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, 2006
                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 incorporation or organization)
            
            (I.R.S.
                Employer Identification Number)**One
                Technology Way****Indianapolis,
                Indiana**
            
            **46268**(Address
                of principal executive offices)
            
            (Zip
                code)





Registrant’s
      telephone number, including area
      code **(317)
      293-5309**





Securities
                registered pursuant to Section 12(b) of the Act:
            None


Securities
                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
                filerx
            Non-accelerated
                filer ̈





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





The
      aggregate market value of the registrant’s voting stock held by non-affiliates
      as of April 30, 2006 (the last day of our most recently completed second
      quarter) was $196,888,671.





The
      number of shares of the registrant’s common stock outstanding as of January 12,
      2007 was 6,380,520.





DOCUMENTS
      INCORPORATED BY REFERENCE: Portions of the registrant’s Proxy Statement for its
      2007 Annual Meeting of Shareholders (Part III).







1





**Disclosure
      Concerning Forward-looking Statements**




Certain
      statements made in this annual report on form 10-K may constitute
“forward-looking statements” within the meaning of the Private Securities
      Litigation Reform Act of 1995. These forward-looking statements involve known
      and unknown risks, uncertainties and other factors that may cause our actual
      results, performance or achievements to be materially different from any future
      results, performance or achievements expressed or implied by such
      forward-looking statements. These factors include the risks identified in Item
      1A.




**PART
      I**




**Item****1.**
              **BUSINESS**


**General**





Hurco
      Companies, Inc. is an industrial technology company. We design, manufacture
      and
      sell computerized machine tools to companies in the metal working industry
      through a worldwide sales, service and distribution network. Although our
      Computer Numeric Control (CNC) systems and software products are proprietary,
      they use industry standard personal computer components. Our CNC systems and
      software products are primarily sold as integral components of our computerized
      machine tool products.





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. Hurco pioneered the
      application of microprocessor technology and conversational programming software
      for use on machine tools. We have concentrated on designing “user-friendly”
computer control systems that can be operated by both skilled and unskilled
      machine tool operators and yet are capable of instructing a machine to perform
      complex tasks. The combination of microprocessor technology and patented
      interactive, conversational programming software in our computer control systems
      enables operators on the production floor to quickly and easily create a program
      for machining a particular part from a blueprint or Computer-Aided Design (CAD)
      file and immediately begin machining that part.




Our
      executive offices and principal design and engineering operations are
      headquartered in Indianapolis, Indiana. Sales, application engineering and
      service offices are located in Indianapolis, Indiana; High Wycombe, England;
      Munich, Germany; Paris, France; Milan, Italy; Singapore and Taichung, Taiwan.
      We
      also have a representative sales office in Shanghai, China, and a technical
      center in Shenzhen, China. Distribution facilities are located in Los Angeles,
      California, Venlo, the Netherlands, and Singapore, and our principal
      manufacturing facility is located in Taiwan. In November 2006, we registered
      a
      distribution company in India and we are currently in the process of
      establishing a sales office in India. We are also developing a new manufacturing
      facility in Ningbo, China. The opening of the Ningbo facility is part of our
      plan to increase capacity and reduce manufacturing costs. This facility will
      focus on machining castings and components to support our manufacturing
      operation in Taiwan. In the future, the Ningbo facility can be expanded to
      include sub-assembly operations. Eventually, machines designed specifically
      for
      the Chinese market will be produced at the Ningbo facility.




Our
      strategy is to design, manufacture and sell a comprehensive line of computerized
      machine tools that incorporate our proprietary, interactive computer control
      technology to 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 using standard PC hardware. We
      have
      emphasized an operator friendly design that employs both interactive
      conversational and graphical programming software.





2





**Products**





Our
      core
      products consist of general purpose computerized machine tools for the metal
      cutting industry, principally vertical machining centers (mills) and turning
      centers (lathes), into 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 control
      systems. Additionally, we produce and distribute software options, control
      upgrades, hardware accessories and replacement parts related to our machine
      tool
      product lines and provide operator training and support services to our
      customers.





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,****2006**
            
            **2005**
            
            **2004****Continuing
                Products and Services**Computerized
                Machine Tools
            
            $
            128,946
            
            
            86.8
            %
            $
            107,313
            
            
            85.5
            %
            $
            83,663
            
            
            84.0
            %Computer
                Control Systems and Software *
            
            
            4,694
            
            
            3.2
            %
            
            4,129
            
            
            3.3
            %
            
            3,604
            
            
            3.6
            %Service
                Parts
            
            
            10,494
            
            
            7.0
            %
            
            9,991
            
            
            8.0
            %
            
            8,696
            
            
            8.8
            %Service
                Fees
            
            
            4,383
            
            
            3.0
            %
            
            4,076
            
            
            3.2
            %
            
            3,609
            
            
            3.6
            %Total
            
            $
            148,517
            
            
            100
            %
            $
            125,509
            
            
            100
            %
            $
            99,572
            
            
            100
            %








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





***Computerized
      Machine Tools - Machining Centers***





We
      design, manufacture and sell computerized machine tools equipped with a fully
      integrated interactive computer control system. During the middle of fiscal
      2007
      our UltiMax ® twin
      screen control console and our MAX ® single
      screen control console will feature our new WinMax ® software.
      Our computer control system enables a machine tool operator to create complex
      two or three-dimensional machining programs directly from an engineering drawing
      or CAD 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), incorporates an upgradeable
      Personal Computer (PC) platform using a Pentium ® *
      class
      processor, solid rendering graphical programming, and, because
      WinMax ® has
      a Windows ® **
      based
      operating system, users will be able to take advantage of commercial trends
      in
      manufacturing integration offering the highest level of shop floor flexibility
      and software productivity. File management, process control, networking, and
      combining programming formats are enhanced with the new WinMax ® control
      software.





In
      the
      intensely competitive global manufacturing marketplace, significant increases
      in
      productivity are being derived from control and software technologies. Companies
      using CNC machine tools must be able to;




§
            maximize
                the efficiency of their human resources;


§
            continue
                to expand their capability of making more advanced and complex parts
                from
                a wide range of materials and multiple processes;


§
            maintain
                the ability to incorporate fast moving changes in technology into
                their
                operations to keep their competitive edge; and


§
            continue
                to integrate themselves into the global supply chain of their customers
                by
                supporting small to medium lot sizes for “Just In Time” initiatives.





*Pentium ® is a
      registered trademark of Intel Corporation.


**Windows ® is a
      registered trademark of Microsoft Corporation.





3





Our Windows ® **
      based
      control facilitates our ability to meet these customer needs. Companies are
      finding that the familiar Windows ® **
      operating system coupled with the Hurco conversational style of program creation
      means that their operators are capable of creating and editing part programs
      without the overhead of specialized CAD/CAM programmers. With the ability to
      transfer most CAD data directly into a Hurco program, programming time becomes
      minutes instead of hours.





Products
      today are being designed to meet the demand for more complex machined parts
      to
      greater part accuracies. The Hurco controls with WinMax ® software
      and Pentium®* processors are capable of processing the large amounts of data required for
      these jobs to be processed at world-class speeds and accuracies. We continue
      to
      add technology to our control design as it becomes available.





Our
      offering of machining centers, currently equipped with either the
      UltiMax ® or
      MAX ® control
      console consists of the following four 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 three models in three sizes with X-axis travels of 26, 40,
      and
      50 inches. The base price of the VM machines ranges from $36,000 to
      $79,000.





*VMX
      Product Line*





The
      VMX
      product line consists of higher performing vertical machining centers aimed
      at
      manufacturers demanding globally competitive machine tools. It is our signature
      product line. The VMX line consists of seven models in six sizes with X-axis
      travels of 24, 30, 40, 50, 60, and 64 inches. In 2006, the line was further
      enhanced to increase operational speeds. The base price of VMX machines ranges
      from $50,000 to $200,000.





*Five-Axis
      (VTX) and Horizontal Machining Centers (HTX)*





The
      VTX/HTX product line is targeted at manufacturers of complex multi-sided parts
      that require processing in one setup. Purchasing one of these machining centers
      can yield significant productivity gains for operations that process each side
      of a part individually. The VTX/HTX product line in 2006 consisted of three
      models, two vertical cutting machines and one horizontal cutting machine. The
      base price of the VTX/HTX machines ranges from $160,000 to
      $180,000.





*TM
      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 three models with chucks of
      6,
      8, and 10 inches respectively. In September 2006, we further enhanced the
      capability of the TM turning centers with the addition of “live” or powered
      tooling on the lathe turret. This allows 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. This ability to
“mill/turn” or “multi-task” on the same machine in one setup can provide
      significant productivity gains. Two models with this capability are being
      offered. The base price of the TM Series ranges from $40,000 to
      $85,000.




*Pentium® 
      is a registered trademark of Intel Corporation.


**Winbdows®
      is a registered trademark of Microsoft Corporation.




4




***Computer
      Control Systems and Software***





The
      following machine tool computer control systems and software products are sold
      directly to end-users and/or to original equipment manufacturers.




·
            *Autobend**®*





Autobend ® computer
      control systems are applied to metal bending press brake machines that form
      parts from sheet metal and steel plate. They consist of a microprocessor-based
      computer control and back gauge (an automated gauging system that determines
      where the bend will be made). We have manufactured and sold the Autobend ® product
      line since 1968. We currently market two models of our Autobend ® computer
      control systems for press brake machines, in combination with six different
      back
      gauges, through distributors to end-users as retrofit units for installation
      on
      existing or new press brake machines, as well as to original equipment
      manufacturers and importers of such equipment.





·
            *CAM
                and Software Products*





In
      addition to our standard computer control features, we offer software option
      products for two and three-dimensional programming. These products are sold
      to
      users of our computerized machine tools equipped with our UltiMax ® or
      MAX ® consoles.
      The options include: Advanced Velocity Control (AVC), Adaptive Surface Finish
      (ASF), DXF Transfer, UltiNet TM ,
      UltiPocket TM ,
      Conversational Part and Tool Probing, and 3D Mold.





Our
      Advanced Velocity Control (AVC) and Adaptive Surface Finish (ASF), high
      performance machining software options, enable a customer to increase machine
      throughput using higher cutting feed rates. The ASF software
      option facilitates optimized surface finishes on complex parts using faster
      high-resolution part data transfers.





