contract manufacturer totaled $2.7
        million, $4.4 million, and $3.7 million for the years ended October 31, 2005,
        2004 and 2003, respectively. Sales of product to this contract manufacturer
        were
        $117,000, $199,000 and $205,000 in fiscal 2005, 2004 and 2003 respectively.
        Trade payables to this contract manufacturer were $509,000 at October 31,
        2005
        and $115,000 at October 31, 2004. Trade receivables were $136,000 at October
        31,
        2005 and $62,000 at October 31, 2004.
  38
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 As
        of
        October 31, 2005, we owned 35% of Hurco Automation, Ltd. (HAL), a Taiwan
        based
        company. HAL’s scope of activities includes the design, manufacture, sales and
        distribution of industrial automation products, software systems and related
        components, including control systems and components manufactured under contract
        for sale exclusively to us. We are accounting for this investment using the
        equity method. The investment of $1.6 million at October 31, 2005 is included
        in
        Investments and Other Assets on the Consolidated Balance Sheet. Purchases
        of
        product from this supplier amounted to $7.7 million, $6.6 million, and $4.8
        million in 2005, 2004 and 2003, respectively. Sales of product to this supplier
        were $1.8 million, $1.9 million and $1.2 million for the years ended October
        31,
        2005, 2004 and 2003, respectively. Trade payables to HAL were $1.6 million
        and
        $2.5 million at October 31, 2005 and 2004, respectively. Trade receivables
        from
        HAL were $242,000 and $581,000 at October 31, 2005 and 2004,
        respectively.
 
 Summary
        financial information for the two affiliates accounted for using the equity
        method of accounting is as follows:
 
 (in
                  thousands)
              
              2005
              
              2004
              
              2003Net
                  Sales
              
              $
              50,896
              
              $
              23,469
              
              $
              26,284Gross
                  Profit
              
              
              8,947
              
              
              7,780
              
              
              4,409Operating
                  Income
              
              
              2,676
              
              
              2,210
              
              
              564Net
                  Income
              
              
              2,313
              
              
              1,479
              
              
              261Current
                  Assets
              
              $
              21,553
              
              $
              16,194
              
              $
              17,162Non-current
                  Assets
              
              
              1,824
              
              
              2,031
              
              
              2,015Current
                  Liabilities
              
              
              14,857
              
              
              17,215
              
              
              13,549
 
 **10.**
              **CONTINGENCIES
                  AND LITIGATION**
 
 We
        are
        involved in various claims and lawsuits arising in the normal course of
        business. We do not expect any of these claims, individually or in the
        aggregate, to have a material adverse effect on our consolidated financial
        position or results of operations.
 
 **11.**
              **GUARANTEES**
  During
        fiscal 2003, we adopted Financial Accounting Standards Board (FASB)
        Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure
        Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
        of
        Others, an interpretation of FASB Statements No. 5, 57 and 107 and Rescission
        of
        FASB Interpretation No. 34.” FIN 45 clarifies the requirements of FASB Statement
        No. 5, Accounting for Contingencies, relating to the guarantor’s accounting for,
        and disclosures of, the issuance of certain types of guarantees.
  From
        time
        to time, our European subsidiaries guarantees third party lease financing
        residuals in connection with the sale of certain machines in Europe. At October
        31, 2005 there were 38 third party guarantees totaling approximately $1.6
        million. A retention of title clause allows our German subsidiary to obtain
        the
        machine if the customer defaults on its lease. We believe that the proceeds
        obtained from liquidation of the machine would cover any payments required
        under
        the guarantee.
  39
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 We
        provide warranties on our products with respect to defects in material and
        workmanship. The terms of these warranties are generally one year for machines
        and shorter periods for service parts. We recognize a reserve with respect
        to
        this obligation at the time of product sale, with subsequent warranty claims
        recorded against the reserve. The amount of the warranty reserve is determined
        based on historical trend experience and any known warranty issues that could
        cause future warranty costs to differ from historical experience. A
        reconciliation of the changes in our warranty reserve is as follows (in
        thousands):
  Warranty
                  ReserveBalance
                  at October 31, 2004
              
              $
              1,750Provision
                  for warranties during the period
              
              
              1,709Charges
                  to the accrual
              
              
              (1,778
              )Impact
                  of foreign currency translation
              
              
              (63
              )Balance
                  at October 31, 2005
              
              $
              1,618
 
 **12.**
              **OPERATING
                  LEASES**
  We
        lease
        facilities, certain equipment and vehicles under operating leases that expire
        at
        various dates through 2010. Future payments required under operating leases
        as
        of October 31, 2005, are summarized as follows (in thousands):
  2006
              
              $
              1,5432007
              
              
              1,0982008
              
              
              6172009
              
              
              4582010
              
              
              291Thereafter
              
              
              194Total
              
              $
              4,201
 
 Lease
        expense for the years ended October 31, 2005, 2004, and 2003 was $1.8 million,
        $1.5 million, and $1.5 million, respectively.
 
