UNITED
STATES


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 for the fiscal year ended October 31, 2010
  or


 ̈
            Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 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
                        
                        (I.R.S. Employer Identification Number)incorporation or organization)One Technology WayIndianapolis, 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.                                                                                                       Yes
 ̈  No
x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or


Section
15(d).                                                                                                       Yes
 ̈  No
x





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





Indicate by check mark if disclosure of
delinquent filers pursuant to Item 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. ̈





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


Large
accelerated filer  ̈  Accelerated
filer x   Non-accelerated
filer  ̈  Smaller
Reporting Company  ̈


(Do
not check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act).                     
Yes  ̈  No
x





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes  ̈  No
 ̈


The
aggregate market value of the registrant’s voting stock held by non-affiliates
as of April 30, 2010 (the last day of our most recently completed second
quarter) was $125,339,000.





The
number of shares of the registrant’s common stock outstanding as of January 7,
2011 was 6,440,851.





DOCUMENTS
INCORPORATED BY REFERENCE: Portions of the registrant’s Proxy Statement for its
2011 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 risks, uncertainties and other
factors include the risks identified in Item 1A.




PART I





Item1.            BUSINESS





General





Hurco
Companies, Inc. is an industrial technology company.  We design,
manufacture and sell computerized machine tools, consisting primarily of
vertical machining centers (mills) and turning centers (lathes), to companies in
the metal working industry through a worldwide sales, service and distribution
network.  Although our computer control systems and software products
are proprietary, they predominantly use industry standard personal computer
components.  Our computer control systems and software products are
primarily sold as integral components of our computerized machine tool
products.  As used in this report, the words “we”, “us”, “our”,
“Hurco” and the “Company” refer to Hurco Companies, Inc. and its consolidated
subsidiaries.





Since our
founding in 1968, we 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 pioneered the
application of microprocessor technology and conversational programming software
for use in machine tools.  Our computer control systems 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 a particular part from a blueprint or computer aided design file and
immediately begin machining that part.





Our
executive offices and principal design and engineering operations are
headquartered in Indianapolis, Indiana, USA.  Sales, application
engineering and service subsidiaries are located in Canada, China, France,
Germany, India, Italy, Poland, Singapore, South Africa, South Korea, and the
United Kingdom. We have manufacturing operations in Taiwan and China, and
distribution facilities in the USA, the Netherlands, and
Singapore.





Our
strategy is to design, manufacture and sell a comprehensive line of computerized
machine tools that incorporate our proprietary, interactive, computer control
technology for the global metalworking market.  Our 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 produced and employed
using standard PC hardware. We have emphasized a “user-friendly” design that
employs both interactive conversational and graphical programming software. Each
year we have expanded our product offering to meet customer needs, which has led
us to design and manufacture more complex machining centers with advanced
capabilities.  We bring a disciplined approach to strategically enter
new geographic markets, as appropriate.  Combined with a strong
worldwide demand for machine tools, our introduction of new, technologically
advanced products and expansion into new markets resulted in significant growth
between the beginning of fiscal 2003 and the end of fiscal
2008.  Since the beginning of fiscal 2009, that growth trend reversed
sharply due to the impact of the recent global recession. While we incurred net
losses during each quarter of fiscal 2010, we experienced improvement each
consecutive quarter of this fiscal year as market conditions started to
recover.


1





Industry




Machine
tool products are considered capital goods, which makes them part
of an industry that has historically been highly cyclical.




Although,
industry association data for the U.S. machine tool market is available, that
market accounts for only 6% of worldwide consumption.  Reports available
for the U.S. machine tool market include:




·
            United
      States Machine Tool Consumption – generated by the Association for
      Manufacturing Technology and American Machine Tool Distributor
      Association, this report includes metal cutting machines of all types and
      sizes, including segments in which we do not
  compete


·
            Purchasing
      Manager’s Index - developed by the Institute for Supply
      Management and reports activity levels in U.S. manufacturing
      plants that purchase machine
  tools


·
            Capacity
      Utilization of Manufacturing Companies – issued by the Federal
      Reserve Board




A limited
amount of information for foreign markets is available, and different
reporting methodologies are used by various countries.  Machine tool
consumption data published by Gardner Publications, Inc., calculates machine
tool consumption annually by country.  It is important to note that data
for foreign countries is based on government reports that may lag 6 to 12 months
and therefore is unreliable for forecasting purposes.




Demand
for capital equipment can fluctuate significantly during periods of
changing economic conditions as experienced in the recent global recession that
began in early fiscal 2009.  Manufacturers and suppliers of capital goods,
such as us, are often the first to experience these changes in demand.
Additionally, since our typical order backlog is approximately 30 to 45
days, it is difficult to estimate demand with any reasonable certainty.
Therefore, we do not have the benefit of relying on the common leading
indicators that are available to many other industries for market analysis and
forecasting purposes.




Products




Our core
products consist of general purpose computerized machine tools for the metal
cutting industry.  These are, principally, vertical machining centers
(mills) and turning centers (lathes), with which our proprietary software and
computer control systems are fully integrated. We also produce computer control
systems and related software for press brake applications that are sold as
retrofit units for installation on existing or new press brake
machines.   Additionally, we produce and distribute software
options, control upgrades, hardware accessories, and replacement parts for our
machine tool product lines, and we provide operator training and support
services to our customers.




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 31,2010
                  
                  
                  2009
                  
                  
                  2008Continuing
      Products and ServicesComputerized
      Machine Tools
                  
                  $
                  88,184
                  
                  
                  
                  83.3
                  %
                  
                  $
                  75,213
                  
                  
                  
                  82.7
                  %
                  
                  $
                  199,238
                  
                  
                  
                  89.0
                  %Computer
      Control Systems and Software *
                  
                  
                  2,347
                  
                  
                  
                  2.2
                  %
                  
                  
                  2,546
                  
                  
                  
                  2.8
                  %
                  
                  
                  5,678
                  
                  
                  
                  2.5
                  %Service
      Parts
                  
                  
                  10,798
                  
                  
                  
                  10.2
                  %
                  
                  
                  8,851
                  
                  
                  
                  9.7
                  %
                  
                  
                  13,240
                  
                  
                  
                  5.9
                  %Service
      Fees
                  
                  
                  4,564
                  
                  
                  
                  4.3
                  %
                  
                  
                  4,406
                  
                  
                  
                  4.8
                  %
                  
                  
                  5,838
                  
                  
                  
                  2.6
                  %Total
                  
                  $
                  105,893
                  
                  
                  
                  100
                  %
                  
                  $
                  91,016
                  
                  
                  
                  100
                  %
                  
                  $
                  223,994
                  
                  
                  
                  100
                  %


*Amounts shown do not
include computer control systems sold as integrated components of computerized
machine tools.


2





Computerized
Machine Tools – Machining and Turning Centers





We
design, manufacture and sell computerized machine tools equipped with a fully
integrated interactive computer control system that features our WinMax®
software. Our computer control system enables a machine tool operator to create
complex two-dimensional or three-dimensional machining programs directly from an
engineering drawing or computer aided design geometry file. An operator with
little or no machine tool programming experience can successfully create a
program with minimal training and begin machining the part in a short period of
time.  The control features an operator console with a liquid crystal
display (LCD), and incorporates an upgradeable personal computer (PC) platform
using a high speed processor with solid rendering graphical
programming.  In addition, WinMax® has
a Windows®*
based operating system to enable users to improve shop floor flexibility and
software productivity.





Companies
using computer controlled machine tools are better able to:





•
            maximize
      the efficiency of their human
resources


•
            make
      more advanced and complex parts from a wide range of materials using
      multiple processes


•
            incorporate
      fast moving changes in technology into their operations to keep their
      competitive edge


•
            integrate
      into the global supply chain of their customers by supporting small to
      medium lot sizes for “just in time”
initiatives





Our
Windows®*
based control facilitates our ability to meet these customer needs. The familiar
Windows®*
operating system coupled with our intuitive conversational style of program
creation allows our customers’ operators to create and edit part-making programs
without incurring the incremental overhead of specialized computer aided design
and computer aided manufacturing programmers. With the ability to transfer most
computer aided design data directly into a Hurco program, programming time
becomes minutes instead of hours.





Machine
tool products today are being designed to meet the demand for machining complex
parts with greater part accuracies.  Our proprietary controls with
WinMax® software and high speed processors efficiently handle the large amounts
of data these complex part-making programs require, which enables our customers
to create parts with higher accuracy at faster speeds. We continue to add
technology to our control design as it becomes available.





Our
offering of machining centers, currently equipped with either a twin
touch-screen console or a single touch-screen console, consists of the following
six product lines:





VM
Product Line





The VM
product line consists of moderately priced vertical machining centers for the
entry-level market. Their design premise of a machining center with a large work
cube and a small footprint optimizes the use of available floor space. The VM
line consists of five models in three sizes with X-axis (horizontal) travels of
26, 40, and 50 inches. The base prices of the VM machines range from $40,000 to
$95,000.





VMX
Product Line





The VMX
product line consists of higher performing vertical machining centers aimed at
manufacturers that require greater part accuracy. It is our flagship series of
machining centers. The VMX line consists of fourteen models in seven sizes with
X-axis travels of 24, 30, 42, 50, 60, 64, and 84 inches. The base prices of VMX
machines range from $50,000 to $200,000.


3





Five-Axis
Product Line





The
five-axis product line is targeted at manufacturers seeking to produce complex
multi-sided parts in a single setup. Machines in this product line can yield
significant productivity gains for manufacturers  that previously had
to process each side of a part separately.  Due to growing market
demand for increased processing efficiency, we continued to focus on five-axis
technology in fiscal 2010. In total, we have nine five-axis machining centers to
offer customers. The base prices of the five-axis machines range from $100,000
to $250,000.





TM/TMM
Product Line





Since its
introduction in fiscal 2005, we have continued to expand the TM turning center
(horizontal slant-bed lathe) product line. The TM series is designed for
entry-level job shops and contract manufacturers seeking efficient processing of
small to medium lot sizes. The TM is offered in four models TM6, TM8, TM10 and
the new TM18L turning center, which accommodates parts as long as 79 inches that
are commonly required in the growing energy sector and the aerospace
sector.  We added motorized tooling on the lathe turret to further
enhance the capability of the TM turning centers and designated it as the TMM
product line.  These turning centers with live tooling allow our
customers to complete a number of secondary milling, drilling and tapping
operations while the part is still held in the chuck after the turning
operations are complete, which provides significant productivity gains. We offer
two TMM models.  The base prices of the TM/TMM machines range from
$40,000 to $225,000.





TMX
Product Line





The TMX
product line consists of high performance turning centers.  We added
two TMX models in fiscal 2010, which means we have six TMX models. Two of the
models are equipped with an additional axis and motorized live tooling, and two
models have an additional spindle. The base prices of TMX turning centers range
from $85,000 to $180,000.





Specialty
Product Lines





This
category includes three product series: the dual column DCX Series, the zone
VTXZ Series, and the horizontal HTX Series. The zone VTXZ machining center is
designed for production flexibility. The VTXZ can work as a dual work zone
machine to support continuous production or a single zone to produce long,
structural parts. Both the DCX Series and VTXZ Series are designed to facilitate
production of large parts and molds often required by the aerospace and energy
industries. The horizontal machining center (HTX) is also included in this
category as it facilitates efficient and accurate machining of complex
production parts. The base prices of these machines range from $240,000 to
$350,000.





*Windows®is a registered trademark of
Microsoft Corporation.





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.


4





Software
Products


In addition to our standard
computer control features, we offer software option products for two-dimensional
programming.  These products are sold to users of our computerized
machine tools equipped with our twin touch-screen or single
touch-screen consoles featuring WinMax®control
software.  The options include: Swept Surface, SelectSurface Finish
Quality (SFQ), DXF Transfer, UltiMonitorTM, UltiMotionTM, UltiPocketTM, Conversational Part and
Tool Probing, Advanced Verification Graphics, and Simultaneous Five-Axis
Contouring.


Our Swept Surface software
option simplifies programming of 3D contours and significantly reduces
programming time.





SelectSurface Finish Quality
(SFQ) lets the customer control surface finish quality and run time in one easy
step.





The DXF Transfer software
option can increase operator productivity because it eliminates manual data
entry of part features by transferring AutoCADTMdrawing files directly into
our computer control or into our desktop programming software,
WinMax®Desktop.





UltiMonitor is a
web-based productivity,
management and service tool, enabling customers tomonitor, inspect and receive
notifications about their Hurco machines from any location where they can access
the internet.  Customers can transfer part designs, receive event
notifications via email or text, access diagnostic data, monitor the machine via
webcam and communicate with the machine operator.





UltiMotionusessoftware-based motion
controlwhich is
more efficient thanconventional hardware-based
motion control. This software-based motion control systemprovides significant cycle
time reductions,
minimizes machine jerk, and increases the quality of the part’s surface
finish.





UltiPocketTMautomatically calculates the
tool path around islands, eliminating the arduous task of plotting these
shapes.  Islands can also be rotated, scaled and
repeated.





Conversational Part and Tool
Probing options permit the computerized dimensional measurement of machined
parts and the associated cutting tools.  This “on-machine” technique
improves the throughput of the measurement process when compared to traditional
“off-machine” approaches.





The Advanced Verification
Graphics feature significantly reduces both scrap and programming time because
it provides customers with a three-dimensional solid rendering of the part,
including dynamic rotation. This feature allows a customer to view the rendered
part from any angle without needing to redraw it.





SimultaneousFive-AxisContouring software enables a
five-axis machine to command motion concurrently on all axes. This allows the
user to create continuous tool-paths along complex geometries with only a single
machine/part setup, providing increased productivity along with the performance
benefits of using shorter cutting tools. The sale of simultaneous five-axis
contouring software is subject to governmentexportlicensingrequirements.





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 product sales.  Our service organization also
sells software options, computer control upgrades, accessories and replacement
parts for our products.  Our after-sales parts and service business
strengthens our customer relationships and provides continuous information
concerning the evolving requirements of end-users.


5





Manufacturing





Our computerized metal
cutting machine tools are manufactured to our specifications primarily by our
wholly owned subsidiary in Taiwan, Hurco Manufacturing Limited
(HML).  HML conducts final assembly operations and is supported by a
network of contract suppliers of components and sub-assemblies who manufacture
components for our products in accordance with our proprietary designs, quality
standards and cost specifications.Our manufacturing facility in
Ningbo, China, focuses on the machining of castings to support HML’s production
in Taiwanas
well as producingVM and TM machines
specifically for the Chinese market.


We have a contract
manufacturing agreement for computer control systems with Hurco Automation,
Ltd., a Taiwanese company in which we have a 35% ownership
interest.  This company produces all of our computer control systems
to our specifications, sources industry standard computer components and our
proprietary parts, performs final assembly and conducts test
operations.





We work closely with our
subsidiaries, key component suppliers and our minority-owned affiliate to ensure
that their production capacity will be sufficient to meet the projected demand
for our machine tool products.  Many of the key components used in our
machines can be sourced from multiple suppliers. However, any prolonged
interruption of operations or significant reduction in the capacity or
performance capability at any of our manufacturing facilities, or at any of our
key component suppliers, could have a material adverse effect on our
operations.





Marketing
and Distribution





We sell our products through
more than 100 independent agents and distributors throughout North America,
Europe and Asia.  Although some distributors carry competitive
products, we are the primary line for the majority of our distributors
globally.  We also have direct sales personnel in Canada, China,
France, Germany,India,Italy,
Poland, Singapore, South Africa,South Korea,the United Kingdom and
certain parts of the United States, which are among the world's principal
machine tool consuming markets.


Approximately 94% of the
worldwidedemand
for computerizedmachine tools and computer control systems is outside the United
States.In fiscal 2010, more than 70% of our
revenues were from overseas customers.  No single end-user or
distributor of
our products accounted for morethan 5%of our total sales and
service fees.





The end-users of our products
are precision tool, die and mold manufacturers, independent metal parts
manufacturers, and specialized production application or prototype departments
within large manufacturing companies.  Industries served include
aerospace, defense, medical equipment, energy, automotive/transportation,
electronics and computer equipment.





We also sell our
Autobend®computer control systems to
original equipment manufacturers of new metal fabrication machine tools who
integrate them with their own products prior to the sale of those products to
their own customers, to retrofitters of used metal fabrication machine tools who
integrate them with those machines as part of the retrofitting operation, and to
end-users who have an installed base of metal fabrication machine tools, either
with or without related computer control systems.





Demand





We believe demand for our
products is driven by advances in industrial technology and the related demand
for automated process improvements.





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 markets in Asia and Eastern
      Europe


•
            the
      declining supply of skilled
machinists


6


Demand for our products is
also 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. For additional information regardingrecenteconomic conditions and
their impact on our results of operationsand financial condition,
refer to Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.





Competition





We compete with many other
machine tool producers in the United States and foreign
countries.  Most of our competitors are larger and have greater
financial resources than our company.  Major worldwide competitors
include Deckel Maho Gildemeister Group (DMG), Mori Seiki Co., Ltd., Mazak, Haas
Automation, Inc., Hardinge, Doosan, Okuma Machinery Works Ltd., Milltronics, and
MAG Industrial Automation Systems.
  We strive to compete
effectively bydevelopingpatented software and other
proprietary features that offer enhanced productivity, 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.


Intellectual
Property





We
consider our products to be proprietary.  Various features of our
control systems and machine tools employ technologies covered by patents and
trademarks that are material to our business.  We also own additional
patents covering new technologies that we have acquired or developed, and that
we are planning to incorporate into our control systems in the
future.





Research and
Development




In the
fiscal years set forth below, non-capitalized research and development
expenditures for new products and significant product improvements and
expenditures related to software development projects that were capitalized were
as follows (in thousands):




FiscalYear
                
                Non-capitalized
                  research and
                  development
                
                
                Capitalized
                  software
                  development2010
                
                $
                2,200
                
                
                $
                1,2002009
                
                
                2,500
                
                
                
                2,0002008
                
                
                3,000
                
                
                
                900


Employees





We had
approximately 440 full-time employees at the end of fiscal 2010, none of whom
were 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 in which we sell our products is set forth in
Note 14 of Notes to Consolidated Financial Statements.





Some of
the risks of doing business on a global basis are described in Item 1A. Risk
Factors below.


7





Backlog





For
information on orders and backlog, see Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations.





Availability of Reports and
Other Information





Our
website can be found at 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 (SEC) as soon as reasonably practical after the filing
date.  These reports can also be obtained at the SEC’s Public
Reference Room at 100 F Street, NE Washington, DC 20549.