The
      DXF
      Transfer software option can substantially increase operator productivity
      because it eliminates manual data entry of part features by transferring
      AutoCAD TM drawing
      files directly into the UltiMax ® or
      MAX ® computer
      control or into our desktop programming software.





UltiNet Ô is a
      networking software option used by our customers to transfer part design and
      manufacturing information to computerized machine tools at high speeds and
      to
      network computerized machine tools within the customer's manufacturing facility.





UltiPocket TM automatically 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.





Our
      3D
      Mold software option uses 2 1/2 D
      technology to allow a user to visualize and then program on the shop floor
      complex 3D parts from simple 2D contours. For many parts, there is no need
      to go
      back offline with a CAM system.





**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
      manufacturing strategy is based on sourcing of our modular designed components
      from a network of contract suppliers and sub-contractors who manufacture our
      components in accordance with our proprietary design, quality standards and
      cost
      specifications. This has enabled us to lower our production costs, reduce our
      working capital per sales dollar, and increase our worldwide manufacturing
      capacity without significant incremental investment in capital equipment or
      personnel.





Our
      computerized metal cutting machine tools are manufactured to our specifications
      primarily by our wholly owned subsidiary in Taiwan, Hurco Manufacturing Limited
      (HML), which we established in fiscal 2000. This subsidiary has increased our
      overall capacity and reduced our dependence on other manufacturers. In addition,
      we have a 24% ownership interest in a contract machine manufacturer in Taiwan
      that produces certain models included in our product line. Both of these
      manufacturers conduct final assembly operations and are supported by a network
      of sub-contract suppliers of components and sub-assemblies. We are also
      developing a new manufacturing facility in Ningbo, China that will focus on
      the
      machining of castings and components to support manufacturing operations in
      Taiwan. In the future, we can expand the Ningbo facility to include sub-assembly
      operations. Eventually, we expect that machines designed specifically for the
      Chinese market will be produced at the Ningbo facility.





We
      have a
      contract manufacturing agreement for computer control systems with another
      Taiwan-based company in which we have a 35% ownership interest. This company
      produces our UltiMax ® ,
      MAX ® and
      Autobend ® computer
      control systems to our specifications, and is engaged primarily in the sourcing
      of industry standard computer components and proprietary parts, as well as
      final
      assembly and test operations. We source one of our proprietary printed circuit
      boards (PCB) for our UltiMax ® control
      from a single domestic supplier.





We
      work
      closely with our wholly owned manufacturing subsidiaries and our minority-owned
      affiliates to assure that their production capacity will be sufficient to meet
      the projected demand for our machine tool products. We continue to consider
      additional contract manufacturing resources to increase our long-term capacity,
      and believe that, except for the sole-sourced PCB, alternative sources for
      our
      standard and proprietary components are available. However, any prolonged
      interruption of operations or significant reduction in capacity or performance
      capability of our Taiwan based manufacturing facility or the PCB supplier would
      have a material adverse effect on our operations.





**Marketing
      and Distribution**





We
      sell
      our products through more than 150 independent agents and distributors in
      countries throughout North America, Europe and Asia. Although some of our
      distributors may carry competitive products, the Hurco line is the primary
      line
      for the majority of our distributors globally. We also have our own direct
      sales
      personnel in England, France, Germany, Italy, Singapore and China, which are
      among the world's principal machine tool consuming countries. During fiscal
      2006, no distributor accounted for more than 5% of our sales and service fees.
      Approximately 88% of the worldwide demand for computerized machine tools and
      computer control systems comes from outside the U.S. In fiscal 2006,
      approximately two-thirds of our revenues were from overseas customers and no
      single end-user of our products accounted for more than 5% of our total sales
      and service fees.





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





Our
      computerized machine tool software options and accessories are sold primarily
      to
      end-users. We sell our Autobend Ò computer
      control systems to original equipment manufacturers of new machine tools who
      integrate them with their own products prior to the sale of those products
      to
      their own customers; to retrofitters of used machine tools who integrate them
      with those machines as part of the retrofitting operation; and to end-users
      who
      have an installed base of machine tools, either with or without related computer
      control systems.





6





We
      believe that advances in industrial technology and the related demand for
      automated process improvements drive demand for our products.





Other
      factors affecting demand include:


·
            the
                need to continuously improve productivity and shorten cycle time


·
            an
                aging machine tool installed base that will require replacement with
                more
                advanced and efficient technology created by shorter product life
                cycles


·
            the
                industrial development of emerging markets in Asia and Eastern Europe
                and


·
            the
                declining supply of skilled
                machinists.





However,
      demand for our products is highly dependent upon economic conditions, the
      general level of business confidence, as well as such factors as production
      capacity utilization and changes in governmental policies regarding tariffs,
      corporate taxation, and other investment incentives. By marketing and
      distributing our products on a worldwide basis, we seek to reduce the potential
      impact on our total sales and service fees due to adverse changes in economic
      conditions that might occur in a particular geographic region.





**Competition**





We
      compete with many other companies in the United States and international
      markets. Several of our competitors are larger and have greater financial
      resources than we do. We strive to compete effectively by incorporating into
      our
      products unique, patented software, and other proprietary features that offer
      enhanced productivity, greater technological capabilities and ease of use.
      We
      offer our products in a range of prices and capabilities to target a broad
      potential market. We also believe that our competitiveness is aided by our
      reputation for reliability and quality, our strong international sales and
      distribution organization, and our extensive customer service
      organization.





In
      the
      United States and European metal cutting markets, major competitors include
      Haas
      Automation, Inc., Daewoo, Miltronics, Deckel, Maho Gildemeister Group (DMG),
      Hardinge Inc. and Fadal Engineering along with a large number of other foreign
      manufacturers, including Okuma Machinery Works Ltd., Mori Seiki Co., Ltd.,
      Masak
      and Matsuura Machinery Corporation.





**Intellectual
      Property**





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





**Research
      and Development**





Research
      and development expenditures for new products and significant product
      improvements, included as period operating expenses, were $2.5 million, $2.4
      million and $2.0 million in fiscal 2006, 2005, and 2004, respectively. In
      addition, we recorded expenditures of $2.1 million in 2006, $1.2 million in
      2005, and $1.3 million in 2004, related to software development projects that
      were capitalized.





**Employees**





We
      had
      320 employees at the end of fiscal 2006, none of whom are covered by a
      collective-bargaining agreement or represented by a union. We have experienced
      no employee-generated work stoppages or disruptions and we consider our employee
      relations to be satisfactory.





7





**Geographic
      Areas**





Financial
      information about geographic areas is set forth in Note 14 of Notes to
      Consolidated Financial Statements.





The
      risks
      of doing business on a global basis are set forth in Item 1A.





**Backlog**





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





**Availability
      of Reports and Other Information**





Our
      website is www.hurco.com .
      We make
      available on this website, free of charge, access to our annual, quarterly
      and
      current reports and other documents filed by us with the Securities and Exchange
      Commission (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**


The
      various risks related to our business are described below. The business,
      financial condition or results of operations of Hurco Companies, Inc., could
      be
      adversely affected by any of these risks. 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 matters 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
      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 in the past, and expect to experience in the future,
      significant fluctuations in our sales, which will affect our results of
      operations and financial condition.





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





During
      the fiscal year ended October 31, 2006, approximately two-thirds of our revenues
      were derived from sales to customers located outside the U.S. We also have
      manufacturing facilities and assets located outside of the U.S. These
      international operations are subject to a number of risks,
      including:




§
            trade
                barriers


§
            regional
                economic uncertainty


§
            differing
                labor regulation


§
            risk
                of 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


§
            differences
                in the availability and terms of
                financing


§
            political
                instability and unrest


§
            risks
                of changes in taxes





8





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. All
      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,
      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 future operating results.





***We
      depend on limited sources for our products.***





Our
      wholly owned subsidiary, Hurco Manufacturing Ltd. (HML), in Taiwan produces
      over
      98% of our machine tools. Any interruption in manufacturing at HML would have
      an
      adverse affect on our financial operating results. Interruption in manufacturing
      at HML could result from a change in the political environment or a natural
      disaster, such as an earthquake, typhoon or tsunami. We source one of our
      proprietary printed circuit boards from a single domestic supplier. Any
      interruptions in supply from this source would have an adverse affect on our
      operating results and our financial condition.




***Fluctuations
      in the exchange rates between the U.S. Dollar and any of several foreign
      currencies could increase our costs or decrease our
      revenue.***




Our
      international sales divisions generate approximately two-thirds of our revenues,
      which are 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 financial reporting purposes.
      In addition, payments for components incorporated into our products are made
      in
      the New Taiwan Dollar. We hedge our foreign currency exposure with the purchase
      of forward exchange contracts. Hedge contracts only mitigate the impact of
      changes in foreign currency rates that occur during the term of the related
      hedge contract period. Refer to Note 1 of Notes to Consolidated Financial
      Statements for the impact of translation of foreign currencies and hedging
      on
      the 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, customer requirements and product offerings by competitors, and
      to
      develop and introduce new and enhanced products on a timely basis that are
      accepted in the market, will be significant factors in maintaining or 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.




***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
      on
      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.
      While we believe our product lines compete effectively, our financial resources
      are limited compared to our competitors’ resources, making it challenging to
      remain competitive.




9





***Fluctuation
      of 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 increased significantly. 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, it would adversely affect our
      business, financial condition and results of operations.




***Due
      to future technological changes, 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 to five year cycles. The phasing out of an old
      product involves both estimating the amount of inventory to hold to satisfy
      the
      final demand for those machines as well as 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 changes in technology, market demand, or competition,
      we
      may have to write off unusable inventory in the future, which may adversely
      affect our results of operations and financial condition.





***Goodwill
      or other assets may become impaired requiring us to record a significant charge
      to earnings.***





Under
      U.S. generally accepted accounting principles, we review our assets for
      impairment when events or changes in circumstances indicate the carrying value
      may not be recoverable. Goodwill, amortizable intangible assets and investments
      accounted for under the equity method of accounting are required to be tested
      for impairment at least annually. We may 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.





***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 and, to a lesser extent, trademark and patent
      law, 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.




**Item
                1B.**
            **UNRESOLVED
                STAFF COMMENTS**




None.