 We
        recorded $180,000 of lease income from subletting 50,000 square feet of our
        Indianapolis facility. The sublease expires on April 30, 2010.
  40
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 **13.**
              **QUARTERLY
                  HIGHLIGHTS (Unaudited)**
 FirstQuarter
                
                SecondQuarter
                
                ThirdQuarter
                
                FourthQuarter**2005
                    (In thousands, except per share data)**Sales
                    and service fees
                
                $
                30,246
                
                $
                30,990
                
                $
                29,555
                
                $
                34,718Gross
                    profit
                
                
                9,740
                
                
                10,767
                
                
                9,863
                
                
                12,188Gross
                    profit margin
                
                
                32.2
                %
                
                34.7
                %
                
                33.3
                %
                
                35.1
                %Selling,
                    general and administrative expenses
                
                
                6,187
                
                
                6,363
                
                
                6,637
                
                
                6,870Operating
                    income
                
                
                3,553
                
                
                4,404
                
                
                3,226
                
                
                5,318Provision
                    (benefit) for income taxes
                
                
                369
                
                
                781
                
                
                317
                
                
                (1,828)
                (1)Net
                    income
                
                
                3,030
                
                
                3,299
                
                
                2,879
                
                
                7,235Income
                    per common share - basic
                
                $
                .50
                
                $
                .53
                
                $
                .46
                
                $
                1.16Income
                    per common share - diluted
                
                $
                .48
                
                $
                .52
                
                $
                .45
                
                $
                1.13
 
 FirstQuarter
                
                SecondQuarter
                
                ThirdQuarter
                
                FourthQuarter**2004
                    (In thousands, except per share data)**Sales
                    and service fees
                
                $
                22,718
                
                $
                24,255
                
                $
                23,748
                
                $
                28,851Gross
                    profit
                
                
                6,531
                
                
                7,413
                
                
                7,313
                
                
                9,041Gross
                    profit margin
                
                
                28.7
                %
                
                30.6
                %
                
                30.8
                %
                
                31.3
                %Restructuring
                    expense and other expense, net (Note 15)
                
                
                --
                
                
                --
                
                
                --
                
                
                465Selling,
                    general and administrative expenses
                
                
                4,927
                
                
                5,127
                
                
                5,241
                
                
                6,106Operating
                    Income
                
                
                1,604
                
                
                2,286
                
                
                2,072
                
                
                2,470Provision
                    (benefit) for income taxes
                
                
                366
                
                
                388
                
                
                405
                
                
                140Net
                    Income
                
                
                669
                
                
                1,737
                
                
                1,582
                
                
                2,281Income
                    per common share - basic
                
                $
                .12
                
                $
                .31
                
                $
                .27
                
                $
                .38Income
                    per common share - diluted
                
                $
                .12
                
                $
                .29
                
                $
                .25
                
                $
                .36
 (1) The
        fourth quarter included a $2.3 million adjustment to the tax provision to
        reverse our deferred tax asset valuation allowance. See Note 6.
  41
 
 **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 **14.**
              **SEGMENT
                  INFORMATION**
 
 We
        operate in a single segment: industrial automation equipment. We design and
        produce interactive computer control systems and software and computerized
        machine tools for sale through our own distribution network to the worldwide
        metal working market. We also provide software options, control upgrades,
        accessories and replacement parts for our products, as well as customer service
        and training support.
 
 Our
        computerized metal cutting machine tools are manufactured to our specifications
        by manufacturing contractors in Taiwan including our wholly owned subsidiary,
        Hurco Manufacturing Limited (HML). Our executive offices and principal design,
        engineering, and manufacturing management operations are headquartered in
        Indianapolis, Indiana. We sell our products through approximately 230
        independent agents and distributors in approximately 50 countries throughout
        North America, Europe and Asia. We also have our own direct sales and service
        organizations in England, France, Germany, Italy, Singapore and China. During
        fiscal 2005, no customer accounted for more than 5% of our sales and service
        fees.
 