Item
1A. RISK
FACTORS





In this
section we describe what we believe to be the material risks related to our
business.  The risks and uncertainties described below or elsewhere in
this report are not the only ones to which we are exposed. Additional risks and
uncertainties not presently known and/or risks we currently deem immaterial may
also adversely affect our business and operations. If any of the developments
included in the following risks were to occur, our business, financial
condition, results of operations, cash flows or prospects could be materially
adversely affected.





The
recent global recession has adversely affected overall demand and our customers’
ability to purchase our products and services.





The
recent global recession and the overall decline in economic activity reduced our
sales substantially from pre-recession levels.  In addition, banks and
other lenders limited the ability of many businesses, including our customers,
to access the credit markets. For additional information regarding recent
economic conditions and their impact on our results of operations and financial
condition, refer to Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.  Although we have seen potential
signs of economic recovery and are currently experiencing substantial increases
in revenues and new orders, there can be no assurance that there will be a
sustained recovery or that our performance will return to pre-recession
levels.





The
cyclical nature of our business causes fluctuations in our operating
results.





The
machine tool industry is highly cyclical and changes in demand can occur
abruptly in the geographic markets we serve.  As a result of this
cyclicality, we have experienced significant fluctuations in our sales, which,
in periods of reduced demand, have adversely affected our results of operations
and financial condition.





Our
international operations pose additional risks that may adversely impact sales
and earnings.





During
fiscal 2010, more than 70% of our revenues were derived from sales to customers
located outside the United States.  In addition, our manufacturing
facilities are located outside of the United States.  Our
international operations are subject to a number of risks,
including:





·
            trade
      barriers


·
            regional
      economic uncertainty


·
            differing
      labor regulation


·
            governmental
      expropriation


·
            domestic
      and foreign customs and tariffs


·
            current
      and changing regulatory environments affecting the importation and
      exportation of products and raw
materials


·
            difficulty
      in obtaining distribution support


·
            difficulty
      in staffing and managing widespread
operations


8





·
            differences
      in the availability and terms of
financing


·
            political
      instability and unrest


·
            changes
      in tax regulations and rates in foreign
  countries





Quotas,
tariffs, taxes or other trade barriers could require us to change manufacturing
sources, reduce prices, increase spending on marketing or product development,
withdraw from or not enter certain markets or otherwise take actions that could
be adverse to us.  Also, in some foreign jurisdictions, we may be
subject to laws limiting the right and ability of entities organized or
operating therein to pay dividends or remit earnings to affiliated companies
unless specified conditions are met.  These factors may adversely
affect our future operating results.  The vast majority of our
products are shipped from our manufacturing facility in Taiwan from the Port of
Taichung to three ports of destination: Los Angeles, California, Venlo, the
Netherlands, and Singapore.  Changes in customs requirements, as a
result of national security or other constraints put upon these ports, may also
have an adverse impact on our results of operations.





We
depend on limited sources for our products.





Our
wholly owned subsidiary in Taiwan, Hurco Manufacturing Ltd. (HML), produces the
vast majority of our machine tools.  An  unplanned
interruption in manufacturing at HML would have a material adverse effect on our
results of operations and financial condition.  Such an interruption
could result from a change in the political environment in Taiwan or a natural
disaster, such as an earthquake, typhoon, or tsunami. Any interruption in
service by one of our key component suppliers, if prolonged, also could have a
material adverse effect on our results of operations and financial
condition.





Fluctuations
in the exchange rates between the U.S. Dollar and any of several foreign
currencies can increase our costs and decrease our revenues.





Our
foreign sales generate more than 70% of our revenues, which are invoiced and
received in several foreign currencies, primarily the Euro and Pound Sterling.
Therefore, our results of operations and financial condition are affected by
fluctuations in exchange rates between these currencies and the U.S. Dollar,
both for purposes of actual conversion and for financial reporting purposes. In
addition, we are exposed to exchange risk associated with our purchases of
materials and components for our Taiwan manufacturing operations, which are
primarily made in the New Taiwan Dollar.  We hedge our foreign
currency exposure with the purchase of forward exchange contracts. These hedge
contracts only mitigate the impact of changes in foreign currency rates that
occur during the term of the related contract period and carry risks of
counter-party failure.  There can be no assurance that our hedges will
have the intended effects.  Refer to Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations and Note 1 of
Notes to Consolidated Financial Statements for the impact of translation of
foreign currencies and hedging on our consolidated financial
statements.





Our
competitive position and prospects for growth may be diminished if we are unable
to develop and introduce new and enhanced products on a timely basis that are
accepted in the market.





The
machine tool industry is subject to technological change, evolving industry
standards, changing customer requirements, and improvements in and expansion of
product offerings. Our ability to anticipate changes in technology, industry
standards, customers’ requirements and competitors’ product offerings and to
develop and introduce new and enhanced products on a timely basis that are
accepted in the market, are significant factors in maintaining and improving our
competitive position and growth prospects.  If the technologies or
standards used in our products become obsolete or fail to gain widespread
commercial acceptance, our business would be materially adversely affected.
Although we believe that we have the technological capabilities to remain
competitive, developments by others may render our products or technologies
obsolete or noncompetitive.


9


We
compete with larger companies that have greater financial resources, and our
business could be harmed by competitors’ actions.





The
markets in which our products are sold are extremely competitive and highly
fragmented. In marketing our products, we compete with other manufacturers in
terms of quality, reliability, price, value, delivery time, service and
technological characteristics. We compete with a number of U.S., European and
Asian competitors, most of which are larger, have substantially greater
financial resources and are supported by governmental or financial institution
subsidies and therefore may have competitive advantages over us. While we
believe our product lines compete effectively, our financial resources are
limited compared to those of most of our competitors, making it challenging to
remain competitive.




Fluctuations
in the price of raw materials, especially steel and iron, could adversely affect
our sales, costs and profitability.





We
manufacture products with a high iron and steel content for which worldwide
prices have been increasing. The availability and price for these and other raw
materials are subject to volatility due to worldwide supply and demand forces,
speculative actions, inventory levels, exchange rates, production costs and
anticipated or perceived shortages. In some cases, those cost increases can be
passed on to customers in the form of price increases; in other cases they
cannot. If the prices of raw materials increase and we are not able to charge
our customers higher prices to compensate, our results of operations would be
adversely affected.





Due
to future changes in technology, changes in market demand, or changes in market
expectations, portions of our inventory may become obsolete or
excess.





The
technology within our products changes and generally new versions of machines
are brought to market, in three-year to five-year cycles. The phasing out of an
old product involves estimating the amount of inventory to hold to satisfy the
final demand for those machines and to satisfy future repair part needs. Based
on changing customer demand and expectations of delivery times for repair parts,
we may find that we have either obsolete or excess inventory on hand. Because of
unforeseen future changes in technology, market demand or competition, we might
have to write off unusable inventory, which would adversely affect our results
of operations.





We
may make acquisitions that could disrupt our operations and harm our operating
results.





Although
we have no current plans for any material acquisitions, we may seek to expand
our product offerings or the markets we serve by acquiring other companies,
product lines, technologies and personnel.  Acquisitions involve
numerous risks, including the following:





·
            difficulties
      integrating the operations, technologies, products, and personnel of the
      acquired companies


·
            diversion
      of management’s attention from normal daily operations of the
      business


·
            potential
      difficulties completing projects associated with in-process research and
      development


·
            difficulties
      entering markets in which we have no or limited prior experience,
      especially when competitors in such markets have stronger market
      positions


·
            initial
      dependence on unfamiliar supply chains or relatively small supply
      partners


·
            insufficient
      revenues to offset increased expenses associated with
      acquisitions


·
            the
      potential loss of key employees of the acquired
  companies





Acquisitions
may also cause us to:





·
            issue
      common stock that would dilute our current shareholders’ percentage
      ownership


·
            assume
      liabilities


·
            record
      goodwill and non-amortizable intangible assets that will be subject to
      impairment testing on a regular basis and potential periodic impairment
      charges


10





·
            incur
      amortization expenses related to certain intangible
  assets


·
            incur
      large and immediate write-offs, and restructuring and other related
      expenses


·
            become
      subject to litigation





Mergers
and acquisitions are inherently risky. No assurance can be given that our
acquisitions will be successful. Further, no assurance can be given that
acquisitions will not adversely affect our business, operating results, or
financial condition. Failure to manage and successfully integrate acquisitions
could harm our business and operating results in a material way. Even when an
acquired company has already developed and marketed products, there can be no
assurance that product enhancements will be made in a timely manner or that
pre-acquisition due diligence will identify all possible issues that might arise
with respect to such products.





Risks
related to new product development also apply to acquisitions. For additional
information, please see the risk factor above entitled, “Due to future changes
in technology, changes in market demand, or changes in market expectations,
portions of our inventory may become obsolete or excess.”





Assets
may become impaired, requiring us to record a significant charge to
earnings.





We review
our assets for indications of impairment when events or changes in circumstances
indicate the carrying value may not be recoverable.  We could be
required to record a significant charge to earnings in our financial statements
for the period in which any impairment of these assets is determined, which
would adversely affect our results of operations for that period.





The
Company may experience negative or unforeseen tax consequences.





The
Company may experience negative or unforeseen tax consequences.  The
Company reviews the probability of the realization of our net deferred tax
assets each period based on forecasts of taxable income in both the U.S. and
foreign jurisdictions.  This review uses historical results, projected
future operating results based upon approved business plans, eligible
carryforward periods, tax-planning opportunities and other relevant
considerations.  Adverse changes in the profitability and financial outlook
in the U.S. or foreign jurisdictions may require the creation of a valuation
allowance to reduce our net deferred tax assets.  Such changes could result
in material non-cash expenses in the period in which the changes are made and
could have a material adverse impact on the Company’s results of operations and
financial condition.





Our
continued success depends on our ability to protect our intellectual
property.





Our
future success depends in part upon our ability to protect our intellectual
property.  We rely principally on nondisclosure agreements, other
contractual arrangements, trade secret law, trademark registration and patents
to protect our intellectual property.  However, these measures may be
inadequate to protect our intellectual property from infringement by others or
prevent misappropriation of our proprietary rights.  In addition, the
laws of some foreign countries do not protect proprietary rights to the same
extent as do U.S. laws.  Our inability to protect our proprietary
information and enforce our intellectual property rights through infringement
proceedings could have a material adverse effect on our business, financial
condition and results of operations.





The
unplanned loss of current members of our senior management team and other key
personnel may adversely affect our operating results.





The
unexpected loss of senior management or other key personnel could impair our
ability to carry out our business plan. We believe that our future success will
depend in part on our ability to attract and retain highly skilled and qualified
personnel. The loss of senior management or other key personnel may adversely
affect our operating results as we incur costs to replace the departed personnel
and potentially lose opportunities in the transition of important job
functions.


11


Item
1B. UNRESOLVED STAFF
COMMENTS




None.




Item
2.         PROPERTIES





The
following table sets forth the principal use, location, and size of each of our
facilities:





PrincipalUses
                                                
                                                Locations
                                                
                                                SquareFootageCorporate
      headquarters, design and engineering, product testing, sales and
      marketing, application engineering and customer service.
                                                
                                                Indianapolis,
      Indiana, USA   (1)
                                                
                                                
                                                165,000Manufacturing
                                                
                                                Taichung,
      Taiwan
                                                
                                                
                                                229,100Ningbo,
      China
                                                
                                                
                                                61,200Sales,
      design engineering, product testing and customer service.
                                                
                                                Dexter,
      Michigan, USA
                                                
                                                
                                                3,000Sales,
      application engineering & customer service.
                                                
                                                Mississauga,
      Canada
                                                
                                                
                                                3,600High
      Wycombe, England
                                                
                                                
                                                12,000Benoni,
      South Africa
                                                
                                                
                                                2,500Paris
      and Toulouse, France
                                                
                                                
                                                11,100Munich,  Hagen
      and Roedermark, Germany
                                                
                                                
                                                24,200Milan,
      Italy
                                                
                                                
                                                10,800Tegelen,
      the Netherlands
                                                
                                                
                                                800South
      Korea
                                                
                                                
                                                700Singapore
                                                
                                                
                                                6,300Shanghai,
      China
                                                
                                                
                                                8,000Guangzhou,
      China
                                                
                                                
                                                4,000Ningbo,
      China
                                                
                                                
                                                3,200Chennai,
      India
                                                
                                                
                                                6,100Liegnitz,
      Poland
                                                
                                                
                                                2,900Grand
      Rapids, Michigan, USA
                                                
                                                
                                                5,000Ball
      Ground, Georgia, USA
                                                
                                                
                                                2,300Warehouse,
      distribution, sales, application engineering and customer
      service.
                                                
                                                Los
      Angeles, California, USA
                                                
                                                
                                                13,100


(1)
              Approximately
      50,000 square feet is leased to a third-party under a lease, which expires
      October 31, 2011.




We own
the Indianapolis facility and lease all other facilities.  The leases
have terms expiring at various dates ranging from February 2011 to May
2017.  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.




12




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 financial position or
results of operations.





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 October 31, 2010, the name of each
executive officer and 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
              
              55
              
              Chairman of the Board,
      Chief Executive Officer and PresidentJohn
      G. Oblazney
              
              42
              
              Vice
      President, Secretary, Treasurer and Chief Financial
  OfficerJohn
      P. Donlon
              
              53
              
              Executive
      Vice President, Worldwide Sales and ServiceSonja
      K. McClelland
              
              39
              
              Corporate
      Controller, Assistant SecretaryGregory
      S. Volovic
              
              46
              
              Executive
      Vice President of Technology and
Operations




Michael
Doar was elected
Chairman of the Board and Chief Executive Officer on November 14, 2001,
and President upon the resignation of Jim Fabris effective October 31,
2009.  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.





John G.
Oblazney was elected Vice President, Secretary, Treasurer and Chief Financial
Officer in September 2006.  Prior to joining us, Mr. Oblazney served
as the Chief Financial Officer of Carrier Corporation’s Light Commercial
Business, a division of United Technologies Corporation, since December 2005.
Prior to that, Mr. Oblazney served in various other financial positions with
Carrier Corporation from 2000 to 2005.  Prior to joining Carrier
Corporation, Mr. Oblazney was employed for six years with Cooper Industries and
employed for three years by an international public accounting
firm.





John P.
Donlon has been employed by us since April 2010 as Executive Vice
President, Worldwide Sales and Service.  Prior to joining us, Mr. Donlon
served as the Vice President of Sales for Yaskawa America Robotics since 2008.
From 2004 to 2008, Mr. Donlon served as the Vice President of Sales and
Marketing for Ansaldo STS, a worldwide supplier of automation technologies to
the rail industry. Earlier in his career, Mr. Donlon held executive sales
and management positions with other multi-national companies including Honeywell
and ABB, and he has significant international experience in the emerging markets
of China, Russia and Brazil.





Sonja K.
McClelland has been employed by us 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.  Prior to joining us, Ms. McClelland was employed for three
years by an international public accounting firm.


13





Gregory
S. Volovic has been employed by us since March 2005 and has been Executive Vice
President of Technology and Operations since October 2009.  Mr.
Volovic previously held the position of Executive Vice President, Software &
Engineering.  Prior to joining us, Mr. Volovic held various positions
with Thomson, Inc. including Director of E-Business, Engineering, and
Information Technology. Prior to that, Mr. Volovic was employed by Unisys
Corporation.





PART II





Item
5. MARKET FOR THE REGISTRANT'S
COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES


OF EQUITY
SECURITIES


Our
common stock is traded on the Nasdaq Global Select Market under the symbol
“HURC”.  The following table sets forth the high and low sale prices
of the shares of our common stock for the periods indicated, as reported by the
Nasdaq Global Select Market.





2010
                
                
                2009Fiscal Quarter Ended:
                
                High
                
                
                Low
                
                
                High
                
                
                LowJanuary
      31
                
                $
                18.59
                
                
                $
                13.83
                
                
                $
                24.68
                
                
                $
                11.81April
      30
                
                
                20.18
                
                
                
                16.11
                
                
                
                16.97
                
                
                
                8.30July
      31
                
                
                19.50
                
                
                
                14.29
                
                
                
                19.89
                
                
                
                12.01October
      31
                
                
                19.15
                
                
                
                15.53
                
                
                
                20.45
                
                
                
                15.26





On
January 7, 2011, the closing price of our common stock on the Nasdaq Global
Select Market was $24.90.





We do not
currently pay dividends on our common stock and intend to continue to retain
earnings for working capital and capital expenditures.





There
were 175 holders of record of our common stock as of January 7,
2011.





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. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.


14


Item
6.           SELECTED FINANCIAL DATA





The
Selected Financial Data presented below has 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 and Management’s Discussion and Analysis of Financial Condition and
Results of Operations.





Year Ended October 312010
                      
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006Statement
      of Operations Data:
                      
                      (Dollars
      in thousands, except per share amounts)Sales
      and service fees
                      
                      $
                      105,893
                      
                      
                      $
                      91,016
                      
                      
                      $
                      223,994
                      
                      
                      $
                      188,047
                      
                      
                      $
                      148,517Gross
      profit
                      
                      
                      21,796
                      
                      
                      
                      25,828
                      
                      
                      
                      82,617
                      
                      
                      
                      71,082
                      
                      
                      
                      53,325Selling,
      general and administrative expenses
                      
                      
                      29,837
                      
                      
                      
                      30,874
                      
                      
                      
                      46,811
                      
                      
                      
                      40,124
                      
                      
                      
                      30,697Operating
      income (loss)
                      
                      
                      (8,041
                      )
                      
                      
                      (5,046
                      )
                      
                      
                      35,806
                      
                      
                      
                      30,958
                      
                      
                      
                      22,628Other
      income (expense)
                      
                      
                      (818
                      )
                      
                      
                      1,234
                      
                      
                      
                      (1,640
                      )
                      
                      
                      1,742
                      
                      
                      
                      745Net
      income (loss)
                      
                      
                      (5,744
                      )
                      
                      
                      (2,321
                      )
                      
                      
                      22,520
                      
                      
                      
                      20,889
                      
                      
                      
                      15,479Earnings
      (loss) per common share- diluted
                      
                      
                      (0.89
                      )
                      
                      
                      (0.36
                      )
                      
                      
                      3.49
                      
                      
                      
                      3.24
                      
                      
                      
                      2.42Weighted
      average common shares outstanding-diluted
                      
                      
                      6,441
                      
                      
                      
                      6,429
                      
                      
                      
                      6,444
                      
                      
                      
                      6,440
                      
                      
                      
                      6,397





As of October 312010
                        
                        
                        2009
                        
                        
                        2008
                        
                        
                        2007
                        
                        
                        2006Balance Sheet Data:
                        
                        (Dollars in thousands)Current
      assets
                        
                        $
                        136,208
                        
                        
                        $
                        118,264
                        
                        
                        $
                        151,312
                        
                        
                        $
                        139,265
                        
                        
                        $
                        103,434Current
      liabilities
                        
                        
                        42,240
                        
                        
                        
                        20,807
                        
                        
                        
                        51,129
                        
                        
                        
                        63,215
                        
                        
                        
                        44,340Working
      capital
                        
                        
                        93,968
                        
                        
                        
                        97,457
                        
                        
                        
                        100,183
                        
                        
                        
                        76,050
                        
                        
                        
                        59,094Current
      ratio
                        
                        
                        3.2
                        
                        
                        
                        5.7
                        
                        
                        
                        3.0
                        
                        
                        
                        2.2
                        
                        
                        
                        2.3Total
      assets
                        
                        
                        160,346
                        
                        
                        
                        144,743
                        
                        
                        
                        177,444
                        
                        
                        
                        163,781
                        
                        
                        
                        125,545Non-current
      liabilities
                        
                        
                        3,366
                        
                        
                        
                        3,560
                        
                        
                        
                        2,838
                        
                        
                        
                        2,963
                        
                        
                        
                        5,830Total
      debt
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        4,010Shareholders’
      equity
                        
                        
                        114,740
                        
                        
                        
                        120,376
                        
                        
                        
                        123,477
                        
                        
                        
                        97,603
                        
                        
                        
                        75,375


15




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.