10





**Item
                2.**
            **PROPERTIES**




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




Location
            
            Square
                Footage
            
            Principal
                UsesIndianapolis,
                Indiana
            
            165,000
            (1)
            
            Corporate
                headquarters, design andengineering,
                product testing, sales and marketing, application engineering and
                customer
                serviceLos
                Angeles, California
            
            13,000
            
            
            Warehouse,
                distribution, sales, application engineering and customer
                serviceHigh
                Wycombe, England
            
            12,000
            
            
            Sales,
                application engineering andcustomer
                serviceParis,
                France
            
            4,700
            
            
            Sales,
                application engineering andcustomer
                serviceMunich,
                Germany
            
            24,800
            
            
            Sales,
                application engineering andcustomer
                serviceMilan,
                Italy
            
            4,850
            
            
            Sales,
                application engineering andcustomer
                serviceSingapore
            
            3,000
            
            
            Sales,
                application engineering andcustomer
                serviceShanghai,
                China
            
            3,000
            
            
            Sales,
                application engineering andcustomer
                serviceTaichung,
                Taiwan
            
            168,000
            
            
            ManufacturingNingbo,
                China
            
            2,600
            
            
            Manufacturing









(1)
            Approximately
                50,000 square feet is leased to a third-party under a lease, which
                expires
                April 30, 2010.





We
      own
      the Indianapolis facility and lease all other facilities. The leases have terms
      expiring at various dates ranging from March 2007 to April 2014. We believe
      that
      all of our facilities are well maintained and are adequate for our needs now
      and
      in the foreseeable future. We do not believe that we would experience any
      difficulty in replacing any of the present facilities if any of our leases
      were
      not renewed at expiration.





**Item
                3.**
            **LEGAL
                PROCEEDINGS**





We
      are
      involved in various claims and lawsuits arising in the normal course of
      business. We do not expect any of these claims, individually or in the
      aggregate, to have a material adverse effect on our financial position or
      results of operations.





**Item
                4.**
            **SUBMISSION
                OF MATTERS TO A VOTE OF SECURITY
                HOLDERS**





None.





11





**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, 2006, 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
            
            51
            
            Chairman
                of the Board and Chief Executive OfficerJames
                D. Fabris
            
            55
            
            President
                and Chief Operating OfficerJohn
                G. Oblazney
            
            38
            
            Vice
                President, Secretary, Treasurer and Chief Financial
                OfficerDavid
                E. Platts
            
            53
            
            Vice
                President, TechnologySonja
                K. McClelland
            
            35
            
            Corporate
                Controller, Assistant Secretary




Michael
      Doar was elected
      Chairman of the Board and Chief Executive Officer on
      November 14, 2001. Mr. Doar had held various management positions with Ingersoll
      Milling Machine Company from 1989 until 2001. Mr. Doar has been a director
      of
      Hurco since 2000.





James
      D.
      Fabris was elected President and Chief Operating Officer on November 14, 2001.
      Mr. Fabris served as Executive Vice President - Operations from November 1997
      until his current appointment and previously served as a Vice President of
      Hurco
      since February 1995.





John
      G.
      Oblazney was elected Vice President, Secretary, Treasurer and Chief Financial
      Officer in September 2006. 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 three years by an international public
      accounting firm.





David
      E.
      Platts, who joined Hurco in 1982, was elected Vice President, Technology, in
      May
      2000 and served in that position until December 2006, having previously
      served as Vice President of Research and Development for 11 years.  The
      position of Vice President, Technology was eliminated in December 2006, and
      the
      responsibilities associated with that position have been assumed by the
      Executive Vice President, Software and Development.





Sonja
      K.
      McClelland has been employed by Hurco since September 1996 and was elected
      Corporate Controller, Assistant Secretary in November 2004. Ms. McClelland
      served as Corporate Accounting Manager from September 1996 to 1999, then as
      Division Controller for Hurco USA from September 1999 to November 2004. Prior
      to
      joining Hurco, Ms. McClelland was employed for three years by an international
      public accounting firm.





12





**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.





2006
            
            2005Fiscal
                Quarter Ended:
            
            High
            
            Low
            
            High
            
            LowJanuary
                31
            
            $
            35.30
            
            $
            17.74
            
            $
            19.40
            
            $
            12.65April
                30
            
            
            37.47
            
            
            23.75
            
            
            19.38
            
            
            10.50July
                31
            
            
            32.98
            
            
            20.42
            
            
            20.00
            
            
            10.25October
                31
            
            
            29.26
            
            
            19.80
            
            
            19.09
            
            
            13.81





At
      January 12, 2007, the closing price of our common stock on the Nasdaq Global
      Select Market was $31 **.** 95.




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





There
      were approximately 202 holders of record of our common stock as of January
      12,
      2007.





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.




13




**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.


Year
                    Ended October 312006
                
                2005
                
                2004
                
                2003
                
                2002Statement
                    of Operations Data:
                
                (Dollars
                    in thousands, except per share amounts)Sales
                    and service fees
                
                $
                148,517
                
                $
                125,509
                
                $
                99,572
                
                $
                75,532
                
                $
                70,486Gross
                    profit
                
                
                53,325
                
                
                42,558
                
                
                30,298
                
                
                20,822
                
                
                15,246
                (1)Selling,
                    general and administrative expenses
                
                
                30,697
                
                
                26,057
                
                
                21,401
                
                
                18,749
                
                
                19,658Restructuring
                    expense (credit) and other expense, net
                
                
                --
                
                
                --
                
                
                465
                
                
                (124
                )
                
                2,755Operating
                    income (loss)
                
                
                22,628
                
                
                16,501
                
                
                8,432
                
                
                2,197
                
                
                (7,167
                )Interest
                    expense
                
                
                259
                
                
                355
                
                
                468
                
                
                658
                
                
                634License
                    fee income and litigation settlement fees, net
                
                
                --
                
                
                --
                
                
                --
                
                
                --
                
                
                163Net
                    income (loss)
                
                
                15,479
                
                
                16,443
                
                
                6,269
                
                
                462
                
                
                (8,263
                )Earnings
                    (loss) per common share-diluted
                
                
                2.42
                
                
                2.60
                
                
                1.04
                
                
                0.08
                
                
                (1.48
                )Weighted
                    average common shares outstanding-diluted
                
                
                6,397
                
                
                6,336
                
                
                6,026
                
                
                5,582
                
                
                5,583
  (1) Includes
          $1,083 of inventory write-down provision.
 As
                  of October 312006
              
              2005
              
              2004
              
              2003
              
              2002Balance
                  Sheet Data:
              
              (Dollars
                  in thousands)Current
                  assets
              
              $
              100,882
              
              $
              73,818
              
              $
              56,472
              
              $
              42,390
              
              $
              41,535Current
                  liabilities
              
              
              44,340
              
              
              30,761
              
              
              30,125
              
              
              20,154
              
              
              21,185Working
                  capital
              
              
              56,542
              
              
              43,057
              
              
              26,347
              
              
              22,236
              
              
              20,350Current
                  ratio
              
              
              2.3
              
              
              2.4
              
              
              1.9
              
              
              2.1
              
              
              2.0Total
                  assets
              
              
              124,114
              
              
              94,114
              
              
              73,446
              
              
              57,958
              
              
              57,152Non-current
                  liabilities
              
              
              4,399
              
              
              4,409
              
              
              4,866
              
              
              9,063
              
              
              7,950Total
                  debt
              
              
              4,010
              
              
              4,136
              
              
              4,600
              
              
              9,222
              
              
              8,885Shareholders’
                  equity
              
              
              75,375
              
              
              58,944
              
              
              38,455
              
              
              28,741
              
              
              28,017
  14


**Item
                7.**
            **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
                OPERATIONS**




EXECUTIVE
      OVERVIEW





Hurco
      Companies, Inc., is an industrial technology company operating in a single
      segment. We design and produce computerized machine tools, featuring our
      proprietary computer control systems and software, for sale through our own
      distribution network to the worldwide metal cutting market. We also provide
      software options, control upgrades, accessories and replacement parts for our
      products, as well as customer service and training support.





Our
      computerized metal cutting machine tools are manufactured in Taiwan to our
      specifications by our wholly owned subsidiary, Hurco Manufacturing Limited
      (HML), and an affiliate. We sell our products through more than 150 independent
      agents and distributors in countries throughout North America, Europe and Asia.
      We also have our own direct sales and service organizations in England, France,
      Germany, Italy, Singapore and China.





The
      primary drivers of our operational performance in the past three years have
      been
      improved worldwide demand for our products and our expanded product
      line.





The
      machine tool industry is highly cyclical and changes in demand can occur
      abruptly. There was a significant decline in global demand that continued
      through the fourth quarter of fiscal 2003. During the downturn, we took actions
      to discontinue the production and sale of underperforming products, refocused
      on
      our core product lines and significantly reduced our operating costs. We also
      began introducing new product models in late fiscal 2002 and have continued
      this
      process. Our new models, together with an increase in worldwide demand for
      machine tools, are largely responsible for the continuing increase in our sales.





Approximately
      88% of worldwide demand for machine tools comes from outside the United States.
      During fiscal 2005 and 2006, approximately two-thirds of our revenues were
      attributable to customers located abroad. Our sales to foreign customers are
      denominated, and payments by those customers are made in the prevailing
      currencies—primarily the Euro and Pound Sterling—in the countries in which those
      customers are located, and our product costs are incurred and paid primarily
      in
      the New Taiwan Dollar and 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 a foreign currency increases in value relative to the U.S. Dollar,
      sales made (and expenses incurred) in that currency, when translated to U.S.
      Dollars for reporting in our financial statements, are higher than would be
      the
      case when that currency has a lower value relative to the U.S. Dollar. In our
      comparison of period-to-period results, we discuss not only the increases or
      decreases in those results as reported in our financial statements (which
      reflect translation to U.S. Dollars at prevailing exchange rates), but also
      the
      effect that changes in exchange rates had on those results. For additional
      information on the impact of translation of foreign currencies and our hedging
      practices, see Note 1 of  Notes to Consolidated Financial
      Statements.





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.





The
      volatility of demand for machine tools can significantly impact our working
      capital requirements and, therefore, our cash flow from operations and our
      operating profits. Because our products are produced in Taiwan, manufacturing
      and ocean transportation lead times require that we schedule machine tool
      production based on forecasts of customer orders for a future period of four
      or
      five months. We continually monitor order activity levels and adjust future
      production schedules to reflect changes in demand, but a significant
      unexpected  decline
      in customer orders from forecasted levels can temporarily increase our finished
      goods inventories and our use of working capital.