 The
        following table sets forth the contribution of each of our product groups
        to our
        total sales and service fees during each of the past three fiscal years (in
        thousands):
 **Net
                    Sales and Service Fees by Product Category**
                
                **Year
                    ended October 31,****2005**
                
                **2004**
                
                **2003**Computerized
                    Machine Tools
                
                $
                107,313
                
                $
                83,663
                
                $
                61,385Computer
                    Control Systems and Software *
                
                
                4,129
                
                
                3,604
                
                
                3,044Service
                    Parts
                
                
                9,991
                
                
                8,696
                
                
                7,643Service
                    Fees
                
                
                4,076
                
                
                3,609
                
                
                3,460Total
                
                $
                125,509
                
                $
                99,572
                
                $
                75,532
  *Amounts
        shown do not include CNC systems sold as an integrated component of computerized
        machine systems.
  The
        following table sets forth revenues by geographic area, based on customer
        location, for each of the past three fiscal years were (in
        thousands):
 
 **Revenues
                  by Geographic Area**
              
              **Year
                  Ended October 31****2005**
              
              **2004**
              
              **2003**United
                  States
              
              $
              40,666
              
              $
              30,654
              
              $
              22,829Germany
              
              
              36,039
              
              
              31,206
              
              
              22,111United
                  Kingdom
              
              
              11,917
              
              
              8,818
              
              
              8,381Other
                  Europe
              
              
              26,061
              
              
              20,361
              
              
              17,735Total
                  Europe
              
              
              74,017
              
              
              60,385
              
              
              48,227Asia
                  and Other
              
              
              10,826
              
              
              8,533
              
              
              4,476Total
                  Foreign
              
              
              84,843
              
              
              68,918
              
              
              52,703$
              125,509
              
              $
              99,572
              
              $
              75,532
  42
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 Long-lived
        tangible assets by geographic area were (in thousands):
 
 October
                  312005
              
              2004United
                  States
              
              $
              8,034
              
              $
              7,458Foreign
                  countries
              
              
              3,117
              
              
              1,489$
              11,151
              
              $
              8,947
  **15.**
              **RESTRUCTURING
                  EXPENSE AND OTHER EXPENSE,
                  NET**
 
 During
        fiscal 2002, we discontinued several under-performing product lines, sold
        the
        related assets and discontinued a software development project to enable
        us to
        focus our resources and technology development on our core products, which
        consist primarily of general purpose computerized machine tools for the metal
        cutting industry (vertical machining centers) into which our proprietary
        Ultimax Ò software
        and computer control systems have been fully integrated. Included in
        restructuring expense and other expense, net in fiscal 2002 is a $1.1 million
        provision for potential expenditures related to a disputed claim in the United
        Kingdom, regarding a terminated facility lease (Note 10). The disputed facility
        lease claim was settled in fiscal 2003 and paid in the first quarter of fiscal
        2004.
 
 The
        severance accrual of $264,000 at October 31, 2002 represented costs related
        to
        employees to be paid in future periods. The severance provision represented
        53
        positions that have been eliminated or were to be eliminated in fiscal 2003.
        At
        October 31, 2002, 38 employees had been paid the full amount of their severance
        while the remaining 15 employees were paid at various times through the second
        quarter of fiscal 2003. In fiscal 2003, we paid the remaining severance and
        adjusted the foreign lease liability balance to the actual settlement
        amount.
 
 On
        November 23, 2004, we entered into a separation and release agreement with
        Roger
        J. Wolf, who retired from his position as Senior Vice President and as Chief
        Financial Officer. Under the agreement, we will pay Mr. Wolf severance
        compensation totaling $465,000.
 
 Description
              
              Balance
                  10/31/02
              
              Provision
                  (Credit)
              
              Charges
                  to Accrual
              
              Balance
                  10/31/03Severance
                  costs
              
              $
              264
              
              $
              (43
              )
              $
              221
              
              $
              --Foreign
                  lease termination liability
              
              
              1,113
              
              
              (81
              )
              
              (157
              )
              
              1,189$
              1,377
              
              $
              (124
              )
              $
              64
              
              $
              1,189
 
 
 Description
              
              
              Balance
                  10/31/03
              
              
              Provision
                  (Credit)
              
              
              Charges
                  to Accrual
              
              
              Balance
                  10/31/04Severance
                  costs
              
              $
              --
              
              $
              465
              
              $
              --
              
              $
              465Foreign
                  lease termination liability
              
              
              1,189
              
              
              --
              
              
              1,189
              
              
              --$
              1,189
              
              $
              465
              
              $
              1,189
              
              $
              465
 
 Description
              
              
              Balance
                  10/31/04
              
              
              Provision
                  (Credit)
              