The
following overview is intended to provide a brief explanation of the principal
factors that have contributed to our recent financial
performance.  This overview is intended to be read in conjunction with
the more detailed information included in our audited financial statements that
appear elsewhere in this report.





Until the
recent global recession, we had experienced a period of sustained growth in
sales and earnings due to the strong worldwide demand for machine tools, the
expansion of our product line to include higher-priced and higher-margin
products, increased customer acceptance of our products, and the strength of our
selling and manufacturing operations outside the United States.  The
recession adversely affected our operational performance and its lingering
effects have reduced global demand for machine tools.





The
market for machine tools is international in scope.  We have both
significant foreign sales and foreign manufacturing
operations.  During fiscal 2009, approximately 66% of our revenues
were attributable to customers located in Europe and 6% of our sales were
attributable to customers located in Asia.  During fiscal 2010, 62% of
our revenues were attributable to customers in Europe and 12% of our sales were
attributable to customers in Asia, reflecting increased market demand in the
Asia Pacific region where we sell more of our entry-level, lower-priced
machines, but where we also encounter competitive price pressures. In contrast,
in Europe, we typically sell our higher performance VMX series machines at
higher prices and margins.  We sell our products through more than 100
independent agents and distributors in countries throughout North America,
Europe and Asia.  We also have our own direct sales and service
organizations in Canada, China, France, Germany, India, Italy, Poland,
Singapore, South Africa, South Korea, the United Kingdom and certain parts of
the United States.  The vast majority of our machine tools are
manufactured to our specifications primarily by our wholly owned subsidiary in
Taiwan, Hurco Manufacturing Limited (HML).  Machine castings and
components to support HML’s production are manufactured at our facility in
Ningbo, China.  We also manufacture machine tools for the Chinese
market at the Ningbo plant.





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. Our product costs are incurred
and paid primarily in the New Taiwan Dollar and the U.S.
Dollar.  Changes in currency exchange rates may have a material effect
on our operating results and consolidated balance sheets as reported under U.S.
Generally Accepted Accounting Principles.  For example, when the U.S.
Dollar weakens in value relative to a foreign currency, 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 the U.S. Dollar is
stronger.  In the comparison of our period-to-period results, we
discuss the effect of currency translation on those results including the
increases or decreases in those results as reported in our financial statements
(which reflect translation to U.S. Dollars at exchange rates prevailing during
the period covered by those financial statements) and 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 derivative instruments – principally foreign
currency forward exchange contracts.


16





In
response to the global recession, beginning in the fourth quarter of fiscal
2008, we implemented various cost saving initiatives that ultimately served to
reduce expenses by an amount in excess of $15 million annually, while staying
committed to our strategic plan of technological development, product innovation
and increased penetration of developing markets.  We also implemented
an inventory reduction plan that allowed us the flexibility to cut back our
production for a period of twelve months to a level substantially lower than
that prevailing during the previous three years in order to bring inventory
levels in line with demand.





Based
upon our current inventory position and order levels, we have increased our
production levels to be in line with the current trend of increasing order
demand.   Our ability to invest in our sales organization and product
development during the worst economic downturn in the history of the machine
tool industry, should allow us to capitalize on this increasing
demand.





Recently
we have had a significant upturn in our business.  During the fourth
quarter of fiscal 2010, orders were 80% higher than in the fourth quarter of
fiscal 2009.  Sales for the fourth quarter of fiscal 2010 were 50%
above those in the fourth quarter of fiscal 2009 and represented the fifth
consecutive quarter of increased sales.  The improvement in sales,
combined with an increase in the number of higher performance VMX series
machines sold in Europe, raised our gross margin rate for the fourth quarter of
fiscal 2010 to 24.4%, compared to a gross margin rate of 18.7% for the combined
first three quarters of fiscal 2010.





Results of
Operations





The
following table presents, for the fiscal years indicated, selected items from
the Consolidated Statements of Operations expressed as a percentage of our
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 % Change2010
                
                
                2009
                
                
                2008
                
                
                Increase (Decrease)’10 vs. ’09
                
                
                ’09 vs. ’08Sales
      and service fees
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                16.3
                %
                
                
                (59.4
                )%Gross
      profit
                
                
                20.6
                %
                
                
                28.4
                %
                
                
                36.9
                %
                
                
                (15.6
                )%
                
                
                (68.7
                )%Selling,
      general and administrative expenses
                
                
                28.2
                %
                
                
                33.9
                %
                
                
                20.9
                %
                
                
                (3.4
                )%
                
                
                (34.0
                )%Operating
      income (loss)
                
                
                (7.6
                )%
                
                
                (5.5
                )%
                
                
                16.0
                %
                
                
                (59.4
                )%
                
                
                (114.1
                )%Other
      income (expense)
                
                
                (0.8
                )%
                
                
                1.4
                %
                
                
                (0.7
                )%
                
                
                (166.3
                )%
                
                
                175.2
                %Net
      income (loss)
                
                
                (5.4
                )%
                
                
                (2.6
                )%
                
                
                10.1
                %
                
                
                (147.5
                )%
                
                
                (110.3
                )%





Fiscal 2010 Compared to
Fiscal 2009





Sales and Service Fees.Annual sales and service fees for fiscal 2010 were $105.9 million, an
increase of $14.9 million, or 16.3%, from fiscal 2009.  There was no
material impact on the year-over-year increase due to foreign currency
translation.





Since the
beginning of fiscal 2009, our net sales have been materially adversely affected
by the global recession as customers deferred or eliminated investments in
capital equipment. Additionally, customers who might otherwise have been willing
to purchase capital goods found it difficult to obtain financing due to the
contraction of the credit markets.  We consider the increase in net
sales we experienced in fiscal 2010 as an indication of a broader global
recovery.  However, economic conditions in the United States and
Europe remain uncertain and it remains to be seen when we will be able to return
to our pre-recession performance.





17


Net
Sales and Service Fees by Geographic Region





The
following table sets forth net sales and service fees by geographic region for
the fiscal years ended October 31, 2010 and 2009 (in thousands):


October 31,
                
                
                Increase (Decrease)2010
                
                
                2009
                
                
                Amount
                
                
                %North
      America
                
                $
                27,818
                
                
                
                26.3
                %
                
                $
                25,652
                
                
                
                28.2
                %
                
                $
                2,167
                
                
                
                8.4
                %Europe
                
                
                65,678
                
                
                
                62.0
                %
                
                
                60,132
                
                
                
                66.1
                %
                
                
                5,547
                
                
                
                9.2
                %Asia
      Pacific
                
                
                12,397
                
                
                
                11.7
                %
                
                
                5,232
                
                
                
                5.7
                %
                
                
                7,163
                
                
                
                136.9
                %Total
                
                $
                105,893
                
                
                
                100.0
                %
                
                $
                91,016
                
                
                
                100.0
                %
                
                $
                14,877
                
                
                
                16.3
                %





The
significant percentage increase in sales in the Asia Pacific region during
fiscal 2010 was primarily the result of substantially increased market
penetration in China and India, strong demand for our entry-level, lower-priced
machines, as well as continued growing demand in the other Asia Pacific
territories.  In fiscal 2010, unit shipments decreased 5% in North
America, increased by 10% in Europe and 157% in Asia compared to fiscal
2009.





Net
Sales and Service Fees by Product Category





The
following table sets forth net sales and service fees by product category for
the years ended October 31, 2010 and 2009 (in thousands):





October 31,
                          
                          
                          Increase2010
                          
                          
                          2009
                          
                          
                          Amount
                          
                          
                          %Computerized
      Machine Tools
                          
                          $
                          88,184
                          
                          
                          
                          83.3
                          %
                          
                          $
                          75,213
                          
                          
                          
                          82.6
                          %
                          
                          $
                          12,971
                          
                          
                          
                          17.2
                          %Service
      Fees, Parts and Other
                          
                          
                          17,709
                          
                          
                          
                          16.7
                          %
                          
                          
                          15,803
                          
                          
                          
                          17.4
                          %
                          
                          $
                          1,906
                          
                          
                          
                          12.1
                          %Total
                          
                          $
                          105,893
                          
                          
                          
                          100.0
                          %
                          
                          $
                          91,016
                          
                          
                          
                          100.0
                          %
                          
                          $
                          14,877
                          
                          
                          
                          16.3
                          %




Orders and
Backlog.  New order bookings in fiscal 2010, were $115.3
million, an increase of $34.7 million, or 43.1%, over the prior
year.  Approximately half of the year-over-year increase in orders
occurred in the fourth quarter of fiscal 2010, reflecting strong customer demand
in all geographic sales regions.  Orders increased in North America by
$8.9 million, or 38%, in Europe by $14.8 million, or 28%, and in the Asia
Pacific region by $11.0 million, or by 288%, in each case as compared to fiscal
2009.  Orders for fiscal 2010 as a whole were unfavorably affected by
approximately $281,000, or 0.8%, compared to fiscal 2009 due to changes in
currency exchange rates.  Unit orders increased 25% in North America,
27% in Europe and 281% in the Asia Pacific region.   Backlog was
$15.6 million at October 31, 2010, compared to $6.3 million at October 31,
2009.  We do not believe backlog is a useful measure of past
performance or indicative of future performance.  Backlog orders as of
October 31, 2010 are expected to be fulfilled in fiscal 2011.





Gross
Profit.  Gross profit for fiscal 2010 was 20.6%, compared to
28.4% for fiscal 2009.  The decrease in profit as a percentage of
sales was the result of higher allocated fixed costs per machine as machines we
sold during the period were produced at a time of reduced production
levels.  Also contributing to the decrease in gross profit was a
product mix that included a greater amount of our entry-level machines that were
in high demand in the Asia Pacific region where competitive price pressure is a
strong factor.





Operating
Expenses.  Selling, general and administrative expenses were
$29.8 million for fiscal 2010, a decrease of $1.0 million, or 3.4%, from fiscal
2009.  These reductions reflect the benefits of cost reduction
initiatives implemented during the recession.


18





Operating Income (Loss).We incurred
an operating loss for fiscal 2010 of $8.0 million, or 7.6% of sales, compared to
operating loss of $5.0 million, or 5.5% of sales, in fiscal
2009.   The increase in the operating loss year-over-year was
primarily the result of higher allocated fixed costs per machine due to reduced
production levels.  Also contributing to the increase in operating
loss was a product mix that included a greater amount of our entry-level
machines that were in high demand in the Asia Pacific region.





Other (Income)
Expense.  The $2.1 million decrease in other income for fiscal
2010 in comparison to fiscal 2009 was primarily due to net realized gains of
$2.0 million in fiscal 2009 from cash flow hedges of forecasted inter-company
sales and purchases that became ineffective as we reduced production levels
during that year.





Provision (Benefit) for Income
Taxes.  Our effective tax rate for fiscal 2010 was a benefit of
35.2%, compared to a benefit of 39.1% for fiscal 2009.  The change in
the effective tax rate was primarily due to the net impact of recording a
valuation allowance on our state net operating loss carryforwards and the
reversal of tax reserves for uncertain tax positions taken in previous years now
expiring due to statutes of limitations.  We regularly review our
recent results and projected future results of operations, as well as other
relevant factors, to reconfirm the likelihood that our state net operating loss
carryforwards in each tax jurisdiction would be fully recoverable.





Net Income
(Loss).  Net loss for fiscal 2010 was $5.7 million, or $0.89
per diluted share, which is a decrease of $3.4 million from fiscal 2009 net loss
of $2.3 million, or $0.36 per diluted share.





Fiscal 2009 Compared to
Fiscal 2008





Sales and Service Fees.Annual sales and service fees for fiscal 2009 were $91.0 million, a
decrease of $133.0 million, or 59.4%, from fiscal 2008 as a result of the global
recession.  Of this decrease, $7.9 million was attributable to the
unfavorable effect of a strengthening U.S. Dollar on currency
translation.





Beginning
in early fiscal 2009, our net sales were materially adversely affected by the
global recession as customers deferred or eliminated investments in capital
equipment. Additionally, customers who might otherwise have been willing to
purchase capital goods found it difficult to obtain financing due to the
contraction of the credit markets.





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, 2009 and 2008 (in thousands):


October 31,
                
                
                Increase (Decrease)2009
                
                
                2008
                
                
                Amount
                
                
                %North
      America
                
                $
                25,652
                
                
                
                28.2
                %
                
                $
                48,373
                
                
                
                21.6
                %
                
                $
                (22,721
                )
                
                
                (47.0
                )%Europe
                
                
                60,132
                
                
                
                66.1
                %
                
                
                163,807
                
                
                
                73.1
                %
                
                
                (103,675
                )
                
                
                (63.3
                )%Asia
      Pacific
                
                
                5,232
                
                
                
                5.7
                %
                
                
                11,814
                
                
                
                5.3
                %
                
                
                (6,582
                )
                
                
                (55.7
                )%Total
                
                $
                91,016
                
                
                
                100.0
                %
                
                $
                223,994
                
                
                
                100.0
                %
                
                $
                (132,978
                )
                
                
                (59.4
                )%




The
significant decreases in net sales in all three geographic regions reflected the
depth and scope of the global recession.  During fiscal 2009, adverse
economic conditions had the greatest impact on our European sales region, the
primary market for our more expensive, higher-margin machines. The European
sales region accounted for 66% of sales in fiscal 2009 and 73% in fiscal
2008.  In fiscal 2009, unit shipments decreased by 58% in Europe and
55% in North America and Asia from fiscal 2008 levels.


19




Net
Sales and Service Fees by Product Category





The
following table sets forth net sales and service fees by product category for
the years ended October 31, 2009 and 2008 (in thousands):





October 31,
                    
                    
                    Increase2009
                    
                    
                    2008
                    
                    
                    Amount
                    
                    
                    %ComputerizedMachine
      Tools
                    
                    $
                    75,213
                    
                    
                    
                    82.6
                    %
                    
                    $
                    199,238
                    
                    
                    
                    88.9
                    %
                    
                    $
                    (124,025
                    )
                    
                    
                    (62.2
                    )%Service
      Fees, Partsand
      Other
                    
                    
                    15,803
                    
                    
                    
                    17.4
                    %
                    
                    
                    24,756
                    
                    
                    
                    11.1
                    %
                    
                    
                    (8,953
                    )
                    
                    
                    (36.2
                    )%Total
                    
                    $
                    91,016
                    
                    
                    
                    100.0
                    %
                    
                    $
                    223,994
                    
                    
                    
                    100.0
                    %
                    
                    $
                    (132,978
                    )
                    
                    
                    (59.4
                    )%





Sales of
computerized machine tools totaled $75.2 million in fiscal 2009, a decrease of
$124.0 million, or 62.2%, as a result of the impact of the global recession on
the machine tool market.





Orders and
Backlog.  New order bookings in fiscal 2009, were $80.6
million, a decrease of $131.9 million, or 62.1%, from the prior
year.  This decrease was consistent with the global decline in demand,
which was primarily driven by a decline in European orders, which were down
$100.8 million, or 65%. Fiscal 2009 orders in North America decreased $23.9
million, or 51%, and orders in the Asia Pacific sales region decreased $7.2
million, or 65%.  Orders for fiscal 2009 compared to fiscal 2008 were
unfavorably affected by approximately $6.9 million, or 5.2%, due to changes in
currency exchange rates.  Unit orders decreased 60% in Europe, 58% in
North America and 61% in the Asia Pacific region.   Backlog was
$6.3 million at October 31, 2009, compared to $15.7 million at October 31,
2008.  We do not believe backlog is a useful measure of past
performance or indicative of future performance.  Backlog orders as of
October 31, 2009 were fulfilled in fiscal 2010.





Gross
Profit.  Gross profit for fiscal 2009 was 28.4%; a decrease
from the 36.9% profit margin realized in the corresponding 2008 period,
reflecting the impact of lower sales of higher-performance VMX machines in the
European sales region, the impact of fixed costs on lower sales and production
volume, and competitive pricing pressures on a global basis.




Operating Expenses.Selling,
general and administrative expenses were $30.9 million for fiscal 2009, a
decrease of $15.9 million, or 34%, from fiscal 2008.  These reductions
reflect lower sales commissions, the benefit of cost reduction initiatives, and
the favorable effect of a stronger U.S. Dollar in 2009 when translating foreign
operating expenses to U.S. Dollars for financial reporting purposes, partially
offset by severance expense of $780,000.




Operating Income
(Loss).  We incurred an operating loss for fiscal 2009 of $5.0
million, or (5.5%) of sales, compared to operating income of $35.8 million, or
16.0% of sales, in fiscal 2008.   The loss was primarily due to
the significant decline in our sales, particularly those of our
higher-performance VMX machines in the European sales region.  Also
contributing to the loss was the impact of fixed costs on lower sales and
production volume, and competitive pricing pressures on a global
basis.





Other (Income)
Expense.  The $2.9 million increase in other income for fiscal
2009 in comparison to fiscal 2008 was primarily due to net realized gains of
$2.0 million from cash flow hedges of forecasted inter-company sales and
purchases that became ineffective as production levels steeply declined during
the fiscal year.





Provision (Benefit) for Income
Taxes.  The effective tax rate for fiscal 2009 was a benefit of
39.1%, compared to a provision of 34.1% for fiscal 2008.  The change
in the effective tax rate was primarily due to tax credits and the reversal of
tax reserves due to expiring statutes of limitations.




20




Net Income
(Loss).  Net loss for fiscal 2009 was $2.3 million, or ($0.36)
per diluted share, which is a decrease of $24.8 million from fiscal 2008 net
income of $22.5 million, or $3.49 per diluted share.