15





**Results
      of Operations**





The
      following table presents, for the fiscal years indicated, selected items from
      the Consolidated Statements of Income expressed as a percentage of worldwide
      sales and service fees and the year-to-year percentage changes in the dollar
      amounts of those items.





Percentage
                of Revenues
            
            Year-to-Year
                % Change2006
            
            2005
            
            2004
            
            Increase
                (Decrease)06
                vs. 05
            
            05
                vs. 04Sales
                and service fees
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            18.3
            %
            
            26.0
            %Gross
                profit
            
            
            35.9
            %
            
            33.9
            %
            
            30.4
            %
            
            25.3
            %
            
            40.5
            %Selling,
                general and Administrative expenses
            
            
            20.7
            %
            
            20.7
            %
            
            21.5
            %
            
            17.8
            %
            
            21.8
            %Restructuring
                expense and Other expenses, net
            
            
            --
            
            
            --
            
            
            .05
            %
            
            --
            
            
            N/AOperating
                income
            
            
            15.2
            %
            
            13.1
            %
            
            8.50
            %
            
            37.1
            %
            
            95.7
            %Interest
                expense
            
            
            0.2
            %
            
            0.3
            %
            
            .05
            %
            
            (27.0
            %)
            
            (24.1
            %)Net
                income
            
            
            10.4
            %
            
            13.1
            %
            
            6.30
            %
            
            (5.9
            %)
            
            162.3
            %





**Fiscal
      2006 Compared to Fiscal 2005**





*Sales
      and Service Fees.* Sales
      and
      service fees for fiscal 2006 were the highest in our 37-year history, totaling
      $148.5 million, an increase of $23.0 million, or 18.3%, over fiscal 2005, of
      which $24.6 million was attributable to operational growth offset by
      approximately $1.6 million of unfavorable effects of currency translation.
      Computerized machine tool sales, which also were the highest in our history,
      totaled $128.9 million, an increase of 20.2% from the $107.3 million recorded
      in
      2005, primarily driven by strong worldwide demand for our products.
      Approximately $4.0 million, or 17.6% of the increase in sales of computerized
      machine tools was the result of sales of our new lathe machine line, which
      we
      introduced in the first quarter of fiscal 2005.





**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, 2006 and 2005 (in thousands):





**October
                31,**
            
            **Increase****2006**
            
            **2005**
            
            **Amount**
            
            **%**Americas
            
            $
            50,563
            
            
            34.0
            %
            $
            43,194
            
            
            34.4
            %
            $
            7,369
            
            
            17.1
            %Europe
            
            
            87,735
            
            
            59.1
            %
            
            75,225
            
            
            59.9
            %
            
            12,510
            
            
            16.6
            %Asia
                Pacific
            
            
            10,219
            
            
            6.9
            %
            
            7,090
            
            
            5.7
            %
            
            3,129
            
            
            44.1
            %Total
            
            $
            148,517
            
            
            100.0
            %
            $
            125,509
            
            
            100.0
            %
            $
            23,008
            
            
            100.0
            %





In
      the
      Americas, sales and service fees increased $7.4 million, or 17.1%, due to the
      growth of our VM product line combined with continued demand for our higher
      end
      VMX product line and incremental sales of the lathe product line. Lathe unit
      shipments increased 15.0% in fiscal 2006 compared to fiscal 2005. Unit shipments
      of vertical machining centers (which exclude lathes) increased approximately
      28.1% in fiscal 2006 compared to 16.8% for similar products in the United States
      as reported by the Association for Manufacturing Technology.




In
      Europe, our sales and service fees increased by $12.5 million, or 16.6%, which
      includes an unfavorable impact due to changes in currency rates of $1.8 million
      or 2.4%. Unit sales increased 19.2% when comparing fiscal 2006 to 2005.





16





Sales
      and
      service fees in the Asia Pacific region were not significantly affected by
      changes in currency exchange rates, but did reflect improved activity in Asian
      markets. Shipments of our lathe product line increased 9.0% and shipments of
      vertical machining centers increased 48.7% in fiscal 2006 compared to fiscal
      2005.





**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, 2006 and 2005 (in thousands):





**October
                31,**
            
            **Increase****2006**
            
            **2005**
            
            **Amount**
            
            **%**Computerized
                Machine Tools
            
            $
            128,946
            
            
            86.8
            %
            $
            107,313
            
            
            85.5
            %
            $
            21,633
            
            
            20.2
            %Service
                Fees, Parts and Other
            
            
            19,571
            
            
            13.2
            %
            
            18,196
            
            
            14.5
            %
            
            1,375
            
            
            7.6
            %Total
            
            $
            148,517
            
            
            100.0
            %
            $
            125,509
            
            
            100.0
            %
            $
            23,008
            
            
            18.3
            %





Sales
      of
      computerized machine tools totaled $128.9 million in fiscal 2006, an increase
      of
      $21.6 million, or 20.2%, primarily driven by strong worldwide demand for our
      existing products.  Approximately
      $4.0 million of the increase in sales of computerized machine tools was a result
      of sales of our new lathe machine line, which was introduced in the first
      quarter of fiscal 2005.





*Orders
      and Backlog* .
      New
      order bookings for fiscal 2006 totaled $154.8 million, an increase of $31.9
      million, or 26.0%, as compared to $122.9 million recorded in fiscal 2005. Orders
      were strong in all geographic regions in fiscal 2006. Unit orders increased
      33.4%, 29.4% and 66.7% in North America, Europe and Asia Pacific, respectively.
      Orders for fiscal 2006 compared to fiscal 2005 were unfavorably affected by
      approximately $1.7 million due to changes in currency exchange rates. Backlog
      was $16.1 million at October 31, 2006, compared to $10.0 million at October
      31,
      2005. We do not believe backlog is a useful measure of past performance or
      indicative of future performance. Backlog orders as of October 31, 2006 are
      expected to be fulfilled in Fiscal 2007.





*Gross
      Margin* .
      Gross
      margin for fiscal 2006 was 35.9%, an increase over the 33.9% margin realized
      in
      the corresponding 2005 period, due principally to the increased sales
      volume.





*Operating
      Expenses* .
      Selling, general and administrative expenses for fiscal 2006 of $30.7 million
      increased $4.6 million, or 17.6%, from those of fiscal 2005. The increase was
      primarily due to a $2.6 million increase in global sales and marketing
      expenditures and a $2.0 million increase in general and administrative expenses.
      The increased global sales and marketing expenditures include increased expenses
      for local and international trade shows, increased European agent sales
      commissions and marketing expenses for expansion of sales into emerging markets.
      The principal factor contributing to the increase in general and administrative
      expenses was consulting and audit fees for compliance with the internal
      control-reporting requirement of Section 404 of the Sarbanes Oxley Act of 2002,
      which became applicable to us in fiscal 2006.





*Operating
      Income* .
      Operating income for fiscal 2006 totaled $22.6 million, or 15.2% of sales,
      compared to $16.5 million or 13.1% of sales, in the prior year.





*Other
      Income (Expense)* .
      Other
      income (expense), net in fiscal 2006 relates primarily to currency exchange
      losses on inter-company receivables and payables denominated in foreign
      currencies, net of gains or losses on related forward contracts.





17





*Provision
      for Income Taxes.* Hurco
      was
      fully taxable in 2006 and incurred income tax expense of $7.6 million. In
      contrast we had no income tax expense in 2005 primarily due to the utilization
      of net operating loss carryforwards of approximately $9.8 million.





*Net
      Income.* Net
      income for fiscal 2006 was $15.5 million, or $2.42 per share, compared to $16.4
      million, or $2.60 per share, in the prior year. The improvement in net income
      was primarily due to increased sales of our computerized machine tools and
      improved gross margins, partially offset by increased operating expenses and
      tax
      provision.





**Fiscal
      2005 Compared to Fiscal 2004**





*Sales
      and Service Fees.* Sales
      and service fees for fiscal 2005 were $125.5 million, an increase of $25.9
      million, or 26%, over fiscal 2004, of which $23.4 million was attributable
      to
      operational growth and approximately $2.5 million was due to the effects of
      translating foreign sales to U.S. Dollars. Computerized machine tool sales
      totaled $107.3 million, an increase of 28% from the $83.6 million recorded
      in
      2004, primarily driven by strong worldwide demand for our existing products.
      Approximately $6 million, or 25%, of the increase in sales of computerized
      machine tools was the result of sales of our new lathe machine line, which
      was
      introduced in the first quarter of fiscal 2005.





**Net
      Sales and Service Fees by Geographic Region**





The
      following table sets forth net sales and service fees by geographic region
      for
      the years ended October 31, 2005 and 2004 (in thousands):





**October
                31,**
            
            **Increase****2005**
            
            **2004**
            
            **Amount**
            
            **%**Americas
            
            $
            43,194
            
            
            34.4
            %
            $
            32,423
            
            
            32.5
            %
            $
            10,771
            
            
            33
            %Europe
            
            
            75,225
            
            
            59.9
            %
            
            60,395
            
            
            60.7
            %
            
            14,830
            
            
            25
            %Asia
                Pacific
            
            
            7,090
            
            
            5.7
            %
            
            6,754
            
            
            6.8
            %
            
            336
            
            
            5
            %Total
            
            $
            125,509
            
            
            100.0
            %
            $
            99,572
            
            
            100.0
            %
            $
            25,937
            
            
            26
            %





In
      the
      Americas, sales and service fees increased $10.7 million, or 33%, due primarily
      to the growth of our VMX signature product line and sales of the lathe product
      line. Shipments of VMX units increased 35% in fiscal 2005 compared to fiscal
      2004 while shipments of our more moderately priced VM product line increased
      6%
      during that same period. Unit shipments of vertical machining centers (which
      exclude lathes) increased approximately 15% in fiscal 2005 compared to 9% for
      similar products in the United States as reported by the Association for
      Manufacturing Technology.




In
      Europe, our sales and service fees increased by $14.8 million, or 25%, as a
      result of increased unit sales and the favorable effect of stronger European
      currencies. Approximately $2.3 million, or 16%, of the increase in our sales
      and
      service fees was attributable to changes in currency exchange rates. The
      increase in sales and service fees was consistent in all of our European
      markets.