              
              Charges
                  to Accrual
              
              
              Balance
                  10/31/05Severance
                  costs
              
              $
              465
              
              $
              --
              
              $
              321
              
              $
              144$
              465
              
              $
              --
              
              $
              321
              
              $
              144
  43
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
  **16.**
              **NEW
                  ACCOUNTING PRONOUNCEMENTS**
 
 In
        the
        first quarter of fiscal 2004, we adopted the Financial Accounting Standards
        Board Interpretation No. 46 (FIN 46) Consolidation of Variable Interest
        Entities. This Interpretation requires existing unconsolidated variable interest
        entities to be consolidated by their primary beneficiaries if the entities
        do
        not effectively disperse risks among parties. The adoption of this standard
        did
        not have a material effect on the Consolidated Financial Statements.
 
 In
        December 2004, the FASB issued Statement No. 123R, “Share Based Payment”, that
        requires companies to expense the value of employee stock options and similar
        awards for interim and annual periods beginning after June 15, 2005 and applies
        to all outstanding and unvested stock-based awards at a company’s adoption date.
        We believe that the adoption of SFAS 123R will not have a material effect
        on the
        Consolidated Financial Statements.
  **Item
                  9.**
              **CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURES**
 
 Not
        Applicable.
 
 **Item
                  9A.**
              **CONTROLS
                  AND PROCEDURES**
 
 We
        carried out an evaluation under the supervision and with participation of
        management, including the Chief Executive Officer and Chief Financial Officer,
        of the effectiveness of the design and operation of our disclosure controls
        and
        procedures as of October 31, 2005 pursuant to Rule 13a-15(b) under the
        Securities Exchange Act of 1934, as amended. Based upon that evaluation,
        our
        management, including the Chief Executive Officer and Chief Financial Officer,
        concluded that our disclosure controls and procedures were effective as of
        the
        evaluation date.
 
 There
        have been no changes in our internal controls over financial reporting that
        occurred during the year ended October 31, 2005 that have materially affected,
        or are reasonably likely to materially affect, our internal control over
        financial reporting.
  **Item9B.**
              **OTHER
                  INFORMATION**
 
 Not
        applicable.
  44
 
 **PART
        III**
 
 **Item
                  10.**
              **DIRECTORS
                  AND EXECUTIVE OFFICERS OF THE
                  REGISTRANT**
 
 The
        information required by this item is hereby incorporated by reference from
        our
        definitive proxy statement for our 2006 annual meeting of shareholders except
        that the information required by Item 10 regarding Executive Officers is
        included herein under a separate caption at the end of Part I.
 
 **Item
                  11.**
              **EXECUTIVE
                  COMPENSATION**
 
 The
        information required by this item is hereby incorporated by reference from
        the
        definitive proxy statement for our 2006 annual meeting of
        shareholders.
 
 **Item
                  12.**
              **SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS**
 
 Except
        for the information concerning equity compensation plans, the information
        required by this item is hereby incorporated by reference from the definitive
        proxy statement for our 2006 annual meeting of shareholders.
 
 Equity
        Compensation Plan Information
 The
        following table gives information about our common stock that may be issued
        upon
        the exercise of options, warrants and rights under all of our existing equity
        compensation plans as of October 31, 2005, including the 1997 Stock Option
        and
        Incentive Plan and the 1990 Stock Option Plan.
 
 Plan
                  Category
              
              Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights (a) (#)
              
              Weighted-average
                  exercise price of outstanding options, warrants and rights (b)
                  ($)
              
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column (a))
                  (c)
                  (#)Equity
                  compensation plans approved by security holders
              
              
              215,400
              
              
              $3.63
              
              
              341,500Equity
                  compensation plans not approved by security holders
              
              
              --
              
              
              --
              
              
              --Total
              
              
              215,400
              
              
              $3.63
              
              
              341,500
 
 As
        of
        October 31, 2005, there were no outstanding non-qualified options that had
        been
        granted outside of the 1990 and 1997 plans to current members of the Board
        of
        Directors.
 
 **Item
                  13.**
              **CERTAIN
                  RELATIONSHIPS AND RELATED
                  TRANSACTIONS**
 
 The
        information required by this item is hereby incorporated by reference from
        the
        definitive proxy statement for our 2006 annual meeting of
        shareholders.
  45
 
 **Item
                  14.**
              **PRINCIPAL
                  ACCOUNTANT FEES AND
                  SERVICES**
 
 The
        information required by this item is hereby incorporated by reference from
        the
        definitive proxy statement for our 2006 annual meeting of
        shareholders.
 