Liquidity and Capital
Resources




At
October 31, 2010, we had cash and cash equivalents of $48.3 million compared to
$28.8 million at October 31, 2009.  This increase in cash was
primarily the result of reducing finished goods inventory, lower production
levels and increased sales.




Approximately
66.5% of the $48.3 million of cash and cash equivalents is denominated in U.S.
Dollars.  The remaining balances are denominated in the local
currencies of our various foreign entities and are subject to fluctuations in
currency exchange rates.





Working
capital, excluding cash, was $45.7 million at October 31, 2010, compared to
$68.7 million at October 31, 2009.  The reduction in working capital,
excluding cash, was primarily due to a decrease in finished goods inventory and
an increase in accounts payable.





Inventories
were $55.9 million at October 31, 2010, compared to $60.3 million at October 31,
2009.  The $4.4 million decrease was due to a combination of lower
production levels and increased sales, which allowed us to reduce our finished
goods inventory by $15.2 million or 36%.  As a result of the increase
in orders during the second half of fiscal 2010, we increased production to
reflect changes in customer demand and reduce our backlog.  This
increase in production has increased work-in-process inventory by $9.6 million,
or 270%.  We continuously adjust production levels to reflect changes
in customer demand.





Capital
expenditures were $1.8 million in fiscal 2010, $3.7 million in fiscal 2009, and
$5.5 million in fiscal 2008.  Capital expenditures for 2010 were
primarily for software development projects and an integrated computer
system.  We funded these expenditures with cash flow from
operations.




At
October 31, 2010, we had no debt or borrowings outstanding under any of our bank
credit facilities.




We
believe our cash resources will permit us to stay committed to our strategic
plan of product innovation and targeted penetration of developing markets
despite the lingering effects of the recent global recession.  During
the recession we significantly reduced our production levels and implemented
cost saving initiatives that improved our cash position and limited our net
losses.





Although
we have not made any significant acquisitions in the recent past, we continue to
receive and review information on businesses and assets, including intellectual
property assets, which are available for purchase.  Because we have
had four consecutive quarters of net losses, our domestic credit agreement has
restrictions on us making acquisitions, declaring and paying dividends, and
incurring additional indebtedness.  These restrictions will remain in
effect as long as this cumulative loss position exists.





Contractual Obligations and
Commitments





The
following is a table of contractual obligations and commitments as of October
31, 2010 (all amounts in thousands):





Payments Due by PeriodTotal
                
                
                Less than
                  1 Year
                
                
                1-3
                  Years
                
                
                3-5
                  Years
                
                
                More
                  than 5
                  YearsOperating
      Leases
                
                $
                5,061
                
                
                $
                2,329
                
                
                $
                2,173
                
                
                $
                463
                
                
                $
                96Other
                
                
                1,031
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                1,031Total
                
                $
                6,092
                
                
                $
                2,329
                
                
                $
                2,173
                
                
                $
                463
                
                
                $
                1,127




21




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-cancelable
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.  Unrecognized tax benefits in the amount of
approximately $196,000 have been excluded from the table above because we are
unable to determine a reasonably reliable estimate of the timing of future
payment.





We expect
capital spending in fiscal 2011 to be approximately $3.2 million, which includes
investments for capitalized software, capital equipment and costs to continue
implementation of our integrated computer system.  We will fund these
commitments with cash on hand and cash generated from operations.





Off Balance Sheet
Arrangements





From time
to time, our subsidiaries guarantee third party payment obligations in
connection with the sale of machines to customers that use
financing.  At October 31, 2010, 32 such guarantees were outstanding
totaling approximately $1.7 million in guaranteed financing.  Upon
shipment, the customer has the risk of ownership.  The customer does
not obtain title until they have paid for the machine.





Critical Accounting Policies
and Estimates





Our
discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. Generally Accepted Accounting Principles.  The
preparation of financial statements in conformity with those accounting
principles require us to make judgments and estimates that affect the amounts
reported in the consolidated financial statements and accompanying
notes.  Those judgments and estimates have a significant effect on the
financial statements because they result primarily from the need to make
estimates about the effects of matters that are inherently
uncertain.  Actual results could differ from those
estimates.  Our accounting policies, including those described below,
are frequently evaluated as our judgment and estimates are based upon historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances.





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 collectability is reasonably
assured.  In certain foreign locations, we retain title after shipment
under a “retention of title” clause solely to protect
collectability.   The retention of title is similar to Uniform
Commercial Code (“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 by one of our
service technicians.  In most instances where a machine is sold
through a distributor, we have no installation involvement.  If sales
are direct or through sales agents, we 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.





22




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.  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 collectability is reasonably assured.





Inventories – We determine at
each balance sheet date how much, if any, of our inventory may ultimately prove
to be unsalable or unsalable 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.  We evaluate the
need for changes to valuation reserves based on market conditions, competitive
offerings and other factors on a regular basis.





Income Taxes - We record
income taxes under Financial Accounting Standards Board’s (FASB) guidance
related to accounting for income taxes.  This guidance utilizes the
liability method for computing deferred income taxes.  Under this
method, the amount of taxes currently payable or refundable are accrued and
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets are also recognized for realizable loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted income tax rates in each jurisdiction in effect for the year in which
those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in income tax rates is recognized in our Consolidated Statements of
Operations in the period that includes the enactment date.





The
determination of our provision for income taxes requires judgment, the use of
estimates and the interpretation and application of complex tax
laws.  Our provision for income taxes reflects a combination of income
earned and taxed at the federal and state level in the U.S., as well as in
various foreign jurisdictions.  We have not provided for 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 abroad.





As part
of our financial reporting process, we must assess the likelihood that our
deferred tax assets can be recovered.  If recovery is not likely, the
provision for taxes must be increased by recording a reserve in the form of a
valuation allowance for the deferred tax assets that are estimated not to be
ultimately recoverable.  In the process, certain relevant criteria are
evaluated including the existence of deferred tax liabilities that can be used
to absorb deferred tax assets, the taxable income in prior carryback years that
can be used to absorb net operating losses and credit carrybacks, tax planning
strategies, and taxable income in future years.  Our judgment
regarding future profitability may change due to future market conditions,
changes in U.S. or foreign tax laws and other factors.  These changes,
if any, may require material adjustments to these deferred tax assets and an
accompanying reduction or increase in net income in the period when such
determinations are made.





In
addition to the risks to the effective tax rate described above, the future
effective tax rate reflected in forward-looking statements is based on currently
effective tax laws.  Significant changes in those laws could
materially affect these estimates.





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 FASB guidance relating to 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
periodically review the carrying values of these assets and make judgments as to
ultimate realization considering the above-mentioned risk
factors.


23


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 FASB guidance relating to
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.





Stock Compensation – We
account for share-based compensation according to FASB guidance relating to
share based payments, which requires the measurement and recognition of
compensation expense for all share-based awards made to employees and directors
based on estimated fair values on the grant date.  This guidance
requires that we estimate the fair value of share-based awards on the date of
grant and recognize as expense the value of the portion of the award that is
ultimately expected to vest over the requisite service period.


24


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, 2010 and
have not borrowed from our bank credit facilities since February
2005.  Note 4 of Notes to Consolidated Financial Statements sets forth
the terms of our current credit facilities.





Foreign Currency Exchange
Risk





In fiscal
2010, we derived more than 70% of our revenues 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 an affiliated contract
manufacturer. Our 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 the exchange rate risk
associated with our 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 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, 2010,
which are designated as cash flow hedges under FASB guidance related to
accounting for derivative instruments and hedging activities were as
follows:





Contract
      Amount atNotional
                    
                    
                    Weighted
                    
                    
                    Forward
      Rates inAmount
                    
                    
                    Avg.
                    
                    
                    U.S.
      DollarsForward
                    
                    in
      Foreign
                    
                    
                    Forward
                    
                    
                    Contract
                    
                    
                    October
      31,
                    
                    MaturityContracts
                    
                    Currency
                    
                    
                    Rate
                    
                    
                    Date
                    
                    
                    2010
                    
                    DatesSale
      Contracts:Euro
                    
                    
                    20,875,000
                    
                    
                    
                    1.3195
                    
                    
                    $
                    27,543,690
                    
                    
                    $
                    28,937,664
                    
                    Nov
      2010-Oct 2011Sterling
                    
                    
                    4,205,000
                    
                    
                    
                    1.5373
                    
                    
                    $
                    6,464,410
                    
                    
                    $
                    6,725,763
                    
                    Nov
      2010-Oct 2011Purchase
      Contracts:New
      Taiwan Dollar
                    
                    
                    884,000,000
                    
                    
                    
                    30.75
                    *
                    
                    $
                    28,751,939
                    
                    
                    $
                    29,201,543
                    
                    Nov
      2010-Oct
2011


*NT
Dollars per U.S. Dollar


25


Forward
contracts for the sale or purchase of foreign currencies as of October 31, 2010,
which were entered into to protect against the effects of foreign currency
fluctuations on receivables and payables and are not designated as hedges under
this guidance denominated in foreign currencies, were as follows:




Contract
      Amount at ForwardNotional
                        
                        
                        Weighted
                        
                        
                        Rates
      inAmount
      in
                        
                        
                        Avg.
                        
                        
                        U.S.
      DollarsForeign
                        
                        
                        Forward
                        
                        
                        Contract
                        
                        
                        October
      31,ForwardContracts
                        
                        Currency
                        
                        
                        Rate
                        
                        
                        Date
                        
                        
                        2010
                        
                        MaturityDatesSale
      Contracts:Euro
                        
                        
                        6,043,892
                        
                        
                        
                        1.3773
                        
                        
                        $
                        8,324,386
                        
                        
                        $
                        8,389,553
                        
                        Nov
      2010 – Mar 2011Pound
      Sterling
                        
                        
                        469,366
                        
                        
                        
                        1.5688
                        
                        
                        $
                        736,345
                        
                        
                        $
                        751,749
                        
                        Nov
      2010Canadian
      Dollar
                        
                        
                        438,485
                        
                        
                        
                        0.9657
                        
                        
                        $
                        423,453
                        
                        
                        $
                        429,273
                        
                        Dec
      2010South
      African Rand
                        
                        
                        3,714,740
                        
                        
                        
                        0.1391
                        
                        
                        $
                        516,761
                        
                        
                        $
                        523,283
                        
                        Jan
      2011Singapore
      Dollar
                        
                        
                        1,638,828
                        
                        
                        
                        0.7132
                        
                        
                        $
                        1,168,755
                        
                        
                        $
                        1,265,795
                        
                        Mar
      2011Purchase
      Contracts:New
      Taiwan Dollar
                        
                        
                        325,443,155
                        
                        
                        
                        30.41
                        *
                        
                        $
                        10,702,938
                        
                        
                        $
                        10,647,022
                        
                        Nov
      2010 – Dec
2010


*  NT
Dollars per U.S. Dollar





We are
exposed to foreign currency exchange risk related to our investment in net
assets in foreign countries.   To manage this risk, we entered
into a forward contract with a notional amount of €3.0 million.  We
designated this forward contract as a hedge of our net investment in Euro
denominated assets.  We selected the forward method under the FASB
guidance related to the accounting for derivatives instruments and hedging
activities.  The forward method requires all changes in the fair value
of the forward to be reported as a cumulative translation adjustment in
Accumulated Other Comprehensive Loss, net of tax, in the same manner as the
underlying hedged net assets. This forward contract matured on November 24, 2009
and we entered into a new forward contract for the same notional
amount.  As of October 31, 2010, we had a realized loss of $23,000 and
an unrealized gain of $189,000, net of tax, recorded as cumulative translation
adjustments in Accumulated Other Comprehensive Loss, related to these forward
contracts.





Forward
contracts for the sale or purchase of foreign currencies as of October 31, 2010,
which are designated as net investment hedges under this guidance were as
follows:





Notional
                    Amount
                  
                  
                  Weighted
                    Avg.
                  
                  
                  Contract
      Amount at Forward
                    Rates
      in
                    U.S. DollarsForward Contracts
                  
                  in
      Foreign
                    Currency
                  
                  
                  Forward
                    Rate
                  
                  
                  Contract
                    Date
                  
                  
                  October
      31,
                    2010
                  
                  Maturity DateSale
      Contracts:Euro
                  
                  
                  3,000,000
                  
                  
                  
                  1.4896
                  
                  
                  $
                  4,468,800
                  
                  
                  $
                  4,168,230
                  
                  Nov
      2010


26


Management’s
Annual Report on Internal Control Over Financial Reporting
 
 Tothe Shareholders
and
 Board of
Directors
 of Hurco
Companies, Inc.:
 
 Management
of Hurco Companies, Inc. (the “Company”), has assessed the effectiveness of
internal controls over financial reporting as of October 31, 2010, based on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).  Management is responsible for thesefinancial statements,
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial
reporting.
 
 Because
of its inherent limitations, the Company’s internal control over financial
reporting may not prevent or detect misstatements.  Also, projections
of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may
deteriorate.
 
 In
management’s opinion, the Company’s internal controls over financial reporting
as of October 31, 2010, are effective based on the criteria specified
above.
 
 Our
independent registered accounting firm, Ernst & Young LLP, who also audited
our consolidated financial statements, audited the effectiveness of our internal
control over financial reporting as of October 31, 2010.  Ernst &
Young has issued their attestation report, which is included in Part II, Item 8
of this Annual Report on Form 10-K.
 
 /s/ Michael
Doar
 Michael
Doar,
 Chairman
of the Board, Chief Executive Officer and President
 
 /s/ John G.
  Oblazney
 John G.
Oblazney,
 Vice
President & Chief Financial Officer
 
 /s/ Sonja K.
  McClelland
 Sonja K.
McClelland
 Corporate
Controller, Assistant Secretary
 (Principal
Accounting Officer)
 
 Indianapolis,
Indiana
 January
12, 2011





27





Item
8.            FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA





Report
of Independent Registered Public Accounting Firm





Tothe Shareholders
and


Board of
Directors


of Hurco
Companies, Inc.





We have
audited the accompanying consolidated balance sheets of Hurco Companies, Inc. as
of October 31, 2010 and 2009 and the related consolidated statements of
operations, changes in shareholders’ equity and cash flows for the years then
ended. Our audits also included the financial statement schedule listed at Item
15(a) for each of the two years in the period ended October 31,
2010.  These financial statements and schedule are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these financial statements and schedule based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements.  An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.  We
believe that our audits provide a reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Hurco Companies, Inc.
as of October 31, 2010 and 2009, and the consolidated  results of
their operations and their cash flows for the years then ended in conformity
with U.S. generally accepted accounting principles.  Also, in our
opinion, the related financial statement schedule for each of the two years in
the period ended October 31, 2010, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.





We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Hurco Companies, Inc.’s internal control over
financial reporting as of October 31, 2010, based on criteria established in
Internal Control – Integrated Framework issued by the Commission of Sponsoring
Organizations of the Treadway Commission and our report dated January 12, 2011
expressed an unqualified opinion thereon.





/s/ Ernst
& Young LLP





Indianapolis,
Indiana


January
12, 2011


28


Report
of Independent Registered Public Accounting Firm





Tothe Shareholders
and


Board of
Directors


of Hurco
Companies, Inc.





We have
audited Hurco Companies, Inc.’s internal control over financial reporting as of
October 31, 2010, based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria).  Hurco Companies, Inc.’s management is
responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Annual Report on Internal
Control Over Financial Reporting.   Our responsibility is to
express an opinion on the company’s internal control over financial reporting
based on our audit.





We
conducted our audit 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
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audit provides a reasonable basis for our opinion.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external reporting purposes in
accordance with the generally accepted accounting principles.  A
company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the company’s assets that could have a
material effect on the financial statements.





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





In our
opinion, Hurco Companies, Inc. maintained, in all material respects effective
internal control over financial reporting as of October 31, 2010, based on the
COSO criteria.





We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets as of October
31, 2010 and 2009 and the related consolidated statements of operations, changes
in shareholders’ equity and cash flows for the years then ended of Hurco
Companies, Inc. and our report dated January 12, 2011 expressed an unqualified
opinion thereon.





/s/ Ernst
& Young LLP





Indianapolis,
Indiana


January
12, 2011




29




Report
of Independent Registered Public Accounting Firm





Tothe Shareholders
and


Board of
Directors of


Hurco
Companies, Inc.





We have
audited the accompanying consolidated statements of operations, cash flows and
changes in shareholders’ equity of Hurco Companies, Inc. for the year ended
October 31, 2008.  In connection with our audit of the consolidated
financial statements, we have also audited the consolidated financial statement
schedule listed in the index under Item 15(a) as it relates to the information
for the year ended October 31, 2008.  Hurco Companies, Inc. management
is responsible for these financial statements and the financial statement
schedule.  Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our
audit.





We
conducted our audit 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.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audit provides a reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the results of Hurco Companies, Inc.’s operations and
its cash flows for the year ended October  31, 2008, in conformity
with U.S. generally accepted accounting principles. Also, in our opinion, the
related consolidated financial statement schedule, when considered in relation
to the 2008 basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth
therein.





/s/ Crowe
Horwath LLP





Indianapolis,
Indiana


January
12, 2009


30


HURCO
COMPANIES, INC.


CONSOLIDATED
STATEMENTS OF OPERATIONS





Year Ended October 312010
                
                
                2009
                
                
                2008(In
      thousands, except per share amounts)Sales
      and service fees
                
                $
                105,893
                
                
                $
                91,016
                
                
                $
                223,994Cost
      of sales and service
                
                
                84,097
                
                
                
                65,188
                
                
                
                141,377Gross
      profit
                
                
                21,796
                
                
                
                25,828
                
                
                
                82,617Selling,
      general and administrative expenses
                
                
                29,837
                
                
                
                30,874
                
                
                
                46,811Operating
      income (loss)
                
                
                (8,041
                )
                
                
                (5,046
                )
                
                
                35,806Interest
      expense
                
                
                49
                
                
                
                35
                
                
                
                63Interest
      income
                
                
                86
                
                
                
                190
                
                
                
                542Investment
      income
                
                
                14
                
                
                
                16
                
                
                
                465Earnings
      (losses) from equity investments
                
                
                (149
                )
                
                
                (326
                )
                
                
                12Other
      (income) expense, net
                
                
                720
                
                
                
                (1,389
                )
                
                
                2,596Income
      (loss) before income taxes
                
                
                (8,859
                )
                
                
                (3,812
                )
                
                
                34,166Provision
      (benefit) for income taxes
                
                
                (3,115
                )
                
                
                (1,491
                )
                
                
                11,646Net
      income (loss)
                
                $
                (5,744
                )
                
                $
                (2,321
                )
                
                $
                22,520Earnings
      (loss) per common share – basic
                
                $
                (0.89
                )
                
                $
                (0.36
                )
                
                $
                3.51Weighted
      average common shares outstanding – basic
                
                
                6,441
                
                
                
                6,429
                
                
                
                6,415Earnings
      (loss) per common share – diluted
                
                $
                (0.89
                )
                
                $
                (0.36
                )
                
                $
                3.49Weighted
      average common shares outstanding – diluted
                
                
                6,441
                
                
                
                6,429
                
                
                
                6,444





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


31


HURCO
COMPANIES, INC.