Sales
      and
      service fees in the Asia Pacific region were not significantly affected by
      changes in currency exchange rates, but did reflect improved activity in Asian
      markets.





18





**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, 2005 and 2004 (in thousands):





**October
                31,**
            
            **Increase****2005**
            
            **2004**
            
            **Amount**
            
            **%**ComputerizedMachine
                Tools
            
            $
            107,313
            
            
            85.5
            %
            $
            83,663
            
            
            84.0
            %
            $
            23,650
            
            
            28
            %Service
                Fees, Partsand
                Other
            
            
            18,196
            
            
            14.5
            %
            
            15,909
            
            
            16.0
            %
            
            2,287
            
            
            14
            %Total
            
            $
            125,509
            
            
            100.0
            %
            $
            99,572
            
            
            100.0
            %
            $
            25,937
            
            
            26
            %





Sales
      of
      computerized machine tools totaled $107.3 million in fiscal 2005, an increase
      of
      $23.7 million, or 28%, of which $ 2.5 million was attributable to the favorable
      effects of currency translation. Unit shipments of computerized machine tools
      increased 26%, fueled by a 19% increase in shipments of products in the VMX
      product line and the release of the lathe product line. The average net selling
      price per unit of computerized machine tool models increased 2% in fiscal 2005
      compared to fiscal 2004, as a result of a greater number of units of higher
      priced VMX models in the total product mix. The average net selling price per
      unit, when measured in local currencies, was substantially unchanged.





*Orders
      and Backlog* .
      New
      order bookings for fiscal 2005 totaled $122.9 million, an increase of $19.4
      million, or 19%, as compared to $103.5 million recorded in fiscal 2004. The
      increase in orders was attributable primarily to the VMX and lathe product
      lines. Unit orders for the VMX product line increased by 15% in fiscal 2005
      compared to the prior year, while unit orders of the VM product increased 3%
      during that same period. Orders were strong in all geographic regions in fiscal
      2005 and unit orders increased 18%, 15% and 13% in North America, Europe and
      Asia Pacific, respectively. Approximately $2.4 million, or 13%, of the increase
      was attributable to changes in currency exchange rates. Backlog was $10.0
      million at October 31, 2005, compared to $12.8 million at October 31, 2004.
      We
      do not believe backlog is a useful measure of past performance or indicative
      of
      future performance.





*Gross
      Margin* .
      Gross
      margin for fiscal 2005 was 33.9%, an increase over the 30.4% margin realized
      in
      the corresponding 2004 period, due principally to the increased sales
      volume.





*Operating
      Expenses* .
      Selling, general and administrative expenses for fiscal 2005 of $26.1 million
      increased $4.7 million, or 21.8%, from those of fiscal 2004. The increase was
      primarily due to a $1.8 million increase in sales and marketing expenditures,
      a
      $1.6 million increase in general and administrative expenses, a $400,000
      increase in product development spending, a $500,000 increase in European agents
      commissions and a $300,000 increase from the translation of foreign currencies
      to U.S. Dollars for financial reporting purposes.





*Operating
      Income* .
      Operating income for fiscal 2005 totaled $16.5 million, or 13.1% of sales,
      compared to $8.4 million or 8.5% of sales, in the prior year. Operating income
      in fiscal 2004 was net of a $465,000 severance charge.





*Other
      Income (Expense)* .
      Other
      income (expense), net in fiscal 2005 relates primarily to currency exchange
      losses on inter-company receivables and payables denominated in foreign
      currencies, net of gains or losses on related forward contracts.





*Provision
      (Benefit) for Income Taxes* .
      At the
      end of fiscal 2004, we had deferred tax assets of approximately $7.0 million
      that were primarily attributable to net operating losses and tax credits in
      the
      United States and certain foreign jurisdictions.  Because of the highly
      cyclical nature of our industry, competitive pressures that could impact
      pricing, and the risks associated with new product introductions, we believed
      there was uncertainty as to the future realization of the benefits from these
      deferred tax assets and, therefore, we maintained a 100% valuation allowance
      against those assets.





19





During
      fiscal 2005, due to the substantial improvement in our operating results,
      especially in the fourth quarter of the year, we utilized approximately $3.7
      million of the net operating loss carryforwards, all of which were subject
      to a
      valuation allowance.  After examining a number of factors, including our
      operating results for fiscal 2005, and particularly the fourth quarter, which
      exceeded our internal projections, and our projections of near term future
      operating results, we determined that it was more likely than not that we would
      ultimately realize the benefits of all our remaining domestic deferred tax
      assets and a significant portion of our foreign deferred tax assets.
 Accordingly, we reduced our remaining valuation allowance to $221,000, all
      of which related to foreign net operating losses for which there remains
      uncertainty as to the future realization of the related tax
      benefits.





As
      a
      result of our utilization in fiscal 2005 of net operating losses against which
      we had previously maintained a 100% valuation allowance and the reduction of
      all
      but $221,000 of the valuation allowance on our remaining deferred tax assets
      at
      the end of fiscal 2005, we recorded a tax benefit of approximately $2.3 million,
      which is net of approximately $1.1 million recorded as additional
      paid-in-capital for the tax effects of the exercise by employees of stock
      options during both fiscal 2005 and 2004. The fiscal 2005 income tax provision,
      excluding the recorded tax benefit of $2.3 million, was $2.0 million compared
      to
      $1.3 million in fiscal 2004.





*Net
      Income.* Net
      income for fiscal 2005 was $16.4 million, or $2.60 per share, compared to $6.3
      million, or $1.04 per share in the prior year. The improvement in net income
      was
      primarily due to a substantial increase in sales of our computerized machine
      tools, improved gross margin, and a favorable tax benefit partially offset
      by an
      increase in operating expenses.





**Liquidity
      and Capital Resources**





At
      October 31, 2006, we had cash and cash equivalents of $29.8 million compared
      to
      $17.6 million at October 31, 2005. Approximately 39% of the $29.8 million of
      cash and cash equivalents is denominated in US 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 and short-term debt, was $26.8 million at October 31,
      2006, compared to $25.6 million at October 31, 2005. Inventories increased
      by
      $12.7 million as a result of increased volume and the introduction of new
      products. The inventory increase was offset by $9.3 million of accounts
      payable and accrued expenses of $3.4 million, related to increased income
      tax liability. We expect our operating working capital requirements to increase
      in fiscal 2007 as our sales and service fees increase. We expect to fund any
      such increase with cash flow from operations and borrowings under our  bank
      credit facilities.





Capital
      expenditures were $3.3 million in fiscal 2006, $3.0 million in fiscal 2005,
      and
      $2.1 million in fiscal 2004. Capital expenditures were primarily for an
      integrated computer system, software development projects and purchases of
      equipment. We funded these expenditures with cash flow from
      operations.





Total
      debt at October 31, 2006 was $4.0 million, representing 5.0% of total
      capitalization, which aggregated $79.4 million, compared to $4.1 million, or
      6.6% of total capitalization, at October 31, 2005. We had no borrowings
      outstanding under our domestic and European bank credit facilities. See Note
      4
      of Notes to Consolidated Financial Statements for further discussions on
      debt.





20





**Contractual
      Obligations and Commitments**





The
      following is a table of contractual obligations and commitments as of October
      31, 2006 (all amounts in thousands):




**Payments
                Due by Period**Total
            
            Less
                than 1 Year
            
            1-3
                Years
            
            3-5
                Years
            
            More
                than 5 YearsLong-Term
                Debt
            
            $
            4,010
            
            $
            136
            
            $
            3,874
            
            $
            --
            
            $
            --Operating
                Leases
            
            
            3,918
            
            
            1,425
            
            
            1,744
            
            
            749
            
            
            --Deferred
                Credits and Other
            
            
            525
            
            
            --
            
            
            --
            
            
            --
            
            
            525Total
            
            $
            8,453
            
            $
            1,561
            
            $
            5,618
            
            $
            749
            
            $
            525





In
      addition to the contractual obligations and commitments disclosed above, we
      also
      have a variety of other obligations for the procurement of materials and
      services, none of which subject us to any material non-cancellable commitments.
      While some of these obligations arise under long-term supply agreements, we
      are
      not committed under these agreements to accept or pay for requirements that
      are
      not needed to meet our production needs. We have no material minimum purchase
      commitments or “take-or-pay” type agreements or arrangements.





We
      expect
      capital spending in fiscal 2007, to be approximately $7.0 million, which
      includes investments for our Ningbo manufacturing operation, capitalized
      software and discretionary items.





**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, 2006, we had outstanding 58 such guarantees totaling approximately $1.8
      million. Upon shipment, the customer has the risk of ownership. The customer
      does not obtain title until the machine is paid in full. We believe that the
      proceeds obtained from liquidation of the machine would cover any payments
      required by the guarantee.





**Critical
      Accounting Policies**





Our
      accounting policies, including those described below, require management to
      make
      significant estimates and assumptions using information available at the time
      the estimates are made. Such estimates and assumptions significantly affect
      various reported amounts of assets, liabilities, revenues and expenses. If
      our
      future experience differs materially from these estimates and assumptions,
      our
      results of operations and financial condition could be affected.





*Revenue
      Recognition -* We
      recognize revenue from sales of our machine tool systems upon delivery of the
      product to the customer, which is normally at the time of shipment, because
      persuasive evidence of an arrangement exists, delivery has occurred, the selling
      price is fixed and determinable, and collectibility is reasonably assured.
      In
      certain foreign locations, we retain title after shipment under a “retention of
      title” clause solely to protect collectibility. The retention of title is
      similar to UCC filings in the United States and provides the creditor with
      additional rights to the machine if the customer fails to pay. Revenue
      recognition at the time of shipment is appropriate in this instance as long
      as
      all risks of ownership have passed to the buyer. Our computerized machine tools
      are general-purpose computer controlled machine tools that are typically used
      in
      stand-alone operations. Transfer of ownership and risk of loss are not
      contingent upon contractual customer acceptance. Prior to shipment, we test
      each
      machine to ensure the machine’s compliance with standard operating
      specifications as listed in our sales literature.





Depending
      upon geographic location, after shipment a machine may be installed at the
      customer’s facility by a distributor, independent contractor or a Hurco service
      technician. In most instances where a machine is sold through a distributor,
      we
      have no installation involvement for the most part. 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.