 **PART
        IV**
 
 **Item
                  15.**
              **EXHIBITS
                  AND FINANCIAL STATEMENT SCHEDULES**
  (a)
                1.
                Financial
                    Statements.
                    The following consolidated financial statements of Registrant
                    are included
                    herein under Item 8 of Part II:
 
 PageReport
                    of Independent Registered Public Accounting Firm
                
                22Consolidated
                    Statements of Income - years ended October 31, 2005, 2004 and
                    2003
                
                23Consolidated
                    Balance Sheets - as of October 31, 2005 and 2004
                
                24Consolidated
                    Statements of Cash Flows - years ended October 31, 2005, 2004
                    and
                    2003
                
                25Consolidated
                    Statements of Changes in Shareholders’ Equity - years ended October 31,
                    2005, 2004 and 2003
                
                26Notes
                    to Consolidated Financial Statements
                
                27
 
 2.
                Financial
                    Statement Schedule.
                    The following financial statement schedule is included in this
                    Item
 
 PageSchedule
                    II - Valuation and Qualifying Accounts and Reserves
                
                47
 
 All
          other
          financial statement schedules are omitted because they are not applicable
          or the
          required information is included in the consolidated financial statements
          or
          notes thereto.
 
 (b)
                Exhibits
 
 Exhibits
          are filed with this Form 10-K or incorporated herein by reference as listed
          on
          pages 48 and 49.
  46
  **Schedule
        II - Valuation and Qualifying Accounts and Reserves**
 **for
        the years ended October 31, 2005, 2004, and 2003**
 (Dollars
        in thousands)
  Description
                
                Balance
                    at Beginning of Period
                
                Charged
                    to Costs and Expenses
                
                Charged
                    To Other Accounts
                
                Deductions
                
                Balance
                    At End Of PeriodAllowance
                    for doubtfulAccounts
                    for the year ended:October
                    31, 2005
                
                $
                723
                
                $
                169
                
                
                --
                
                $
                50
                (1)
                $
                842October
                    31, 2004
                
                $
                630
                
                $
                286
                
                
                --
                
                $
                193
                (2)
                $
                723October
                    31, 2003
                
                $
                689
                
                $
                421
                
                $
                --
                
                $
                480
                (3)
                $
                630Accrued
                    warranty expensesFor
                    the year ended:October
                    31, 2005
                
                $
                1,750
                
                $
                1,646
                
                
                --
                
                $
                1,778
                
                $
                1,618October
                    31, 2004
                
                $
                1,016
                
                $
                2,323
                
                
                --
                
                $
                1,589
                
                $
                1,750October
                    31, 2003
                
                $
                1,003
                
                $
                1,148
                
                $
                --
                
                $
                1,135
                
                $
                1,016
 (1)
              Receivable
                  write-offs of $50,000, net of cash recoveries on accounts previously
                  written off of $0.
  (2)
              Receivable
                  write-offs of $193,000, net of cash recoveries on accounts previously
                  written off of $0.
  (3)
              Receivable
                  write-offs of $493,000 net of cash recoveries on accounts previously
                  written off of $13,000.
  47
  **EXHIBITS
        INDEX**
 
 Exhibits
        Filed .
        The
        following exhibits are filed with this report:
 
 11
              Statement
                  re: computation of per share earnings.21
              Subsidiaries
                  of the Registrant.23
              Consent
                  of PricewaterhouseCoopers LLP.31.1
              Certification
                  by the Chief Executive Officer, pursuant to Rule 13a-15(b) under
                  the
                  Securities and Exchange Act of 1934, as amended.31.2
              Certification
                  by the Chief Financial Officer, pursuant to Rule 13a-15(b) under
                  the
                  Securities and Exchange Act of 1934, as amended.32.1
              Certification
                  by the Chief Financial Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.32.2
              Certification
                  by the Chief Financial Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.
 