CONSOLIDATED
BALANCE SHEETS





As
      of October 312010
                          
                          
                          2009(
      In thousands, except share and per share data)ASSETSCurrent
      assets:Cash
      and cash equivalents
                          
                          $
                          48,255
                          
                          
                          $
                          28,782Accounts
      receivable, less allowance for doubtful accounts of  $497 in
      2010 and $809 in 2009
                          
                          
                          20,114
                          
                          
                          
                          13,988Refundable
      taxes
                          
                          
                          5,093
                          
                          
                          
                          7,121Inventories,
      net
                          
                          
                          55,866
                          
                          
                          
                          60,281Deferred
      income taxes, net
                          
                          
                          2,467
                          
                          
                          
                          2,670Derivative
      assets
                          
                          
                          905
                          
                          
                          
                          376Other
                          
                          
                          3,508
                          
                          
                          
                          5,046Total
      current assets
                          
                          
                          136,208
                          
                          
                          
                          118,264Property
      and equipment:Land
                          
                          
                          782
                          
                          
                          
                          782Building
                          
                          
                          7,116
                          
                          
                          
                          7,116Machinery
      and equipment
                          
                          
                          15,095
                          
                          
                          
                          14,995Leasehold
      improvements
                          
                          
                          2,183
                          
                          
                          
                          2,02125,176
                          
                          
                          
                          24,914Less
      accumulated depreciation and amortization
                          
                          
                          (13,424
                          )
                          
                          
                          (11,802
                          )11,752
                          
                          
                          
                          13,112Software
      development costs, less accumulated amortization
                          
                          
                          6,042
                          
                          
                          
                          6,503Investments
      and other assets, net
                          
                          
                          6,344
                          
                          
                          
                          6,864$
                          160,346
                          
                          
                          $
                          144,743LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                          
                          $
                          28,715
                          
                          
                          $
                          7,920Accounts
      payable-related parties
                          
                          
                          1,679
                          
                          
                          
                          342Accrued
      expenses and other
                          
                          
                          8,132
                          
                          
                          
                          9,025Accrued
      warranty expenses
                          
                          
                          1,591
                          
                          
                          
                          1,286Derivative
      liabilities
                          
                          
                          2,123
                          
                          
                          
                          2,234Total
      current liabilities
                          
                          
                          42,240
                          
                          
                          
                          20,807Non-current
      liabilities:Deferred
      income taxes, net
                          
                          
                          2,335
                          
                          
                          
                          2,570Deferred
      credits and other
                          
                          
                          1,031
                          
                          
                          
                          9903,366
                          
                          
                          
                          3,560Commitments
      and contingenciesShareholders’
      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, 13,250,000 shares
      authorized and 6,440,851 shares issued and outstanding
                          
                          
                          644
                          
                          
                          
                          644Additional
      paid-in capital
                          
                          
                          52,144
                          
                          
                          
                          52,003Retained
      earnings
                          
                          
                          63,824
                          
                          
                          
                          69,568Accumulated
      other comprehensive loss
                          
                          
                          (1,872
                          )
                          
                          
                          (1,839
                          )Total
      shareholders’ equity
                          
                          
                          114,740
                          
                          
                          
                          120,376$
                          160,346
                          
                          
                          $
                          144,743





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


32


HURCO
COMPANIES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS





Year Ended October 312010
                  
                  
                  2009
                  
                  
                  2008(In
      thousands)Cash
      flows from operating activities:Net
      income (loss)
                  
                  $
                  (5,744
                  )
                  
                  $
                  (2,321
                  )
                  
                  $
                  22,520Adjustments
      to reconcile net income (loss) to net cash provided by (used for)
      operating activities:Provision
      for doubtful accounts
                  
                  
                  (312
                  )
                  
                  
                  131
                  
                  
                  
                  (73
                  )Changes
      in deferred income taxes
                  
                  
                  (216
                  )
                  
                  
                  (2,824
                  )
                  
                  
                  1,048Equity
      in (income) loss of affiliates
                  
                  
                  149
                  
                  
                  
                  326
                  
                  
                  
                  (12
                  )Foreign
      currency (gain) loss
                  
                  
                  1,927
                  
                  
                  
                  (6,422
                  )
                  
                  
                  8,184Unrealized
      (gain) loss on derivatives
                  
                  
                  (624
                  )
                  
                  
                  4,058
                  
                  
                  
                  (3,886
                  )Depreciation
      and amortization
                  
                  
                  3,804
                  
                  
                  
                  3,295
                  
                  
                  
                  3,023Stock-based
      compensation
                  
                  
                  141
                  
                  
                  
                  246
                  
                  
                  
                  535Change
      in assets and liabilities:(Increase)
      decrease in accounts receivable and refundable taxes
                  
                  
                  (4,047
                  )
                  
                  
                  14,262
                  
                  
                  
                  (6,260
                  )(Increase)
      decrease in inventories
                  
                  
                  4,154
                  
                  
                  
                  11,409
                  
                  
                  
                  (11,832
                  )Increase
      (decrease) in accounts payable
                  
                  
                  21,114
                  
                  
                  
                  (20,524
                  )
                  
                  
                  (7,649
                  )Increase
      (decrease) in accrued expenses
                  
                  
                  (398
                  )
                  
                  
                  (9,610
                  )
                  
                  
                  3,304Net
      change in derivative assets and liabilities
                  
                  
                  (174
                  )
                  
                  
                  3,261
                  
                  
                  
                  (2,158
                  )Other
                  
                  
                  1,978
                  
                  
                  
                  3,230
                  
                  
                  
                  (6,583
                  )Net
      cash provided by (used for) operating activities
                  
                  
                  21,752
                  
                  
                  
                  (1,483
                  )
                  
                  
                  161Cash
      flows from investing activities:Proceeds
      from sale of property and equipment
                  
                  
                  40
                  
                  
                  
                  239
                  
                  
                  
                  17Purchase
      of property and equipment
                  
                  
                  (632
                  )
                  
                  
                  (1,679
                  )
                  
                  
                  (4,580
                  )Purchase
      of investments
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  (9,100
                  )Sale
      of investments
                  
                  
                  —
                  
                  
                  
                  6,674
                  
                  
                  
                  12,100Software
      development costs
                  
                  
                  (1,216
                  )
                  
                  
                  (2,020
                  )
                  
                  
                  (934
                  )Other
      proceeds (investments)
                  
                  
                  50
                  
                  
                  
                  (889
                  )
                  
                  
                  (80
                  )Net
      cash provided by (used for) investing activities
                  
                  
                  (1,758
                  )
                  
                  
                  2,325
                  
                  
                  
                  (2,577
                  )Cash
      flows from financing activities:Tax
      benefit from exercise of stock options
                  
                  
                  —
                  
                  
                  
                  26
                  
                  
                  
                  36Proceeds
      from exercise of common stock options
                  
                  
                  —
                  
                  
                  
                  43
                  
                  
                  
                  151Net
      cash provided by financing activities
                  
                  
                  —
                  
                  
                  
                  69
                  
                  
                  
                  187Effect
      of exchange rate changes on cash
                  
                  
                  (521
                  )
                  
                  
                  1,477
                  
                  
                  
                  (1,137
                  )Net
      increase (decrease) in cash
                  
                  
                  19,473
                  
                  
                  
                  2,388
                  
                  
                  
                  (3,366
                  )Cash
      and cash equivalents at beginning of year
                  
                  
                  28,782
                  
                  
                  
                  26,394
                  
                  
                  
                  29,760Cash
      and cash equivalents at end of year
                  
                  $
                  48,255
                  
                  
                  $
                  28,782
                  
                  
                  $
                  26,394Supplemental
      disclosures:Cash
      paid for (refunds of):Interest
                  
                  $
                  18
                  
                  
                  $
                  4
                  
                  
                  $
                  —Income
      taxes, net
                  
                  $
                  (6,211
                  )
                  
                  $
                  3,844
                  
                  
                  $
                  15,790





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


33


HURCO
COMPANIES, INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY





Common
      Stock(Dollars
      in thousands)
                    
                    Shares
      Issued
                      &
                      Outstanding
                    
                    
                    Amount
                    
                    
                    Additional
                      Paid-In
                      Capital
                    
                    
                    Retained
                      Earnings
                    
                    
                    Accumulated
                      Other
                      Comprehensive
                      Income
                      (Loss)
                    
                    
                    TotalBalances,
      October 31, 2007
                    
                    
                    6,392,220
                    
                    
                    
                    639
                    
                    
                    
                    50,971
                    
                    
                    
                    49,369
                    
                    
                    
                    (3,376
                    )
                    
                    
                    97,603Net
      income
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    22,520
                    
                    
                    
                    —
                    
                    
                    
                    22,520Translation
      of foreign currency financial statements
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (3,747
                    )
                    
                    
                    (3,747
                    )Unrealized
      gain of derivative instruments, net of tax
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    6,581
                    
                    
                    
                    6,581Unrealized
      loss on investments, net of tax
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (202
                    )
                    
                    
                    (202
                    )Comprehensive
      income
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    25,152Exercise
      of common stock options
                    
                    
                    28,631
                    
                    
                    
                    3
                    
                    
                    
                    148
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    151Tax
      benefit from exercise of stock options
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    36
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    36Stock-based
      compensation expense
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    535
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    535Balances,
      October 31, 2008
                    
                    
                    6,420,851
                    
                    
                    
                    642
                    
                    
                    $
                    51,690
                    
                    
                    
                    71,889
                    
                    
                    
                    (744
                    )
                    
                    
                    123,477Net
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (2,321
                    )
                    
                    
                    —
                    
                    
                    
                    (2,321
                    )Translation
      of foreign currency financial statements
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    2,716
                    
                    
                    
                    2,716Realized
      gains on derivative instruments reclassified into operations, net of tax
      of $366
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    623
                    
                    
                    
                    623Unrealized
      loss of derivative instruments, net of tax $(2,706)
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (4,434
                    )
                    
                    
                    (4,434
                    )Comprehensive
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (3,416
                    )Exercise
      of common stock options
                    
                    
                    20,000
                    
                    
                    
                    2
                    
                    
                    
                    41
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    43Tax
      benefit from exercise of stock options
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    26
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    26Stock-based
      compensation expense
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    246
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    246Balances,
      October 31, 2009
                    
                    
                    6,440,851
                    
                    
                    $
                    644
                    
                    
                    $
                    52,003
                    
                    
                    $
                    69,568
                    
                    
                    $
                    (1,839
                    )
                    
                    $
                    120,376Net
      loss
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (5,744
                    )
                    
                    
                    —
                    
                    
                    
                    (5,744
                    )Translation
      of foreign currency financial statements
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (50
                    )
                    
                    
                    (50
                    )Realized
      losses on derivative instruments reclassified into operations, net of tax
      of $(11)
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (19
                    )
                    
                    
                    (19
                    )Unrealized
      gains of derivative instruments, net of tax of $20
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    36
                    
                    
                    
                    36Comprehensive
      loss
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    
                    (5,777
                    )Exercise
      of common stock options
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Tax
      benefit from exercise of stock options
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Stock-based
      compensation expense
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    141
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    141Balances,
      October 31, 2010
                    
                    
                    6,440,851
                    
                    
                    $
                    644
                    
                    
                    $
                    52,144
                    
                    
                    $
                    63,824
                    
                    
                    $
                    (1,872
                    )
                    
                    $
                    114,740





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


34


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 its wholly owned subsidiaries.  We have a
35% ownership interest in a Taiwan affiliate that is accounted for using the
equity method.  Our investment in that affiliate was approximately
$2.1 million and $2.3 million as of October 31, 2010 and 2009 respectively. That
investment is included in Investments and Other Assets, Net on the accompanying
Consolidated Balance Sheets.  Intercompany accounts and transactions
have been eliminated.





Reclassifications.  Reclassifications
of certain prior year amounts have been made to conform to current year
presentation.  These reclassifications had no impact on our results of
operations, financial position, or changes in shareholders’ equity.





Statements of Cash
Flows.  We consider all highly liquid investments with a stated
maturity at the date of purchase of three months or less to be cash
equivalents.  Cash flows from purchases and sales of auction rate
securities are classified as investing activities.  Cash flows from
hedges are classified consistent with the items being hedged.





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 and
translation adjustments of foreign currency balance sheets are recorded as a
component of Accumulated Other Comprehensive Loss in shareholders'
equity.  Income and expenses are translated at the average exchange
rates during the year.  Cumulative foreign currency translation
adjustments as of October 31, 2010 were a net loss of $1,597,000 and are
included in Accumulated Other Comprehensive Loss. Foreign currency transaction
gains and losses are recorded as income or expense as incurred and are recorded
in other (income) expense.





Hedging.We
account for derivative instruments as either assets or liabilities and carry
them at fair value.  The accounting for changes in the fair value of a
derivative depends on the intended use of the derivative and the resulting
designation.  For derivative instruments designated as a fair value
hedge, the gain or loss is recognized in earnings in the period of change
together with the offsetting loss or gain on the hedged item attributed to the
risk being hedged.  For a derivative instrument designated as a cash
flow hedge, the effective portion of the derivative’s gain or loss is initially
reported as a component of Accumulated Other Comprehensive Loss in shareholders’
equity and subsequently reclassified into earnings when the hedged exposure
affects earnings.  The ineffective portion of the gain or loss is
reported in earnings immediately.  For derivative instruments that are
not designated as accounting hedges under the Derivatives and Hedging Topic of
FASB guidance, changes in fair value are recognized in earnings in the period of
change.  The Company does not hold or issue derivative financial
instruments for speculative trading purposes.  We only enter into
derivatives with one counterparty which is among one of the largest U.S. banks
ranked by assets, in order to minimize its credit risk and to date, no such
counterparty has failed to meet its financial obligations under such
contracts.  We are exposed to certain market risks relating to our
ongoing business operations, including foreign currency risk, interest rate risk
and credit risk.  We manage our exposure to these and other market
risks through regular operating and financing activities.  Currently,
the only risk that we manage through the use of derivative instruments is
foreign currency risk.





We
operate on a global basis and are exposed to the risk that our financial
condition, results of operations and cash flows could be adversely affected by
changes in foreign currency exchange rates.  To reduce the potential
effects of foreign exchange rate movements on our net equity investment in one
of our foreign subsidiaries, gross profit and net earnings, we enter into
derivative financial instruments in the form of foreign exchange forward
contracts with a major financial institution.  We are primarily
exposed to foreign currency exchange rate risk with respect to transactions and
net assets denominated in Euros, Pounds Sterling, Canadian Dollars, South
African Rand, Singapore Dollars and New Taiwan Dollars.


35


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





We
account for derivative instruments designated as hedging instruments in
accordance with FASB guidance related to accounting for derivative instruments
and report all derivative instruments as assets or liabilities at fair value on
our consolidated balance sheet.





Derivatives Designated as
Hedging Instruments





We enter
into foreign currency forward exchange contracts periodically to hedge certain
forecasted inter-company sales and purchases denominated in foreign currencies
(the 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 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 Sheets at fair
value in Derivative Assets and Derivative Liabilities.  The effective
portion of the gains and losses resulting from the changes in the fair value of
these hedge contracts are deferred in Accumulated Other Comprehensive Loss and
recognized as an adjustment to Cost of Sales and Service in the period that the
corresponding inventory sold that is the subject of the related hedge contract
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 being hedged.  The ineffective portion of gains and losses
resulting from the changes in the fair value of these hedge contracts is
reported in Other (Income) Expense immediately.  We perform quarterly
assessments of hedge effectiveness by verifying and documenting the critical
terms of the hedge instrument and determining that forecasted transactions have
not changed significantly.   We also assess on a quarterly basis
whether there have been adverse developments regarding the risk of a
counterparty default.





We had
forward contracts outstanding as of October 31, 2010, in Euros and Pounds
Sterling and New Taiwan Dollars with set maturity dates ranging from November
2010 through October 2011.  The contract amount at forward rates in
U.S. Dollars at October 31, 2010 for Euros and Pounds Sterling was $28.9 million
and $6.7 million, respectively.  The contract amount at forward rates
in U.S. Dollars for New Taiwan Dollars was $29.2 million at October 31,
2010.  At October 31, 2010, we had approximately $441,000 of losses,
net of tax, related to cash flow hedges deferred in Accumulated Other
Comprehensive Loss.  Of this amount, $759,000 represents unrealized
losses, net of tax, related to cash flow hedge instruments that remain subject
to currency fluctuation risk.  These deferred losses will be recorded
as an adjustment to Cost of Sales and Service in periods through October 2011,
in which the corresponding inventory that is the subject of the related hedge
contract is sold, as described above.





We are
exposed to foreign currency exchange risk related to our investment in net
assets in foreign countries.   To manage this risk, we entered
into a forward contract with a notional amount of €3.0 million.  We
designated this forward contract as a hedge of our net investment in Euro
denominated assets.  We selected the forward method under the FASB
guidance related to the accounting for derivatives instruments and hedging
activities.  The forward method requires all changes in the fair value
of the forward to be reported as a cumulative translation adjustment in
Accumulated Other Comprehensive Loss, net of tax, in the same manner as the
underlying hedged net assets. This forward contract matured on November 24, 2009
and we entered into a new forward contract for the same notional amount that is
set to mature in November 2010.  As of October 31, 2010, we had a
realized loss of $23,000 and an unrealized gain of $189,000, net of tax,
recorded as cumulative translation adjustments in Accumulated Other
Comprehensive Loss, related to these forward contracts.


36


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





Derivatives Not Designated
as Hedging Instruments





We 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 FASB guidance and, as a result, changes in their fair value are reported
currently as Other (Income) Expense, Net in the Consolidated Statements of
Operations consistent with the transaction gain or loss on the related
receivables and payables denominated in foreign currencies.





We had
forward contracts outstanding as of October 31, 2010, in Euros, Pounds Sterling,
Canadian Dollars, South African Rand, Singapore Dollars and New Taiwan Dollars
with set maturity dates ranging from November 2010 through March
2011.  The contract amounts at forward rates in U.S. Dollars at
October 31, 2010 for Euros, Pounds Sterling, Canadian Dollars, South African
Rand and Singapore Dollars totaled $11.4 million.  The contract amount
at forward rates in U.S. Dollars for New Taiwan Dollars was $10.6 million at
October 31, 2010.