21





Service
      fees from maintenance contracts are deferred and recognized in earnings on
      a pro
      rata basis over the term of the contract. Sales related to software products
      are
      recognized when shipped in conformity with American Institute of Certified
      Public Accountants’ Statement of Position 97-2 Software Revenue Recognition. The
      software does not require production, modification or customization and at
      the
      time of shipment persuasive evidence of an arrangement exists, delivery has
      occurred, the selling price is fixed and determinable, and collectibility is
      reasonably assured.





*Inventories
      -* We
      determine at each balance sheet date how much, if any, of our inventory may
      ultimately prove to be unsaleable or unsaleable at its carrying cost. Reserves
      are established to effectively adjust the carrying value of such inventory
      to
      net realizable value. To determine the appropriate level of valuation reserves,
      we evaluate current stock levels in relation to historical and expected patterns
      of demand for all of our products. Management evaluates the need for changes
      to
      valuation reserves based on market conditions, competitive offerings and other
      factors on a regular basis.





*Deferred
      Tax Asset Valuation* - As of
      October 31, 2006, we have deferred tax assets of $3.9 million. These deferred
      tax assets relate primarily to net operating loss carryforwards in certain
      foreign jurisdictions and other future taxable and tax deductible items
      resulting in temporary differences between the tax basis of assets and
      liabilities and the reported amounts of those assets and liabilities for
      financial reporting purposes. The benefit of the foreign net operating loss
      carryforwards does not have an expiration date and no limitation on utilization
      of specific amounts each year. Realization of those benefits is entirely
      dependent upon generating future taxable earnings in the specific tax
      jurisdictions. We regularly evaluate the realization of these benefits to
      determine if it is more likely than not that we will realize all of our net
      deferred tax assets.





*Capitalized
      Software Development Costs* - Costs
      incurred to develop new computer software products and significant enhancements
      to software features of existing products are capitalized as required by
      Statement of Financial Accounting Standards (SFAS) No. 86, “Accounting for the
      Costs of Computer Software to be Sold, Leased, or Otherwise Marketed”, and
      amortized over the estimated product life of the related software. The
      determination as to when in the product development cycle technological
      feasibility has been established, and the expected product life, require
      judgments and estimates by management and can be affected by technological
      developments, innovations by competitors and changes in market conditions
      affecting demand. We capitalized $2.1 million in fiscal 2006, $1.2 million
      in
      fiscal 2005, and $1.3 million in fiscal 2004 related to software development
      projects. At October 31, 2006, we have an asset of $5.6 million for capitalized
      software development projects, a significant portion of which relates to
      projects currently in progress and subject to development risk and market
      acceptance. We periodically review the carrying values of these assets and
      make
      judgments as to ultimate realization considering the above-mentioned risk
      factors.





*Derivative
      Financial Instruments* -
      Critical aspects of our accounting policy for derivative financial instruments
      include conditions requiring that the critical terms of a derivative instrument
      be essentially the same as those of the forecasted transaction being hedged.
      Another important element of our policy demands that formal documentation be
      maintained as required by SFAS No. 133, “Accounting for Derivative Instruments
      and Hedging Activities.” Failure to comply with these conditions would result in
      a requirement to recognize changes in market value of derivative instruments
      in
      earnings. We routinely monitor significant estimates, assumptions, and judgments
      associated with derivative instruments, and compliance with formal documentation
      requirements.





*Stock
      Based Compensation* - Prior
      to fiscal 2006, we applied the provisions of Accounting Principles Board (APB)
      Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for
      stock-based compensation. As a result, no compensation expense was recognized
      for stock options granted with exercise prices equivalent to the fair market
      value of the stock on the date of grant. Effective November 1, 2005, we adopted
      SFAS No. 123(R), “Share Based Payment,” using the modified prospective method.
      As of November 1, 2005, we began applying the provisions of SFAS No. 123(R)
      to
      option grants (of which there have been none), as well as to the nonvested
      portion of outstanding options granted before that date. Compensation expense
      was determined at the date of grant using the Black-Scholes valuation model.
      We
      expect to record additional compensation expense of approximately $5,000 ratably
      through the first quarter of fiscal 2007 for the remaining options that vest
      during the period November 1, 2006 through January 31, 2007.





22





*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.





**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, 2006
      and
      have not borrowed from our bank credit facilities since February 2005. Our
      only
      debt at October 31, 2006 is a first mortgage loan with a fixed interest rate
      of
      73⁄8%. As a result, a one percentage point (1%) increase in our variable borrowing
      interest rate would have had no impact on our fiscal 2006 results. Note 4 of
      the
      Notes to Consolidated Financial Statements set forth the interest rates related
      to our current credit facilities.





**Foreign
      Currency Exchange Risk**





In
      fiscal
      2006, approximately two-thirds of our revenues, including export sales, were
      derived from foreign markets. All of our computerized machine tools and computer
      control systems, as well as certain proprietary service parts, are sourced
      by
      our U.S.-based engineering and manufacturing division and re-invoiced to our
      foreign sales and service subsidiaries, primarily in their functional
      currencies.





Our
      products are sourced from foreign suppliers or built to our specifications
      by
      our wholly owned subsidiary in Taiwan, or other overseas contract manufacturers.
      These purchases are predominantly in foreign currencies and in some cases our
      arrangements with these suppliers include foreign currency risk sharing
      agreements, which reduce (but do not eliminate) the effects of currency
      fluctuations on product costs. The predominant portion of our exchange rate
      risk
      associated with product purchases relates to the New Taiwan Dollar.





We
      enter
      into foreign currency forward exchange contracts from time to time to hedge
      the
      cash flow risk related to forecasted inter-company sales and forecasted
      inter-company and third party purchases denominated in, or based on, foreign
      currencies (primarily the Euro, Pound Sterling and New Taiwan Dollar). We also
      enter into foreign currency forward exchange contracts to protect against the
      effects of foreign currency fluctuations on receivables and payables denominated
      in foreign currencies. We do not speculate in the financial markets and,
      therefore, do not enter into these contracts for trading purposes.





23





Forward
      contracts for the sale or purchase of foreign currencies as of October 31,
      2006
      which are designated as cash flow hedges under SFAS No. 133 were as
      follows:





Contract
                Amount at Forward Rates inU.S.
                DollarsForwardContracts
            
            Notional
                Amount in ForeignCurrency
            
            Weighted
                Avg. ForwardRate
            
            ContractDate
            
            October
                31,2006
            
            MaturityDatesSale
                Contracts:Euro
            
            
            28,800,000
            
            $
            1.2863
            
            $
            37,045,440
            
            $
            37,055,162
            
            
            Nov
                2006-Oct 2007Sterling
            
            
            4,800,000
            
            $
            1.8798
            
            $
            9,023,040
            
            $
            9,160,656
            
            
            Nov
                2006-Oct 2007**Purchase
                Contracts:**New
                Taiwan Dollar
            
            
            900,000,000
            
            
            32.43*
            
            $
            27,750,627
            
            $
            27,420,566
            
            
            Nov
                2006-Jul 2007


*
      NT
      Dollars per U.S. Dollar




We
      also
      enter into foreign currency forward exchange contracts to protect against the
      effects of foreign currency fluctuations on receivables and payables demonimated
      in foreign currencies. These derivative instruments are not designated as hedges
      under SFAS 133, “Accounting Standards for Derivative Instruments and Hedging
      Activities.” The forward contracts for the sale or purchase of those currencies
      related to receivables and payables as of October 31, 2006 are as
      follows:





Contract
                Amount at Forward Rates inU.S.
                DollarsForwardContracts
            
            Notional
                Amount in ForeignCurrency
            
            Weighted
                Avg. ForwardRate
            
            ContractDate
            
            October
                31,2006
            
            MaturityDates**Sale
                Contracts**Euro
            
            
            12,706,793
            
            $
            1.2718
            
            $
            16,160,499
            
            $
            16,261,443
            
            
            Nov
                2006-Dec 2006Singapore
                Dollar
            
            
            10,480,235
            
            $
            1.5710
            
            $
            6,671,060
            
            $
            6,755,003
            
            
            Nov
                2006-Mar 2007Sterling
            
            
            1,066,880
            
            $
            1.8838
            
            $
            2,009,789
            
            $
            2,035,906
            
            
            Nov
                2006-Dec 2006**Purchase
                Contracts:**New
                Taiwan Dollar
            
            
            463,700,000
            
            
            32.91*
            
            $
            14,089,172
            
            $
            14,016,816
            
            
            Nov
                2006-Jan 2007


*
      NT
      Dollars per U.S. Dollar





24





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





To **** the
      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, 2006, 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 these ** financial
      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 controls 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 control over financial reporting as
      of October 31, 2006, are effective based on the criteria specified
      above.





Our
      assessment of the effectiveness of the Company’s internal control over financial
      reporting as of October 31, 2006, has been audited by Crowe Chizek and Company
      LLC, as stated in their report which appears herein.








/s/
      Michael Doar


Michael
      Doar,


Chairman
      of the Board & Chief Executive Officer





/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, 2007**





25




**Item
              8.**
            **FINANCIAL
                STATEMENTS AND SUPPLEMENTARY
                DATA**





**Report
      of Independent Registered Public Accounting Firm**





To **** the
      Shareholders and


Board
      of
      Directors


of
      Hurco
      Companies, Inc.





We
      have
      audited the accompanying consolidated balance sheet of Hurco Companies, Inc.
      and
      Subsidiaries as of October 31, 2006 and the related consolidated statements
      of income, changes in shareholders’ equity and cash flows for the year ended
      October 31, 2006. In connection with our audit of the consolidated
      financial statements, we also have audited the financial statement schedule
      as
      it relates to the fiscal year 2006 information which is listed in the index
      under Item 15. We have also audited management’s assessment, included in the
      accompanying Management’s Annual Report on Internal Control Over Financial
      Reporting, that Hurco Companies, Inc. maintained effective internal control
      over
      financial reporting as of October 31, 2006, based on criteria established
      in Internal Control--Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (COSO). Hurco Companies, Inc.
      management is responsible for these financial statements and the financial
      statement schedule, for maintaining effective internal control over financial
      reporting, and for its assessment of the effectiveness of internal control
      over
      financial reporting. Our responsibility is to express an opinion on these
      financial statements and the financial statement schedule, an opinion on
      management’s assessment, and an opinion on the effectiveness of 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 the financial
      statements are free of material misstatement and whether effective internal
      control over financial reporting was maintained in all material respects. Our
      audit of the financial statements included examining, on a test basis, evidence
      supporting the amounts and disclosures in the financial statements, assessing
      the accounting principles used and significant estimates made by management,
      and
      evaluating the overall financial statement presentation. Our audit of internal
      control over financial reporting included obtaining an understanding of internal
      control over financial reporting, evaluating management's assessment, testing
      and evaluating the design and operating effectiveness of internal control,
      and
      performing such other procedures as we considered necessary in the
      circumstances. We believe that our audit provides a reasonable basis for our
      opinions.