 Exhibits
        Incorporated by Reference .
        The
        following exhibits are incorporated into this report:
 
 3.1
              Amended
                  and Restated Articles of Incorporation of the Registrant, incorporated
                  by
                  reference to Exhibit 3.1 to the Registrant's Report on Form 10-Q
                  for the
                  quarter ended July 31, 2000.3.2
              Amended
                  and Restated By-Laws of the Registrant dated January 5, 2005, incorporated
                  by reference as Exhibit 3.1 to the Registrant’s Form 8-K filed on January
                  11, 2005.10.3
              First
                  Amendment to the Third Amended and Restated Credit Agreement between
                  the
                  Registrant and Bank One, NA dated as of October 26, 2004, incorporated
                  by
                  reference as Exhibit 10.1 to the Registrant’s Form 8-K filed on November
                  1, 2004.10.4
              Revolving
                  Credit Facility and Overdraft Facility - Supplemental Facility
                  Agreement
                  between Hurco Europe Limited and Bank One, NA dated October 26,
                  2004,
                  incorporated by reference as Exhibit 10.2 to the Registrant’s Form 8-K
                  filed on November 1, 2004.10.5
              Employment
                  Agreement between the Registrant and James D. Fabris dated November
                  18,
                  1997, incorporated by reference as Exhibit 10.15 to the Registrant's
                  Report on Form 10-Q for the quarter ended January 31,
                  1998.10.6
              Mortgage
                  dated April 30, 2002 between the Registrant and American Equity
                  Investment
                  Life Insurance Company incorporated by reference as Exhibit 10.2
                  to the
                  Registrant’s Report on Form 10-Q for the quarter ended April 30,
                  2002.10.7
              Employment
                  Agreement between the Registrant and Michael Doar dated November
                  13, 2001
                  incorporated by reference as Exhibit 10.2 to the Registrant’s Report on
                  Form 10-Q dated January 31,
                  2002.
  48
 
 10.8
              Separation
                  and Release Severance Agreement between the Registrant and Roger
                  J. Wolf,
                  incorporated by reference as Exhibit 10.2 to the Registrant’s Form 8-K
                  filed November 24, 2004.10.9*
              Amended
                  1997 Stock Option and Incentive Plan incorporated by reference
                  as Exhibit
                  10 to the Registrant’s Report on Form 10-Q filed for the quarter ended
                  July 31, 2005.10.10
              Employment
                  Agreement between the Registrant and Stephen J. Alesia dated January
                  18,
                  2005 incorporated by reference as Exhibit 10.2 to the Registrant’s Annual
                  Report on Form 10-K dated October 31, 2004.10.11*
              Form
                  of option agreement relating to the Amended 1997 Stock Option and
                  Incentive Plan incorporated by reference as Exhibit 10.1 to the
                  Registrant’s Annual Report on Form 10-K dated October 31,
                  2004.
 _______________
 *
              The
                  indicated exhibit is a management contract, compensatory plan or
                  arrangement required to be listed by Item 601 of Regulation S-K.
  49
  **SIGNATURES**
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the Registrant has duly caused this Report to be signed on its behalf
        by
        the undersigned, thereunto duly authorized, this 23rd day of January
        2006.
 
 HURCO
                  COMPANIES, INC.By:
              /s/
                  Stephen J. AlesiaStephen
                  J. AlesiaVice-President,
                  Secretary,Treasurer
                  andChief
                  Financial Officer
 
 
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the Registrant and in
        the
        capacities and on the dates indicated:
 
 
 Signature
                  and Title(s)
              
              Date/s/
                  Michael Doar
              
              January
                  23, 2006Michael
                  Doar, Chairman of the Board,Chief
                  Executive Officer and Directorof
                  Hurco Companies, Inc.(Principal
                  Executive Officer)/s/
                  Stephen J. Alesia
              
              January
                  23, 2006Stephen
                  J. AlesiaVice-President,Secretary,
                  Treasurer andChief
                  Financial Officerof
                  Hurco Companies, Inc.(Principal
                  Financial Officer)/s/
                  Sonja K. McClelland
              
              January
                  23, 2006Sonja
                  K. McClellandCorporate
                  Controller, Assistant Secretaryof
                  Hurco Companies, Inc.(Principal
                  Accounting Officer)
  50
 
 /s/
                  Stephen H. Cooper
              
              January
                  23, 2006Stephen
                  H. Cooper, Director/s/
                  Robert W. Cruickshank
              
              January
                  23, 2006Robert
                  W. Cruickshank, Director/s/
                  Richard T. Niner
              
              January
                  23, 2006Richard
                  T. Niner, Director/s/
                  O. Curtis Noel
              
              January
                  23, 2006O.
                  Curtis Noel, Director/s/
                  Charlie Rentschler
              
              January
                  23, 2006Charlie
                  Rentschler, Director/s/
                  Gerald V. Roch
              
              January
                  23, 2006Gerald
                  V. Roch, Director
  51