Fair Value of Derivative
Instruments





We
recognize the fair value of derivative instruments as assets and liabilities on
a gross basis on our Consolidated Balance Sheets.  As of October 31,
2010 and October 31, 2009, all derivative instruments were recorded at fair
value on the balance sheets as follows (in thousands):


2010
                                
                                2009Balance
      Sheet
                                
                                Fair
                                
                                Balance
      Sheet
                                
                                FairDerivatives
                                
                                Location
                                
                                Value
                                
                                Location
                                
                                ValueDesignated
      as Hedging Instruments:Foreign
      exchange forward contracts
                                
                                Derivative
      assets
                                
                                $
                                872
                                
                                Derivative
      assets
                                
                                $
                                74Foreign
      exchange forward contracts
                                
                                Derivative
      liabilities
                                
                                $
                                1,778
                                
                                Derivative
      liabilities
                                
                                $
                                1,246Not Designated as Hedging
      Instruments:Foreign
      exchange forward contracts
                                
                                Derivative
      assets
                                
                                $
                                33
                                
                                Derivative
      assets
                                
                                $
                                302Foreign
      exchange forward contracts
                                
                                Derivative
      liabilities
                                
                                $
                                345
                                
                                Derivative
      liabilities
                                
                                $
                                988





Effect of Derivative
Instruments on the Consolidated Balance Sheets, Statements of Changes in
Shareholders’ Equity and Statements of Operations





Derivative
instruments had the following effects on our Consolidated Balance Sheets,
Statements of Changes in Shareholders’ Equity and Statements of Operations, net
of tax during the year ended October 31, 2010 and 2009 (in
thousands):


Derivatives
                        
                        Amount
      of Gain (Loss)
                          Recognized
      in Other
                          Comprehensive
      Income
                        
                        Location
      of Gain (Loss)
                          Reclassified
      from Other
                          Comprehensive
      Income
                        
                        Amount
      of Gain (Loss)
                          Reclassified
      from Other
                          Comprehensive
      Income2010
                        
                        
                        2009
                        
                        
                        
                        2010
                        
                        
                        2009Designated
      as Hedging Instruments:
                          (Effective
      Portion)Foreign
      exchange forward contracts – Intercompany
    sales/purchases
                        
                        $
                        56
                        
                        
                        $
                        (7,140
                        )
                        Cost
      of sales and service
                        
                        $
                        (30
                        )
                        
                        $
                        989Foreign
      exchange forward contract – Net Investment
                        
                        $
                        228
                        
                        
                        $
                        (589
                        )


37


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





As a
result of the global recession we had to close hedge contracts before maturity
due to forecasted reductions in production and sales.  Those contracts
closed early were deemed ineffective for financial reporting purposes and as a
result we recognized a loss of $111,000 during the year ended October 31, 2010,
and a gain of $2.0 million during the year ended October 31, 2009.




Location
      of Gain (Loss)
                
                
                Amount
      of Gain (Loss)Derivatives
                
                Recognized
      in Operations
                
                
                Recognized
      in Operations2010
                
                
                2009Not
      Designated as Hedging Instruments:Foreign
      exchange forward contracts
                
                Other
      income (expense)
                
                
                $
                539
                
                
                $
                (4,699
                )





Inventories.  Inventories
are stated at the lower of cost or market, with cost determined using the
first-in, first-out method.  Provisions are made to reduce excess or
obsolete inventories to their estimated realizable value.





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:


NumberofYearsBuilding
                
                40Machines
                
                7-10Shop
      and office equipment
                
                3-7Leasehold
      improvements
                
                3-40





Total
depreciation expense for the years ended October 31, 2010, 2009 and 2008 was
$2.1 million, $2.1 million, and $1.5 million, respectively.





Revenue
Recognition.  We recognize revenue from sales of our products
upon delivery of the products to the customers, 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 collectability is
reasonably assured.  In certain foreign locations, we retain title
after shipment under a “retention of title” clause solely to protect
collectability. 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 principal products 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, we have no installation involvement.  If sales are direct
or through sales agents, we 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 for maintenance contracts are deferred and recognized in earnings on a pro
rata basis over the term of the contract.


38


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





Allowance for Doubtful
Accounts.  The allowance for doubtful accounts is based on our
best estimate of probable credit issues and historical experience.  We
perform credit evaluations of the financial condition of our
customers.  No collateral is required for sales made on open account
terms.  Concentrations of credit risk with respect to accounts
receivable are limited due to the large number of customers comprising our
customer base.   We consider trade accounts receivable to be past
due when payment is not made by the due date as specified on the customer
invoice, and charge off  uncollectible balances when all collection
efforts have been exhausted.





Software Revenue
Recognition.  Sales related to software products are recognized
when shipped in conformity with FASB guidance related to software revenue
recognition that requires at the time of shipment, persuasive evidence of an
arrangement exists, delivery has occurred, the selling price is fixed and
determinable and collectability is reasonably assured.  The software
does not require production, modification or customization.





Product
Warranty.  Expected future product warranty expense is recorded
when the product is sold.  Product warranty estimates are established
using historical information about the nature, frequency, and average cost of
warranty claims.  Warranty claims are influenced by factors such as
new product introductions, technological developments, the competitive
environment, and the costs of component parts.  Actual payments for
warranty claims could differ from the amounts estimated requiring adjustments to
the liabilities in future periods.  See Note 11 of Notes to
Consolidated Financial Statements for further discussion of
warranties.





Research and Development
Costs.  The costs associated with research and development
programs for new products and significant product improvements other than
software development costs, which are eligible for capitalization per FASB
guidance, are expensed as incurred and are included in Selling, General and
Administrative Expenses.  Research and development expenses totaled
$2.2 million, $2.5 million, and $3.0 million, in fiscal 2010, 2009, and 2008,
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 and Service on a straight-line
basis over the estimated product life of the related software, which ranges from
three to five years.  We capitalized costs of $1.2 million in 2010,
$2.0 million in 2009, and $934,000 in 2008 related to software development
projects.  Amortization expense was $1.7 million, $1.2 million, and
$1.2 million, for the years ended October 31, 2010, 2009, and 2008,
respectively.  Accumulated amortization at October 31, 2010 and 2009
was $7.8 million and $6.1 million, respectively.  Estimated
amortization expense for the existing amortizable intangible assets for the
years ending October 31, is as follows (in thousands):





FiscalYear
                
                Amortization
                  Expense2011
                
                $
                2,2122012
                
                
                1,7532013
                
                
                7932014
                
                
                5352015
                
                
                317





Impairment of Long-Lived
Assets.The
Company periodically evaluates the carrying value of long-lived assets to be
held and used, including property and equipment and software development costs,
when events or circumstances warrant such a review.  The carrying
value of a long-lived asset (or group of assets) to be held and used is
considered impaired when the anticipated separately identifiable undiscounted
cash flows from such an asset (or group of assets) are less than the carrying
value of the asset (or group of assets) in accordance with FASB guidance related
to accounting for the impairment or disposal of long-lived
assets.


39




HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





Earnings (Loss) Per
Share.Basic and diluted earnings (loss) per common share are
based on the weighted average number of shares of our common stock
outstanding.  Diluted earnings per common share give effect to shares
underlying outstanding stock options using the treasury method.  The
dilutive number of shares for the year ended October 31, 2008 was
29,000.





Twelve
      Months Ended(in
      thousands, except per share amount)
                              
                              October 31,2010
                              
                              
                              2009
                              
                              
                              2008Basic
                              
                              
                              Diluted
                              
                              
                              Basic
                              
                              
                              Diluted
                              
                              
                              Basic
                              
                              
                              DilutedNet
      income (loss)
                              
                              $
                              (5,744
                              )
                              
                              $
                              (5,744
                              )
                              
                              $
                              (2,321
                              )
                              
                              $
                              (2,321
                              )
                              
                              $
                              20,520
                              
                              
                              $
                              20,520Weighted
      average sharesoutstanding
                              
                              
                              6,441
                              
                              
                              
                              6,441
                              
                              
                              
                              6,429
                              
                              
                              
                              6,429
                              
                              
                              
                              6,415
                              
                              
                              
                              6,415Assumed
      issuances understock
      options plans
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              296,441
                              
                              
                              
                              6,441
                              
                              
                              
                              6,429
                              
                              
                              
                              6,429
                              
                              
                              
                              6,415
                              
                              
                              
                              6,444Income
      (loss) per common share
                              
                              $
                              (0.89
                              )
                              
                              $
                              (0.89
                              )
                              
                              $
                              (0.36
                              )
                              
                              $
                              (0.36
                              )
                              
                              $
                              3.51
                              
                              
                              $
                              3.49





Income Taxes.We record
income taxes under FASB  guidance  related to accounting for
income taxes.  This guidance utilizes the liability method
for  computing deferred income taxes.  Under this method,
the amount  of taxes  currently  payable or
refundable   are accrued and deferred tax assets
and  liabilities are recognized
for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax basis. Deferred tax assets are also recognized for
realizable loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted income tax rates in each jurisdiction in
effect for the year in which those temporary differences are expected to be
recovered or settled.  The effect on deferred tax assets and
liabilities of a change in income tax rates is recognized in our Consolidated
Statements of Operations in the period that includes the enactment
date.





The
determination of our provision for income taxes requires judgment, the use of
estimates and the interpretation and application of complex tax
laws.  Our provision for income taxes reflects a combination of income
earned and taxed at the federal and state level in the U.S., as well as in
various foreign jurisdictions.  We have not provided for 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 abroad.





As part
of our financial reporting process, we must assess the likelihood that our
deferred tax assets can be recovered.  If recovery is not likely, the
provision (benefit) for taxes must be increased (decreased) by recording a
reserve in the form of a valuation allowance for the deferred tax assets that
are estimated not to be ultimately recoverable.  In the process,
certain relevant criteria are evaluated including the existence of deferred tax
liabilities that can be used to absorb deferred tax assets, the taxable income
in prior carryback years that can be used to absorb net operating losses and
credit carrybacks, tax planning strategies, and taxable income in future
years.  Our judgment regarding future profitability may change due to
future market conditions, changes in U.S. or foreign tax laws and other
factors.  These changes, if any, may require material adjustments to
these deferred tax assets and an accompanying reduction or increase in net
income in the period when such determinations are made.


40


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued




In
addition to the risks to the effective tax rate described above, the future
effective tax rate reflected in forward-looking statements is based on currently
effective tax laws.  Significant changes in those laws could
materially affect these estimates.





The
Company recognizes uncertain tax positions when it is more likely than not that
the tax position will be sustained upon examination by relevant taxing
authorities, based on the technical merits of the position. The amount
recognized is measured as the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement.





Estimates.The
preparation of financial statements in conformity with U.S. Generally Accepted
Accounting Principles requires us to make estimates and assumptions that affect
the reported amounts presented and disclosed in our consolidated financial
statements. Significant estimates and assumptions in these consolidated
financial statements require the exercise of judgment and are used for, but not
limited to, allowance for doubtful accounts, estimates of future cash flows and
other assumptions associated with intangible and long-lived asset impairment
tests, useful lives for depreciation and amortization, warranty programs, income
taxes and deferred tax valuation allowances, lease classification, and
contingencies.  Due to the inherent uncertainty involved in making
estimates, actual results reported in future periods may be different from these
estimates.





Stock Based Compensation. We
account for share-based compensation according to FASB guidance relating to
share based payments, which requires the measurement and recognition of
compensation expense for all share-based awards made to employees and directors
based on estimated fair values on the grant date.  This guidance
requires that we estimate the fair value of share-based awards on the date of
grant and recognize as expense the value of the portion of the award that is
ultimately expected to vest over the requisite service period.




2.         BUSINESS
OPERATIONS





Nature of
Business.  We design and manufacture computer control systems,
software and computerized machine tools for sale through our own distribution
system to the worldwide machine tool industry.  The machine tool
industry is highly cyclical and declines in demand can and will occur abruptly
in the geographic markets we serve.  As a result of the recent global
recession, we experienced a significant decline in our sales and orders during
fiscal 2009 and 2010 that significantly adversely affected our results of
operations.





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, automotive/transportation,
electronics and computer industries.  Our products are sold through
independent agents and distributors throughout North America, Europe and
Asia.  We also have our own direct sales and service organizations in
Canada, China, France, Germany, India, Italy, Poland, Singapore, South Africa,
South Korea, the United Kingdom, and certain areas of the United
States.





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 wholly
owned subsidiaries in Taiwan and China, Hurco Manufacturing Ltd. (HML) and
Ningbo Hurco Manufacturing Limited (NHML), produce all of our machine
tools.  Any interruption in manufacturing at either of these locations
would have an adverse effect on our financial operating
results.  Interruption in manufacturing at one of these locations
could result from a change in the political environment or a natural disaster,
such as an earthquake, typhoon, or tsunami. Any interruption with one of our key
suppliers may also have an adverse effect on our operating results and our
financial condition.


41


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





3.         INVENTORIES





Inventories
as of October 31, 2010 and 2009 are summarized below (in
thousands):





2010
                  
                  
                  2009Purchased
      parts and sub-assemblies
                  
                  $
                  16,137
                  
                  
                  $
                  14,961Work-in-process
                  
                  
                  13,157
                  
                  
                  
                  3,559Finished
      goods
                  
                  
                  26,572
                  
                  
                  
                  41,761$
                  55,866
                  
                  
                  $
                  60,281




4.  DEBT
AGREEMENTS





We are
party to an unsecured domestic credit agreement that provides us with a $15.0
million unsecured revolving credit facility and maximum outstanding letters of
credit of $3.0 million.  We also have an uncommitted demand credit
facility in Taiwan in the amount of 100.0 million New Taiwan Dollars in addition
to a £1.0 million revolving credit facility in the United Kingdom and a €1.5
million revolving credit facility in Germany.  The domestic and United
Kingdom facilities mature on December 7, 2012.  The revolving credit
facility in Germany does not have an expiration date.





Borrowings
under the domestic facility may be used for general corporate purposes and bear
interest at a floating rate, based either on LIBOR or the prime rate, plus an
applicable margin.  The domestic credit agreement restricts our ability to
declare and pay dividends, incur additional indebtedness other than under this
facility and make acquisitions whenever we have a cumulative net loss for the
most recent four consecutive quarters and for so long thereafter as the
cumulative loss continues.  These restrictions are currently in effect
as we have a cumulative net loss for the most recent four consecutive
quarters.  The domestic credit agreement contains a financial covenant that
requires no less than a 1:00 to 1:00 ratio of excess cash (defined as cash minus
debt) to an annualized net loss (defined as a net loss for the two most recent
consecutive quarters multiplied by two).  After achieving cumulative
income for four consecutive quarters we are required to maintain a ratio of 0.5
to 1.0 of total indebtedness to the sum of total indebtedness and net
worth.




As of
October 31, 2010 and October 31, 2009, we had no debt or borrowings outstanding
under any of our credit facilities and no outstanding letters of
credit.  As of October 31, 2010, we had unutilized credit facilities
of $21.6 million available for either direct borrowings or commercial letters of
credit.  As of October 31, 2008, we had $615,000 of outstanding
letters of credit issued to non-U.S. suppliers for inventory purchase
commitments.


42


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





5.           FINANCIAL
INSTRUMENTS





The
carrying amounts for trade receivables and payables approximate their fair
values.  We also have financial instruments in the form of foreign
currency forward exchange contracts as described in Note 1 of Notes to
Consolidated Financial Statements.  The U.S. Dollar equivalent
notional amount of these contracts was $89.1 million and $50.8 million at
October 31, 2010 and 2009, respectively.  The fair value of Derivative
Assets recorded on our Consolidated Balance Sheets at October 31, 2010 and 2009
was $905,000 and $376,000, respectively.  The fair value of Derivative
Liabilities recorded on our Consolidated Balance Sheets at October 31, 2010 and
2009 was $2.1 million and $2.2 million, respectively.





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.





FASB fair
value guidance established a three-tier fair value hierarchy, which categorizes
the inputs used in measuring fair value.  These tiers include: Level
1, defined as observable inputs, such as quoted prices in active markets; Level
2, defined as inputs other than quoted prices in active markets that are either
directly or indirectly observable; and Level 3, defined as unobservable inputs
in which little or no market data exist, therefore requiring an entity to
develop its own assumptions.





In
accordance with this guidance, the following table represents the fair value
hierarchy for our financial assets and liabilities measured at fair value as of
October 31, 2010 (in thousands):




Assets
                      
                      
                      LiabilitiesOctober
      31,
                      
                      
                      October
      31,
                      
                      
                      October
      31,
                      
                      
                      October
      31,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009Level 1Deferred
      Compensation
                      
                      $
                      674
                      
                      
                      $
                      642
                      
                      
                      $
                      -
                      
                      
                      $
                      -Level 2Derivatives
                      
                      $
                      905
                      
                      
                      $
                      376
                      
                      
                      $
                      2,123
                      
                      
                      $
                      2,234





Included
in Level 1 assets are mutual fund investments under a nonqualified deferred
compensation plan.   We estimate the fair value of these
investments on a recurring basis using market prices which are readily
available.  Included as Level 2 fair value measurements are derivative
assets and liabilities related to hedged and unhedged gains and losses on
foreign currency forward exchange contracts entered into with a third
party.  We estimate the fair value of these derivatives on a recurring
basis using foreign currency exchange rates obtained from active
markets.





During
fiscal 2010, we did not have any significant non-recurring measurements of
nonfinancial assets and nonfinancial liabilities.