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 purposes in accordance
      with U.S. 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 U.S. 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, the 2006 consolidated financial statements referred to above present
      fairly in all material respects, the financial position of Hurco Companies,
      Inc
      and Subsidiaries as of October 31, 2006, and the results of their
      operations and their cash flows for the year ended October 31, 2006 in
      conformity with accounting principles generally accepted in the United States
      of
      America. Also, in our opinion, the related financial statement schedule as
      it
      relates to the fiscal year 2006 information, when considered in relation to
      the
      basic 2006 consolidated financial statements taken as a whole, presents fairly,
      in all material respects, the information set forth therein. Also, in our
      opinion, management’s assessment that Hurco Companies, Inc. and Subsidiaries
      maintained effective internal control over financial reporting as of
      October 31, 2006, is fairly stated, in all material respects, based on
      criteria established in Internal Control--Integrated Framework issued by the
      Committee of Sponsoring Organizations of the Treadway Commission (COSO).
      Furthermore, in our opinion, Hurco Companies, Inc. and Subsidiaries maintained,
      in all material respects, effective internal control over financial reporting
      as
      of October 31, 2006, based on criteria established in Internal
      Control--Integrated Framework issued by the Committee of Sponsoring
      Organizations of the Treadway Commission (COSO).








/s/Crowe
      Chizek and Company LLC





Indianapolis,
      Indiana


**January
      12, 2007**





26





**Report
      of Independent Registered Public Accounting Firm**





To **** the
      Shareholders and


Board
      of
      Directors


of
      Hurco
      Companies, Inc. :





In
      our
      opinion, the consolidated financial statements listed in the accompanying
      index  appearing
      under Item 15(a)(1) present fairly, in all material respects, the financial
      position of Hurco Companies, Inc. and its subsidiaries at October 31, 2005,
      and
      the results of their **** operations
      and their **** cash
      flows for each of the two years in the period ended October 31, 2005 in
      conformity with accounting principles generally accepted in the United States
      of
      America. In addition, in our opinion, the financial statement schedule listed
      in
      the accompanying index appearing under Item 15(a) (2) presents fairly, in all
      material respects, the information set forth therein when read in conjunction
      with the related consolidated **** financial
      statements. These financial statements and financial statement schedule are
      the
      responsibility of the Company's management. Our responsibility is to express
      an
      opinion on these financial statements and financial statement schedule based
      on
      our audits. We conducted our audits of these statements in accordance with
      the
      standards of the Public Company Accounting Oversight Board (United States).
      Those standards require that we plan and perform the audit to obtain reasonable
      assurance about whether the financial statements are free of material
      misstatement. An audit includes examining, on a test basis, evidence supporting
      the amounts and disclosures in the financial statements, assessing the
      accounting principles used and significant estimates made by management, and
      evaluating the overall financial statement presentation. We believe that our
      audits provide a reasonable basis for our opinion.





/s/PricewaterhouseCoopers
      LLP





Indianapolis,
      Indiana


**January
      18, 2006**





27





**HURCO
      COMPANIES, INC.**


**CONSOLIDATED
      STATEMENTS OF INCOME**





Year
                Ended October 312006
            
            2005
            
            2004(Dollars
                in thousands, except per share amounts)**Sales
                and service fees**
            
            $
            148,517
            
            $
            125,509
            
            $
            99,572Cost
                of sales and service
            
            
            95,192
            
            
            82,951
            
            
            69,274**Gross
                profit**
            
            
            53,325
            
            
            42,558
            
            
            30,298Selling,
                general and administrative expenses
            
            
            30,697
            
            
            26,057
            
            
            21,401Restructuring
                expense and other expense, net (Note 15)
            
            
            --
            
            
            --
            
            
            465**Operating
                income**
            
            
            22,628
            
            
            16,501
            
            
            8,432Interest
                expense
            
            
            259
            
            
            355
            
            
            468Variable
                options expense
            
            
            --
            
            
            --
            
            
            322Earnings
                from equity investments
            
            
            865
            
            
            418
            
            
            387Other
                income (expense), net
            
            
            (120
            )
            
            (482
            )
            
            (461
            )Income
                before income taxes
            
            
            23,114
            
            
            16,082
            
            
            7,568Provision
                (benefit) for income taxes (Note 6)
            
            
            7,635
            
            
            (361
            )
            
            1,299Net
                income
            
            $
            15,479
            
            $
            16,443
            
            $
            6,269Earnings
                per common share - basic
            
            $
            2.45
            
            $
            2.66
            
            $
            1.08Weighted
                average common shares outstanding - basic
            
            
            6,317
            
            
            6,171
            
            
            5,784Earnings
                per common share - diluted
            
            $
            2.42
            
            $
            2.60
            
            $
            1.04Weighted
                average common shares outstanding - diluted
            
            
            6,397
            
            
            6,336
            
            
            6,026




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





28





**HURCO
      COMPANIES, INC.**


**CONSOLIDATED
      BALANCE SHEETS**





**ASSETS**


**As
                  of October 31****2006**
              
              **2005****Current
                  assets:**
              
              (Dollars
                  in thousands, except per share amounts)Cash
                  and cash equivalents
              
              $
              29,846
              
              $
              17,559Accounts
                  receivable, less allowance for doubtful accountsof
                  $635 in 2006 and $842 in 2005
              
              
              22,248
              
              
              20,100Inventories
              
              
              43,343
              
              
              29,530Deferred
                  tax assets
              
              
              2,768
              
              
              3,043Other
              
              
              2,677
              
              
              3,586Total
                  current assets
              
              
              100,882
              
              
              73,818Property
                  and equipment:Land
              
              
              761
              
              
              761Building
              
              
              7,234
              
              
              7,205Machinery
                  and equipment
              
              
              12,952
              
              
              13,170Leasehold
                  improvements
              
              
              1,147
              
              
              1,10222,094
              
              
              22,238Less
                  accumulated depreciation and amortization
              
              
              (12,944
              )
              
              (13,187
              )9,150
              
              
              9,051Deferred
                  tax assets - long-term
              
              
              1,121
              
              
              1,346Software
                  development costs, less accumulated amortization
              
              
              5,580
              
              
              3,752Investments
                  and other assets
              
              
              7,381
              
              
              6,147$
              124,114
              
              $
              94,114**LIABILITIES
                  AND SHAREHOLDERS’ EQUITY****Current
                  liabilities:**Accounts
                  payable
              
              $
              24,482
              
              $
              17,051Accounts
                  payable-related parties
              
              
              2,123
              
              
              2,087Accrued
                  expenses and other
              
              
              15,673
              
              
              9,879Accrued
                  warranty expenses
              
              
              1,926
              
              
              1,618Current
                  portion of long-term debt
              
              
              136
              
              
              126Total
                  current liabilities
              
              
              44,340
              
              
              30,761**Non-current
                  liabilities:**Long-term
                  debt
              
              
              3,874
              
              
              4,010Deferred
                  credits and other
              
              
              525
              
              
              3994,399
              
              
              4,409**Commitments
                  and contingencies (Notes 10 and 11)****Shareholders'
                  equity:**Preferred
                  stock: no par value per share, 1,000,000 shares authorized, no
                  shares
                  issued
              
              
              --
              
              
              --Common
                  stock: no par value, $.10 stated value per share, 12,500,000 shares
                  authorized, 6,346,520 and 6,220,220 shares issued and outstanding
                  in 2006
                  and 2005, respectively
              
              
              635
              
              
              622Additional
                  paid-in capital
              
              
              50,011
              
              
              48,701Retained
                  earnings
              
              
              28,480
              
              
              13,001Accumulated
                  other comprehensive income (loss)
              
              
              (3,751
              )
              
              (3,380
              )Total
                  shareholders’ equity
              
              
              75,375
              
              
              58,944$
              124,114
              
              $
              94,114





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





29





**HURCO
      COMPANIES, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**





Year
                Ended October 312006
            
            2005
            
            2004**Cash
                flows from operating activities:**
            
            (Dollars
                in thousands)Net
                income
            
            $
            15,479
            
            $
            16,443
            
            $
            6,269Adjustments
                to reconcile net income to Net cash provided by (used for) operating
                activities:Provision
                for doubtful accounts
            
            
            (207
            )
            
            119
            
            
            286Equity
                in income of affiliates
            
            
            (865
            )
            
            (418
            )
            
            (387
            )Depreciation
                and amortization
            
            
            1,504
            
            
            1,331
            
            
            1,223Restructuring
                and other charges
            
            
            --
            
            
            --
            
            
            465Tax
                benefit from exercise of stock options (prior toAdoption
                of SFAS 123(R)
            
            
            --
            
            
            1,146
            
            
            --Change
                in assets/liabilities(Increase)
                decrease in accounts receivable
            
            
            (1,312
            )
            
            (3,606
            )
            
            (3,992
            )(Increase)
                decrease in inventories
            
            
            (12,726
            )
            
            (660
            )
            
            (4,947
            )Increase
                (decrease) in accounts payable
            
            
            9,318
            
            
            (1,191
            )
            
            8,623Increase
                (decrease) in accrued expenses
            
            
            3,423
            
            
            2,653
            
            
            (197
            )(Increase)
                decrease in deferred tax asset
            
            
            491
            
            
            (4,389
            )
            
            --Other
            
            
            (1,059
            )
            
            549
            
            
            (537
            )**Net
                cash provided by operating activities**
            
            
            14,046
            
            
            11,977
            
            
            6,806**Cash
                flows from investing activities:**Proceeds
                from sale of property and equipment
            
            
            16
            
            
            --
            
            
            26Purchase
                of property and equipment
            
            
            (1,212
            )
            