43


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





6.           INCOME
TAXES





In the
fiscal years set forth below, the provision (benefit) for income taxes consisted
of the following:





(in
      thousands)
                
                Year
      Ended October 312010
                
                
                2009
                
                
                2008Current:U.S.
      taxes
                
                $
                (4,410
                )
                
                $
                (5,512
                )
                
                $
                8,768Foreign
      taxes
                
                
                1,079
                
                
                
                1,197
                
                
                
                3,926(3,331
                )
                
                
                (4,315
                )
                
                
                12,694Deferred:U.S.
      taxes
                
                
                189
                
                
                
                2,954
                
                
                
                (1,163
                )Foreign
      taxes
                
                
                27
                
                
                
                (130
                )
                
                
                115216
                
                
                
                2,824
                
                
                
                (1,048
                )$
                (3,115
                )
                
                $
                (1,491
                )
                
                $
                11,646





A
comparison of income tax expense at the U.S. statutory rate of 35% in 2010, 2009
and 2008, to the Company’s effective tax rate is as follows:





Income
      (Loss) before income taxes (in thousands):
                    
                    Year Ended October 312010
                    
                    
                    2009
                    
                    
                    2008Domestic
                    
                    $
                    (12,504
                    )
                    
                    $
                    (7,098
                    )
                    
                    $
                    20,856Foreign
                    
                    
                    3,645
                    
                    
                    
                    3,286
                    
                    
                    
                    13,310Earnings
      (Loss) before taxes on income
                    
                    $
                    (8,859
                    )
                    
                    $
                    (3,812
                    )
                    
                    $
                    34,166Tax
      rates:U.S.
      statutory rate
                    
                    
                    35.0
                    %
                    
                    
                    35.0
                    %
                    
                    
                    35.0
                    %Effect
      of tax rate of international jurisdictionsdifferent
      than U.S. statutory rates
                    
                    
                    2.6
                    %
                    
                    
                    4.4
                    %
                    
                    
                    (1.9
                    )%Valuation
      allowance
                    
                    
                    (9.5
                    )%
                    
                    
                    (2.2
                    )%
                    
                    
                    —State
      taxes
                    
                    
                    3.3
                    %
                    
                    
                    4.7
                    %
                    
                    
                    1.9
                    %Uncertain
      tax position statute expiration
                    
                    
                    5.6
                    %
                    
                    
                    3.4
                    %
                    
                    
                    —Other
                    
                    
                    (1.8
                    )%
                    
                    
                    (6.2
                    )%
                    
                    
                    (0.9
                    )%Effective
      tax rate
                    
                    
                    35.2
                    %
                    
                    
                    39.1
                    %
                    
                    
                    34.1
                    %





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. Estimated undistributed earnings of
foreign investments and subsidiaries at October 31, 2010 are approximately $33.6
million. In the event these earnings are later distributed to the U.S., such
distributions would likely result in additional U.S. tax that may be offset, at
least in part by associated foreign tax credits.





Deferred
income taxes are determined based on the difference between the amounts used for
financial reporting purposes and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Deferred taxes are adjusted for changes in tax rates and tax laws
when changes are enacted. Valuation allowances are recorded to reduce deferred
tax assets when it is more likely than not that a tax benefit will not be
realized.




As of
October 31, 2010, we have deferred tax assets established for accumulated net
operating loss carryforwards of $961,000, primarily related to state and foreign
jurisdictions. The Company has established a valuation allowance against these
carryforwards due to the uncertainly of their realization.


44


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





Significant
components of our deferred tax assets and liabilities at October 31, 2010 and
2009 were as follows (in thousands):





October
      312010
                    
                    
                    2009Deferred
      Tax Assets:Net
      derivative instrument
                    
                    
                    162
                    
                    
                    
                    268Accrued
      inventory reserves
                    
                    
                    801
                    
                    
                    
                    1,068Accrued
      warranty expenses
                    
                    
                    212
                    
                    
                    
                    59Deferred
      compensation
                    
                    
                    256
                    
                    
                    
                    283Other
      accrued expenses
                    
                    
                    756
                    
                    
                    
                    286Net
      operating loss and credit carryforwards
                    
                    
                    1,401
                    
                    
                    
                    715Other
                    
                    
                    267
                    
                    
                    
                    6203,855
                    
                    
                    
                    3,299Less:
      Valuation allowance on net operating loss carryforwards
                    
                    
                    (961
                    )
                    
                    
                    (163
                    )Deferred
      tax assets
                    
                    
                    2,894
                    
                    
                    
                    3,136Deferred
      Tax Liabilities:Property
      and equipment and capitalized software development costs
                    
                    
                    (2,762
                    )
                    
                    
                    (3,036
                    )Net
      deferred tax assets
                    
                    $
                    132
                    
                    
                    $
                    100





As of
October 31, 2010, we had deferred tax assets relating to net operating losses
and other carryforwards for international and U.S. income tax purposes of
$1,401,000; $194,000 will expire within 5 years; $1,042,000 will expire between
5 and 20 years; and $165,000 of the carryforwards will never
expire.




A
reconciliation of the beginning and ending amount of unrecognized tax benefits,
excluding the related accrual for interest or penalties, is as follows (in
thousands):


2010
                
                
                2009
                
                
                2008Balance,
      beginning of year
                
                $
                574
                
                
                $
                613
                
                
                $
                576Additions
      based on tax positions related to the current year
                
                
                -
                
                
                
                15
                
                
                
                -Additions
      for tax positions of prior years
                
                
                1
                
                
                
                51
                
                
                
                40Reductions
      due to statute expiration
                
                
                (397
                )
                
                
                (105
                )
                
                
                (3
                )Balance,
      end of year
                
                $
                178
                
                
                $
                574
                
                
                $
                613





The
entire balance of the unrecognized tax benefits and related interest at October
31, 2010, if recognized, would favorably affect the effective tax rate in future
periods.




We
recognize accrued interest and penalties related to unrecognized tax benefits as
components of our income tax provision. We believe there is substantial support
for taking these tax benefits and therefore have estimated no tax penalties. As
of October 31, 2010, the gross amount of interest accrued, reported in other
liabilities, was approximately $18,000, which did not include the federal tax
benefit of interest deductions.


45


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





The
statute of limitation with respect to unrecognized tax benefits will expire
between July 2011 and July 2014. It is reasonably possible that our uncertain
tax position could be reduced by $19,500 due to statute expiration during the
next fiscal year.




We file
income tax returns in the U.S. federal jurisdiction and various state,
local, and non-U.S. jurisdictions. The state of Indiana completed its
examination of the fiscal years 2006 and 2007 in the second quarter of fiscal
2010 with no significant adjustments for the periods subject to their audit. We
were also notified by the German taxing authority that they intend to audit the
tax returns for fiscal years 2005 to 2008 of our German subsidiary. Due to the
uncertain and complex application of tax regulations, it is possible that the
ultimate resolution of future audits may result in liabilities that could be
different from this estimate. In such case, we will record additional tax
expense or tax benefit in the tax provision (benefit) or reclassify amounts on
the consolidated balance sheets in the period in which such the matter is
effectively settled with the taxing authority.





We or one
of our subsidiaries files U.S. federal and/or state income tax returns as well
as tax returns in one or more foreign jurisdictions. A summary of open tax years
by major jurisdiction is presented below:





United
      States federal
              Fiscal
      2007 through the current periodIndiana
              Fiscal
      2007 through the current periodCalifornia
              Fiscal
      2006 through the current periodGermany1
              Fiscal
      2005 through the current periodTaiwan
              Fiscal
      2005 through the current
period




1Includes federal as well as
state, provincial or similar local jurisdictions, as applicable.





7.           EMPLOYEE
BENEFITS





We have
defined contribution plans that include a majority of our employees, under which
our matching contributions are primarily 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
matching contributions to the plans are based on employee contributions or
compensation. As of April 1, 2009, we suspended our discretionary contributions
to the U.S. plan as a cost reduction measure during the economic recession,
however on January 1, 2011 we will reinstate our matching contributions to that
plan at a contribution rate lower than we had previously. Our contributions
totaled $144,000, $443,800, and $877,600, for the fiscal years ended October 31,
2010, 2009 and 2008, respectively.





8.           STOCK
OPTIONS





In March
2008, we adopted the Hurco Companies, Inc. 2008 Equity Incentive Plan (the “2008
Plan”), which allows us to grant awards of stock options, Stock Appreciation
Rights settled in stock (SARs), restricted shares, performance shares and
performance units. The 2008 Plan replaced the 1997 Stock Option and Incentive
Plan (the “1997 Plan”) which expired in March 2007. The Compensation Committee
of the Board of Directors has authority to determine the officers, directors and
key employees who will be granted awards; designate the number of shares subject
to each award; determine the terms and conditions upon which awards will be
granted; and prescribe the form and terms of award agreements. We have granted
stock options under both plans which are currently outstanding. No stock option
may be exercised more than ten years after the date of grant or such shorter
period as the Compensation Committee may determine at the date of grant. The
total number of shares of our common stock that may be issued as awards under
the 2008 Plan is 750,000. The market value of a share of our common stock, for
purposes of the 2008 Plan, is the closing sale price as reported by the Nasdaq
Global Select Market on the date in question or, if not a trading day, on the
last preceding trading date.


46





HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





During
fiscal 2010, 2009 and 2008, we recorded approximately $141,000, $246,000 and
$535,000, respectively, of stock-based compensation expense related to grants
under the plans. As of October 31, 2010, there was approximately $468,000 of
total unrecognized stock-based compensation cost that we expect to recognize by
the end of fiscal 2014.





On May
13, 2010, the Compensation Committee granted a total of 20,000 stock options
under the 2008 Plan to four executive employees. The fair value of the options
was estimated on the date of grant using a Black-Scholes valuation model with
assumptions for expected volatility based on the historical volatility of our
common stock of 63%, expected term of the options, dividend yield rate of 0% and
a risk-free interest rate of 2.3% based upon the five-year U.S. Treasury yield
as of the date of grant. The options vest over a three-year period beginning one
year from the date of grant. Based upon the foregoing factors, the grant date
fair value of the stock options was determined to be $9.90 per
share.





On
December 18, 2009, the Compensation Committee granted a total of 30,000 stock
options under the 2008 Plan to four executive employees. The fair value of the
options was estimated on the date of grant using a Black-Scholes valuation model
with assumptions for expected volatility based on the historical volatility of
our common stock of 65%, expected term of the options, dividend yield rate of 0%
and a risk-free interest rate of 2.3% based upon the five-year U.S. Treasury
yield as of the date of grant. The options vest over a three-year period
beginning one year from the date of grant. Based upon the foregoing factors, the
grant date fair value of the stock options was determined to be $8.29 per
share.





During
fiscal 2009, options to purchase 20,000 shares were exercised, resulting in cash
proceeds of approximately $43,000 and an additional tax benefit of approximately
$26,000, compared to 28,631 shares and 45,700 shares exercised in 2008 resulting
in cash proceeds of approximately $151,000 and additional tax benefits of
approximately $36,000.




On April
16, 2009, the Compensation Committee granted a total of 21,000 options under the
2008 Plan to three new employees. The fair value of the options was estimated on
the date of grant using a Black-Scholes valuation model with assumptions for
expected volatility based on the historical volatility of our common stock of
69%, the expected term of the options, dividend yield rate of 0% and a risk-free
interest rate based upon the five-year U.S. Treasury yield as of the date of
grant of 1.8%. The options granted to the employees vest over a five-year period
beginning one year from the date of grant. Based upon the foregoing factors, the
grant date fair value of the options was determined to be $8.62 per
share.





On May
28, 2008, the Compensation Committee granted fully vested options with respect
to 5,000 shares under the 2008 Plan to each of two new directors. The fair value
of options awarded was estimated on the date of grant using a Black-Scholes
valuation model with assumptions for expected volatility based on the historical
volatility of our common stock of 88%, expected term of the options, dividend
yield rate of 0% and a risk-free interest rate based upon a three-year U.S.
Treasury yield as of the date of grant of 2.7%. The directors’ options were
granted with immediate vesting as of the date of grant. Based upon the foregoing
factors, the fair value of the options was determined to be $30.71 per
share.


47


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





A summary
of the status of the options as of October 31, 2010, 2009 and 2008 and the
related activity for the year is as follows:


Shares Under
                    Option
                  
                  
                  Weighted Average
                    Exercise Price Per ShareBalance
      October 31, 2007
                  
                  
                  83,000
                  
                  
                  $
                  13.24Granted
                  
                  
                  10,000
                  
                  
                  
                  35.83Cancelled
                  
                  
                  —
                  
                  
                  
                  —Expired
                  
                  
                  —
                  
                  
                  
                  —Exercised
                  
                  
                  (28,631
                  )
                  
                  $
                  5.26Balance
      October 31, 2008
                  
                  
                  64,369
                  
                  
                  $
                  20.29Granted
                  
                  
                  21,000
                  
                  
                  
                  14.88Cancelled
                  
                  
                  —
                  
                  
                  
                  —Expired
                  
                  
                  —
                  
                  
                  
                  —Exercised
                  
                  
                  (20,000
                  )
                  
                  $
                  2.15Balance
      October 31, 2009
                  
                  
                  65,369
                  
                  
                  $
                  24.11Granted
                  
                  
                  50,000
                  
                  
                  
                  16.14Cancelled
                  
                  
                  —
                  
                  
                  
                  —Expired
                  
                  
                  —
                  
                  
                  
                  —Exercised
                  
                  
                  —
                  
                  
                  
                  —Balance
      October 31, 2010
                  
                  
                  115,369
                  
                  
                  $
                  20.66





The total
intrinsic value of stock options exercised during the twelve months ended
October 31, 2010, 2009 and 2008 was approximately $0, $0.3 million and $0.5
million respectively.





As of
October 31, 2010, the total intrinsic value of outstanding stock options already
vested and expected to vest and the intrinsic value of options that are
outstanding and exercisable as of October 31, 2010 was
$195,000.  Stock options outstanding and exercisable on October 31,
2010, 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$2.15
                            
                            
                            500
                            
                            
                            $
                            2.15
                            
                            
                            
                            1.114.82
                            
                            
                            30,000
                            
                            
                            
                            14.82
                            
                            
                            
                            9.114.88
                            
                            
                            21,000
                            
                            
                            
                            14.88
                            
                            
                            
                            8.518.13
                            
                            
                            20,000
                            
                            
                            
                            18.13
                            
                            
                            
                            9.526.69
                            
                            
                            33,869
                            
                            
                            
                            26.69
                            
                            
                            
                            6.035.83
                            
                            
                            10,000
                            
                            
                            
                            35.83
                            
                            
                            
                            7.6$  2.15 – 35.83
                            
                            
                            115,369
                            
                            
                            $
                            20.66
                            
                            
                            
                            7.9Exercisable$2.15
                            
                            
                            500
                            
                            
                            $
                            2.15
                            
                            
                            
                            1.114.88
                            
                            
                            7,000
                            
                            
                            
                            14.88
                            
                            
                            
                            8.526.69
                            
                            
                            33,869
                            
                            
                            
                            26.69
                            
                            
                            
                            6.035.83
                            
                            
                            10,000
                            
                            
                            
                            35.83
                            
                            
                            
                            7.6$  2.15 – 35.83
                            
                            
                            51,369
                            
                            
                            $
                            26.62
                            
                            
                            
                            5.9




48


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





9.           RELATED
PARTY TRANSACTIONS





As of
October 31, 2010, we owned approximately 35% of the outstanding shares of a
Taiwanese-based contract manufacturer, Hurco Automation, Ltd.
(HAL).  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 produced under
contract for sale exclusively to us.  We are accounting for this
investment using the equity method.  The investment of $2.1 million
and $2.3 million at October 31, 2010 and 2009 is included in Investments and
Other Assets, Net on the Consolidated Balance Sheets.  Purchases of
product from HAL amounted to $5.8 million, $2.9 million and $10.3 million in
2010, 2009 and 2008, respectively.  Sales of product to HAL were $1.2
million, $322,000 and $2.0 million for the years ended October 31, 2010, 2009
and 2008, respectively.  Trade payables to HAL were $1.7 million and
$342,000 at October 31, 2010 and 2009, respectively.  Trade
receivables from HAL were $381,000 and $50,000 at October 31, 2010 and 2009,
respectively.





Summary
unaudited financial information for HAL’s operations and financial conditions is
as follows:





(in
      thousands)
                  
                  2010
                  
                  
                  2009
                  
                  
                  2008Net
      Sales
                  
                  $
                  7,057
                  
                  
                  $
                  3,710
                  
                  
                  $
                  11,935Gross
      Profit
                  
                  
                  816
                  
                  
                  
                  488
                  
                  
                  
                  1,883Operating
      Income (Loss)
                  
                  
                  (399
                  )
                  
                  
                  (689
                  )
                  
                  
                  159Net
      Income (Loss)
                  
                  
                  (337
                  )
                  
                  
                  (1,203
                  )
                  
                  
                  147Current
      Assets
                  
                  $
                  7,439
                  
                  
                  $
                  6,110
                  
                  
                  $
                  8,658Non-current
      Assets
                  
                  
                  1,846
                  
                  
                  
                  1,742
                  
                  
                  
                  2,195Current
      Liabilities
                  
                  
                  2,529
                  
                  
                  
                  1,211
                  
                  
                  
                  3,176





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
AND PRODUCT WARRANTIES





We follow
FASB guidance for 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 subsidiaries guarantee third party payment obligations in
connection with the sale of machines to customers that use
financing.  We follow FASB guidance for accounting for contingencies
with respect to these guarantees.   As of October 31, 2010, we
had 32 outstanding third party payment guarantees totaling approximately $1.7
million. The terms of these guarantees are consistent with the underlying
customer financing terms.  Upon shipment of a machine, the customer
has the risk of ownership. The customer does not obtain title, however, until it
has paid for the machine.  A retention of title clause allows us to
recover the machine if the customer defaults on the financing. We accrue for
potential liabilities under these guarantees when we believe a loss is probable
and can be estimated.




49


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):


2010
                
                
                2009
                
                
                2008Balance,
      beginning of year
                
                $
                1,286
                
                
                $
                2,536
                
                
                $
                2,449Provision
      for warranties during the period
                
                
                2,170
                
                
                
                799
                
                
                
                2,944Charges
      to the accrual
                
                
                (1,875
                )
                
                
                (2,096
                )
                
                
                (2,666
                )Impact
      of foreign currency translation
                
                
                10
                
                
                
                47
                
                
                
                (189
                )Balance,
      end of year
                
                $
                1,591
                
                
                $
                1,286
                
                
                $
                2,536





12.           OPERATING
LEASES




We lease
facilities, certain equipment and vehicles under operating leases that expire at
various dates through 2017.  Future payments required under operating
leases as of October 31, 2010, are summarized as follows (in
thousands):





2011
                  
                  $
                  2,3292012
                  
                  
                  1,3782013
                  
                  
                  7952014
                  
                  
                  3682015
      and thereafter
                  
                  
                  191Total
                  
                  $
                  5,061





Lease
expense for the years ended October 31, 2010, 2009, and 2008 was $2.7 million,
$3.0 million, and $2.6 million, respectively.





We
recorded approximately $138,000 of lease income during fiscal 2010 from leasing
50,000 square feet of our Indianapolis facility.  The lease expires on
October 31, 2011.




50


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





13.         QUARTERLY
HIGHLIGHTS (Unaudited)





First
                        Quarter
                      
                      
                      Second
                        Quarter
                      
                      
                      Third
                        Quarter
                      
                      
                      Fourth
                        Quarter2010 (In thousands, except per share
      data)Sales
      and service fees
                      
                      $
                      20,616
                      
                      
                      $
                      24,088
                      
                      
                      $
                      26,474
                      
                      
                      $
                      34,715Gross
      profit
                      
                      
                      3,980
                      
                      
                      
                      4,677
                      
                      
                      
                      4,659
                      
                      
                      
                      8,480Gross
      profit margin
                      
                      
                      19.3
                      %
                      
                      
                      19.4
                      %
                      
                      
                      17.6
                      %
                      
                      
                      24.4
                      %Selling,
      general and administrative expenses
                      
                      
                      6,533
                      
                      
                      
                      7,230
                      
                      
                      
                      6,994
                      
                      
                      
                      9,080Operating
      income (loss)
                      
                      
                      (2,553
                      )
                      
                      
                      (2,553
                      )
                      
                      
                      (2,335
                      )
                      
                      
                      (600
                      )Provision
      (benefit) for income taxes
                      
                      
                      (983
                      )
                      
                      
                      (1,096
                      )
                      
                      
                      (1,210
                      )
                      
                      
                      174Net
      income (loss)
                      
                      
                      (1,836
                      )
                      
                      
                      (1,573
                      )
                      
                      
                      (1,173
                      )
                      
                      
                      (1,162
                      )Income
      (loss) per common share – basic
                      
                      $
                      (0.29
                      )
                      
                      $
                      (0.24
                      )
                      
                      $
                      (0.18
                      )
                      
                      $
                      (0.18
                      )Income
      (loss) per common share – diluted
                      
                      $
                      (0.29
                      )
                      
                      $
                      (0.24
                      )
                      
                      $
                      (0.18
                      )
                      
                      $
                      (0.18
                      )





First
                      Quarter
                    
                    
                    Second
                      Quarter
                    
                    
                    Third
                      Quarter
                    
                    
                    Fourth
                      Quarter2009 (In thousands, except per share
      data)Sales
      and service fees
                    
                    $
                    28,307
                    
                    
                    $
                    20,489
                    
                    
                    $
                    19,039
                    
                    
                    $
                    23,181Gross
      profit
                    
                    
                    8,542
                    
                    
                    
                    5,220
                    
                    
                    
                    5,251
                    
                    
                    
                    6,815Gross
      profit margin
                    
                    
                    30.2
                    %
                    
                    
                    25.5
                    %
                    
                    
                    27.6
                    %
                    
                    
                    29.4
                    %Selling,
      general and administrative expenses
                    
                    
                    8,029
                    
                    
                    
                    7,518
                    
                    
                    
                    7,200
                    
                    
                    
                    8,127Operating
      income (loss)
                    
                    
                    513
                    
                    
                    
                    (2,298
                    )
                    
                    
                    (1,949
                    )
                    
                    
                    (1,312
                    )Provision
      (benefit) for income taxes
                    
                    
                    195
                    
                    
                    
                    (207
                    )
                    
                    
                    (552
                    )
                    
                    
                    (927
                    )Net
      income (loss)
                    
                    
                    354
                    
                    
                    
                    (281
                    )
                    
                    
                    (1,231
                    )
                    
                    
                    (1,163
                    )Income
      (loss) per common share – basic
                    
                    $
                    0.06
                    
                    
                    $
                    (0.04
                    )
                    
                    $
                    (0.19
                    )
                    
                    $
                    (0.18
                    )Income
      (loss) per common share – diluted
                    
                    $
                    0.05
                    
                    
                    $
                    (0.04
                    )
                    
                    $
                    (0.19
                    )
                    
                    $
                    (0.18
                    )




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.




51


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





We sell
our products through more than 100 independent agents and distributors
throughout North America, Europe and Asia.  Our line is the primary
line for the majority of our distributors globally even though some may carry
competitive products.  We also have our own direct sales and service
organizations in Canada, China, France, Germany, India, Italy, Poland,
Singapore, South Africa, South Korea, the United Kingdom, and certain areas of
the United States, which are among the world's principal machine tool consuming
countries.  During fiscal 2010, no distributor accounted for more than
5% of our sales and service fees.  In fiscal 2010, more than 70% 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
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
      31,2010
                    
                    
                    2009
                    
                    
                    2008Computerized
      Machine Tools
                    
                    $
                    88,184
                    
                    
                    $
                    75,213
                    
                    
                    $
                    199,238Computer
      Control Systems and Software *
                    
                    
                    2,347
                    
                    
                    
                    2,546
                    
                    
                    
                    5,678Service
      Parts
                    
                    
                    10,798
                    
                    
                    
                    8,851
                    
                    
                    
                    13,240Service
      Fees
                    
                    
                    4,564
                    
                    
                    
                    4,406
                    
                    
                    
                    5,838Total
                    
                    $
                    105,893
                    
                    
                    $
                    91,016
                    
                    
                    $
                    223,994


*Amounts
shown do not include computer control systems and software 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 (in thousands):





Revenues
      by Geographic Area
                
                Year Ended October
      312010
                
                
                2009
                
                
                2008North
      America
                
                $
                26,079
                
                
                $
                25,203
                
                
                $
                48,087Germany
                
                
                25,887
                
                
                
                26,273
                
                
                
                81,945United
      Kingdom
                
                
                13,703
                
                
                
                11,242
                
                
                
                20,877Italy
                
                
                5,863
                
                
                
                4,969
                
                
                
                10,329France
                
                
                6,061
                
                
                
                4,486
                
                
                
                13,412Other
      Europe
                
                
                12,185
                
                
                
                11,372
                
                
                
                36,202Total
      Europe
                
                
                63,699
                
                
                
                58,342
                
                
                
                162,765Asia
                
                
                13,697
                
                
                
                5,557
                
                
                
                11,816Other
      Foreign
                
                
                2,418
                
                
                
                1,914
                
                
                
                1,326Total
      Foreign
                
                
                79,814
                
                
                
                65,813
                
                
                
                175,907$
                105,893
                
                
                $
                91,016
                
                
                $
                223,994





Long-lived
tangible assets, net by geographic area were (in thousands):





As
      of October 312010
                    
                    
                    2009United
      States
                    
                    $
                    6,998
                    
                    
                    $
                    7,942Foreign
      countries
                    
                    
                    6,277
                    
                    
                    
                    7,048$
                    13,275
                    
                    
                    $
                    14,990


52


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





Net
assets by geographic area were (in thousands):


As of October
      312010
                  
                  
                  2009North
      America
                  
                  $
                  55,961
                  
                  
                  $
                  63,659Europe
                  
                  
                  41,737
                  
                  
                  
                  41,824Asia
                  
                  
                  17,042
                  
                  
                  
                  14,893$
                  114,740
                  
                  
                  $
                  120,376





15.        NEW
ACCOUNTING PRONOUNCEMENTS




In
January 2010, the FASB issued guidance to improve disclosures about fair value
measurements.  Reporting entities will have to provide information
about movements of assets among Levels 1 and 2; and a reconciliation of
purchases, sales, issuance, and settlements of activity valued with a Level 3
method, of the three-tier fair value hierarchy established by previous FASB
guidance. The guidance also clarifies the existing requirements for fair value
measurement disclosures as it relates to each class of assets and liabilities.
The guidance was effective for interim and annual reporting periods beginning
after December 15, 2009 for Level 1 and 2 disclosure requirements and after
December 15, 2010 for Level 3 disclosure requirements. We adopted this
guidance in the third quarter of fiscal 2010 and it did not have a material
impact on our consolidated financial statements.




In
February 2010, the FASB issued amendments to certain recognition and
disclosure requirements. This guidance removes the requirement that SEC filers
disclose the date through which subsequent events have been evaluated. This
amendment alleviates potential conflicts between previous guidance and the SEC’s
requirements. The guidance became effective upon issuance and we adopted this
guidance during the first quarter of fiscal 2010.





In
October, 2009, the FASB issued an ASU related to Revenue Recognition that amends
the previous guidance on arrangements with multiple deliverables. This guidance
provides principles and application guidance on whether multiple deliverables
exist, how the arrangements should be separated, and how the consideration
should be allocated. It also clarifies the method to allocate revenue in an
arrangement using the estimated selling price. This guidance is effective for us
November 1, 2010, and is not expected to have a material impact to our
consolidated financial position or results of operations.





The FASB
issued guidance for business combinations with acquisition dates on or after
November 1, 2010. This guidance, with its amendment, changes the way in which
the acquisition method is to be applied in a business combination. The primary
revisions require an acquirer in a business combination to measure assets
acquired, liabilities assumed, and any noncontrolling interest in the acquiree
at the acquisition date, at their fair values as of that date, with limited
exceptions specified in the guidance. This guidance also requires the acquirer
in a business combination achieved in stages to recognize the identifiable
assets and liabilities, as well as the noncontrolling interest in the acquiree,
at the full amounts of their fair values (or other amounts determined in
accordance with the guidance). Assets acquired and liabilities assumed arising
from contingencies are to be measured at fair value if it can be determined
during the measurement period. If fair value cannot be determined, the asset or
liability should be recognized at the acquisition date if it is probable that an
asset existed or a liability had been incurred and the amount can be reasonably
estimated. This guidance significantly amends other authoritative guidance on
Business Combinations as well, and now requires the capitalization of research
and development assets acquired in a business combination at their
acquisition-date fair values, separately from goodwill. The accounting for
income taxes was also amended by this guidance to require the acquirer to
recognize changes in the amount of its deferred tax benefits that are
recognizable because of a business combination either in income from continuing
operations in the period of the combination or directly in contributed capital,
depending on the circumstances.


53


Item
9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE





None.





Item
9A. CONTROLS AND
PROCEDURES





Under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, we carried out an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures as of October 31, 2010, 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 fourth quarter of the fiscal year ended October 31, 2010
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.





Item
9B. OTHER
INFORMATION





During
the fourth quarter of fiscal 2010, the Audit Committee of the Board of Directors
did not engage our independent registered public accounting firm to perform any
new non-audit services.  This disclosure is made pursuant to Section
10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202 of the
Sarbanes-Oxley Act of 2002.





The
following graph illustrates the cumulative total shareholder return on our
common stock for the five-year period ended October 31, 2010, as compared to the
Russell 2000 and a peer group consisting of traded securities for U.S. companies
in the same three digit Standard Industrial Classification group as Hurco (SIC
3540-3549 – Metal Working Machinery and Equipment).  The comparisons
in this table are required by the SEC and are not intended to forecast or be
indicative of possible future performance of our common stock.











10/05
                        
                        
                        
                        10/06
                        
                        
                        
                        10/07
                        
                        
                        
                        10/08
                        
                        
                        
                        10/09
                        
                        
                        
                        10/10Hurco
      Companies, Inc.
                        
                        
                        100.00
                        
                        
                        
                        146.16
                        
                        
                        
                        320.25
                        
                        
                        
                        126.19
                        
                        
                        
                        89.19
                        
                        
                        
                        103.20Russell
      2000
                        
                        
                        100.00
                        
                        
                        
                        119.98
                        
                        
                        
                        131.10
                        
                        
                        
                        86.32
                        
                        
                        
                        91.89
                        
                        
                        116.31Peer
      Group - SIC Codes 3540-3549
                        
                        
                        100.00
                        
                        
                        
                        119.03
                        
                        
                        
                        168.84
                        
                        
                        
                        84.92
                        
                        
                        
                        107.93
                        
                        
                        
                        149.54





*The stock price performance
included in this graph is not necessarily indicative of future stock price
performance


54


PART
III





Item
10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE





The
information required by this item is incorporated herein by reference to the
definitive proxy statement for our 2011 annual meeting of shareholders except
that the information required by Item 10 regarding our 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 incorporated herein by reference to the
definitive proxy statement for our 2011 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 incorporated herein by reference to the definitive
proxy statement for our 2011 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, 2010:





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
                
                
                115,369
                
                
                $
                20.66
                
                
                
                669,000Equity
      compensation plans not approved by security holders
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                
                115,369
                
                
                $
                20.66
                
                
                
                669,000





As of
October 31, 2010, there were no outstanding non-qualified options that had been
granted other than pursuant to a plan approved by our shareholders.





Item
13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE





The
information required by this item is incorporated herein by reference to the
definitive proxy statement for our 2011 annual meeting of
shareholders.





Item
14. PRINCIPAL ACCOUNTING FEES
AND SERVICES





The
information required by this item is incorporated herein by reference to the
definitive proxy statement for our 2011 annual meeting of
shareholders.


55


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 – Ernst & Young
      LLP
                          
                          28Report
      of Independent Registered Public Accounting Firm – Crowe Horwath
      LLP
                          
                          30Consolidated
      Statements of Operations – years ended October 31, 2010, 2009 and
      2008
                          
                          31Consolidated
      Balance Sheets – as of October 31, 2010 and 2009
                          
                          32Consolidated
      Statements of Cash Flows – years ended October 31, 2010, 2009 and
      2008
                          
                          33Consolidated
      Statements of Changes in Shareholders’ Equity – years ended October
      31, 2010, 2009 and 2008
                          
                          34Notes
      to Consolidated Financial Statements
                          
                          352.
                          Financial Statement
      Schedule.  The following financial statement schedule is
      included in this Item.




PageSchedule
      II - Valuation and QualifyingAccounts
      and Reserves
                57




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
      being filed with this Form 10-K or incorporated herein by reference are
      listed on page 58.




56


Schedule
II - Valuation and Qualifying Accounts and Reserves


for
the years ended October 31, 2010, 2009, and 2008


(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 doubtful accounts for the year ended:October
      31, 2010
                                                    
                                                    $
                                                    809
                                                    
                                                    
                                                    $
                                                    (301
                                                    )
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    $
                                                    11
                                                    (1)
                                                    
                                                    $
                                                    497October
      31, 2009
                                                    
                                                    $
                                                    678
                                                    
                                                    
                                                    $
                                                    736
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    $
                                                    605
                                                    (2)
                                                    
                                                    $
                                                    809October
      31, 2008
                                                    
                                                    $
                                                    751
                                                    
                                                    
                                                    $
                                                    (42
                                                    )
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    $
                                                    31
                                                    (3)
                                                    
                                                    $
                                                    678Accrued
      warranty expenses for the year ended:October
      31, 2010
                                                    
                                                    $
                                                    1,286
                                                    
                                                    
                                                    $
                                                    2,180
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    $
                                                    1,875
                                                    
                                                    
                                                    $
                                                    1,591October
      31, 2009
                                                    
                                                    $
                                                    2,536
                                                    
                                                    
                                                    $
                                                    846
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    $
                                                    2,096
                                                    
                                                    
                                                    $
                                                    1,286October
      31, 2008
                                                    
                                                    $
                                                    2,449
                                                    
                                                    
                                                    $
                                                    2,755
                                                    
                                                    
                                                    
                                                    —
                                                    
                                                    
                                                    $
                                                    2,666
                                                    
                                                    
                                                    $
                                                    2,536




(1) Receivable
write-offs of $13,000, net of cash recoveries on accounts previously
written off of $2,000.




(2) Receivable
write-offs of $605,000.




(3) Receivable
write-offs of $39,000, net of cash recoveries on accounts previously written off
of $8,000.


57


EXHIBITS
INDEX





Exhibits
Filed.  The following exhibits are filed with this
report:


10.1*
            Summary
      compensation sheet.21
            Subsidiaries
      of the Registrant.23.1
            Consent
      of Independent Registered Public Accounting Firm, Ernst & Young
      LLP23.2
            Consent
      of Independent Registered Public Accounting Firm, Crowe Horwath
      LLP31.1
            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 Executive 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 Quarterly Report on Form 10-Q
      for the quarter ended July 31, 2000.3.2
            Amended
      and Restated By-Laws of the Registrant as amended through July 8, 2009,
      incorporated by reference to Exhibit 3.1 to the Registrant’s Quarterly
      Report on Form 10-Q for the quarter ended July 31,
2009.10.2
            Credit
      Agreement dated as of December 7, 2007, between Hurco Companies, Inc. and
      JP Morgan Chase Bank, N.A. incorporated by reference to Exhibit 10.1 to
      the Registrant’s Current Report on Form 8-K filed December 12,
      2007.10.3
            First
      Amendment to Credit Agreement dated as of October 30, 2009, between Hurco
      Companies, Inc. and JP Morgan Chase Bank, N.A. incorporated by reference
      to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed
      November 4, 2009.10.4*
            Employment
      Agreement between the Registrant and John G. Oblazney dated January 12,
      2007, incorporated by reference to Exhibit 10.1 to the Registrant’s Annual
      Report on Form 10-K for the year ended October 31,
2006.10.5*
            Separation
      and Release Agreement between the Registrant and James D. Fabris dated
      October 1, 2009, incorporated by reference to Exhibit 10.1 to the
      Registrant’s Current Report on Form 8-K filed on October 2,
      2009.10.6*
            Employment
      Agreement between the Registrant and Michael Doar dated November 13, 2001,
      incorporated by reference as Exhibit 10.2 to the Registrant’s Quarterly
      Report on Form 10-Q for the quarter ended January 31,
  2002.10.7*
            Amended
      1997 Stock Option and Incentive Plan incorporated by reference as Exhibit
      10 to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter
      ended July 31, 2005.10.8
            Hurco
      Companies, Inc. 2008 Equity Incentive Plan incorporated by reference to
      Appendix A of the Registrant’s definitive Proxy Statement on Schedule 14A
      filed January 28, 2008.10.9*
            Form
      of restated split-dollar insurance agreement incorporated by reference to
      Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the year
      ended October 31, 2008.


*
            The
      indicated exhibit is a management contract, compensatory plan or
      arrangement required to be listed by Item 601 of Regulation
      S-K.


58


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 11th day of January
2011.





HURCO
      COMPANIES, INC.By:
              /s/ John G. OblazneyJohn
      G. OblazneyVice-President,
      Secretary,Treasurer
      andChief
      Financial Officer




59


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
      12, 2011Michael
      Doar, Chairman of the Board,Chief
      Executive Officer and Presidentof
      Hurco Companies, Inc.(Principal
      Executive Officer)/s/ John G. Oblazney
                    
                    January
      12, 2011John
      G. OblazneyVice-President,Secretary,
      Treasurer andChief
      Financial Officerof
      Hurco Companies, Inc.(Principal
      Financial Officer)/s/ Sonja K. McClelland
                    
                    January
      12, 2011Sonja
      K. McClellandCorporate
      Controller, Assistant Secretaryof
      Hurco Companies, Inc.(Principal
      Accounting Officer)/s/ Stephen H. Cooper
                    
                    January
      12, 2011Stephen
      H. Cooper, Director/s/ Robert W. Cruickshank
                    
                    January
      12, 2011Robert
      W. Cruickshank, Director/s/ Philip James
                    
                    January
      12, 2011Philip
      James, Director/s/ Michael P. Mazza
                    
                    January
      12, 2011Michael
      P. Mazza, Director/s/ Richard T. Niner
                    
                    January
      12, 2011Richard
      T. Niner, Director/s/ Charlie Rentschler
                    
                    January
      12, 2011Charlie
      Rentschler, Director/s/ Janaki Sivanesan
                    
                    January
      12, 2011Janaki
      Sivanesan, Director




60