            (1,879
            )
            
            (762
            )Software
                development costs
            
            
            (2,089
            )
            
            (1,161
            )
            
            (1,290
            )Change
                in restricted cash
            
            
            --
            
            
            277
            
            
            345Other
                proceeds (investments)
            
            
            (335
            )
            
            224
            
            
            (53
            )**Net
                cash used for investing activities**
            
            
            (3,620
            )
            
            (2,539
            )
            
            (1,734
            )**Cash
                flows from financing activities:**Advances
                on bank credit facilities
            
            
            --
            
            
            4,977
            
            
            20,468Repayments
                on bank credit facilities
            
            
            --
            
            
            (5,124
            )
            
            (24,520
            )Repayments
                of term debt
            
            
            --
            
            
            (200
            )
            
            (538
            )Repayment
                of first mortgage
            
            
            (126
            )
            
            (117
            )
            
            (108
            )Tax
                benefit from exercise of stock options (adoption of SFAS123(R))
            
            
            744
            
            
            --
            
            
            --Proceeds
                from exercise of common stock options
            
            
            562
            
            
            797
            
            
            2,128**Net
                cash provided by (used for) financing activities**
            
            
            1,180
            
            
            333
            
            
            (2,570
            )**Effect
                of exchange rate changes on cash**
            
            
            681
            
            
            (461
            )
            
            458**Net
                increase in cash**
            
            
            12,287
            
            
            9,310
            
            
            2,960**Cash
                and cash equivalents at beginning of year**
            
            
            17,559
            
            
            8,249
            
            
            5,289**Cash
                and cash equivalents at end of year**
            
            $
            29,846
            
            $
            17,559
            
            $
            8,249Supplemental
                disclosures:Cash
                paid for:Interest
            
            $
            314
            
            $
            331
            
            $
            439Income
                taxes
            
            $
            3,920
            
            $
            1,509
            
            $
            286




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





30





**HURCO
      COMPANIES, INC.**


**CONSOLIDATED
      STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY**





**Common
                Stock**
            
            
            
            
            
            **Accumulated
                Other****(Dollars
                in thousands except shares issued and
                outstanding)**
            
            **Shares
                Issued & Outstanding**
            
            **Amount**
            
            **Additional
                Paid-In Capital**
            
            **Retained
                Earnings (Deficit)**
            
            **Comprehensive
                Income (Loss)**
            
            **Total****Balances,
                October 31, 2003**
            
            
            **5,575,987**
            
            **$**
            **557**
            
            **$**
            **44,695**
            
            **$**
            **(9,711**
            **)**
            **$**
            **(6,800**
            **)**
            **$**
            **28,741**Net
                income
            
            
            **--**
            
            
            **--**
            
            
            **--**
            
            
            6,269
            
            
            **--**
            
            
            6,269Translation
                of foreign currency financial statements
            
            
            **--**
            
            
            **--**
            
            
            **--**
            
            
            **--**
            
            
            1,227
            
            
            1,227Unrealized
                gain of derivative instruments
            
            
            **--**
            
            
            **--**
            
            
            **--**
            
            
            **--**
            
            
            90
            
            
            90Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            7,586Exercise
                of common stock options
            
            
            443,607
            
            
            45
            
            
            2,083
            
            
            **--**
            
            
            **--**
            
            
            2,128**Balances,
                October 31, 2004**
            
            
            **6,019,594**
            
            
            **602**
            
            
            **46,778**
            
            
            **(3,442**
            **)**
            
            **(5,483**
            **)**
            
            **38,455**Net
                income
            
            
            **--**
            
            
            **--**
            
            
            **--**
            
            
            16,443
            
            
            **--**
            
            
            16,443Translation
                of foreign currency financial statements
            
            
            **--**
            
            
            **--**
            
            
            **--**
            
            
            **--**
            
            
            (838
            )
            
            (838
            )Unrealized
                gain of derivative instruments
            
            
            **--**
            
            
            **--**
            
            
            **--**
            
            
            **--**
            
            
            2,941
            
            
            2,941Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            18,546Exercise
                of common stock options
            
            
            200,626
            
            
            20
            
            
            777
            
            
            **--**
            
            
            **--**
            
            
            797Tax
                benefit from exercise of stock options
            
            
            **--**
            
            
            **--**
            
            
            1,146
            
            
            **--**
            
            
            --
            
            
            1,146**Balances,
                October 31, 2005**
            
            
            **6,220,220**
            
            
            **622**
            
            
            **48,701**
            
            
            **13,001**
            
            
            **(3,380**
            **)**
            
            **58,944**Net
                income
            
            
            **--**
            
            
            **--**
            
            
            **--**
            
            
            15,479
            
            
            **--**
            
            
            15,479Translation
                of foreign currency financial statements
            
            
            **--**
            
            
            **--**
            
            
            **--**
            
            
            **--**
            
            
            1,288
            
            
            1,288Unrealized
                loss of derivative instruments
            
            
            **--**
            
            
            **--**
            
            
            **--**
            
            
            **--**
            
            
            (1,659
            )
            
            (1,659
            )Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            15,108Exercise
                of common stock options
            
            
            126,300
            
            
            13
            
            
            549
            
            
            **--**
            
            
            **--**
            
            
            562Tax
                benefit from exercise of stock options
            
            
            **--**
            
            
            **--**
            
            
            744
            
            
            **--**
            
            
            **--**
            
            
            744Stock-based
                compensation expense
            
            
            **--**
            
            
            **--**
            
            
            17
            
            
            **--**
            
            
            **--**
            
            
            17**Balances,
                October 31, 2006**
            
            
            **6,346,520**
            
            **$**
            **635**
            
            **$**
            **50,011**
            
            **$**
            **28,480**
            
            **$**
            **(3,751**
            **)**
            **$**
            **75,375**





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





31





**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 and controlled subsidiaries.
      We
      have a 35% and 24% ownership interest in two affiliates accounted for using
      the
      equity method. Our combined investments in affiliates are approximately $3.3
      million and are included in Investments and Other Assets on the accompanying
      Consolidated Balance Sheets. Intercompany accounts and transactions have been
      eliminated.





*Statements
      of Cash Flows* .
      We
      consider all highly liquid investments purchased with maturity of three months
      or less to be cash equivalents. Cash flows from hedges are classified consistent
      with the items being hedged.





*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 recorded as a component of Accumulated Other
      Comprehensive Income (Loss). Income and expenses are translated at the average
      exchange rates during the year. Cumulative foreign currency translation
      adjustments as of October 31, 2006, were a net loss of $3.3 million and are
      included in Accumulated Other Comprehensive Income (Loss) in shareholders'
      equity. These foreign currency translation adjustments are recorded net of
      tax
      as they relate to permanent investments in international subsidiaries. Foreign
      currency transaction gains and losses are recorded as income or expense as
      incurred.





*Hedging.* We
      enter
      into foreign currency forward exchange contracts periodically to hedge certain
      forecasted inter-company sales and forecasted inter-company and third party
      purchases of product denominated in foreign currencies (primarily Pound
      Sterling, Euro and New Taiwan Dollar). The purpose of these instruments is
      to
      mitigate the risk that the U.S. Dollar net cash inflows and outflows resulting
      from the sales and purchases denominated in foreign currencies will be adversely
      affected by changes in exchange rates. These forward contracts have been
      designated as cash flow hedge instruments, and are recorded in the Consolidated
      Balance Sheet at fair value in Other Current Assets and Accrued Expenses. Gains
      and losses resulting from changes in the fair value of these hedge contracts
      are
      deferred in Accumulated Other Comprehensive Income (Loss) and recognized as
      an
      adjustment to cost of sales in the period that the sale of the related hedged
      item is recognized, thereby providing an offsetting economic impact against
      the
      corresponding change in the U.S. Dollar value of the inter-company sale or
      purchase item being hedged.





At
      October 31, 2006, we had approximately $448,000 of losses related to cash flow
      hedges deferred in Accumulated Other Comprehensive Income (Loss) net of tax.
      Of
      this amount, $289,000 represents unrealized losses related to future cash flow
      hedge instruments that remain subject to currency fluctuation risk. These
      deferred losses will be recorded as an adjustment to Cost of Sales in the
      periods through October 31, 2007, in which the sale of the related hedged item
      is recognized, as described above. At October 31, 2005, we had $1.2 million
      of
      gains related to cash flow hedges deferred in Accumulated Other Comprehensive
      Income (Loss). Net gains on cash flow hedge contracts, which we reclassified
      from Accumulated Other Comprehensive Income (Loss) to Cost of Sales, were
      $698,000 for the period ended October 31, 2006, compared to net losses
      reclassified in the periods ending October 31, 2005 and 2004, of $747,000 and
      $2.8 million, respectively.





32





**HURCO
      COMPANIES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**





We
      also
      enter into foreign currency forward exchange contracts to protect against the
      effects of foreign currency fluctuations on receivables and payables denominated
      in foreign currencies. These derivative instruments are not designated as hedges
      under SFAS 133, “Accounting Standards for Derivative Instruments and Hedging
      Activities” (SFAS 133) and, as a result, changes in fair value are reported
      currently as Other Expense, Net in the Consolidated Statements of Income
      consistent with the transaction gain or loss on the related foreign denominated
      receivable or payable. Such net transaction losses were $423,000, $476,000,
      and
      $246,000 for the years ended October 31, 2006, 2005 and 2004, respectively.





*Inventories* .
      Inventories are stated at the lower of cost or market, with cost determined
      using the first-in, first-out method.





*Property
      and Equipment* .
      Property and equipment are carried at cost. Any impairment would be recognized
      based on an assessment of future operations (including cash flows) to ensure
      that assets are appropriately valued. Depreciation and amortization of assets
      are provided primarily under the straight-line method over the shorter of the
      estimated useful lives or the lease terms as follows:





Number
                of YearsBuilding
            
            
            40Machines
            
            
            7-10Shop
                and office equipment
            
            
            3-7Leasehold
                improvements
            
            
            3-40





Total
      depreciation expense for the years ended October 31, 2006, 2005 and 2004 was
      $1.1 million, $1.0 million, and $932,000, respectively.





*Revenue
      Recognition.* We
      recognize revenue from sales of our machine tool systems upon delivery of the
      product to the customer, which is normally at the time of shipment, because
      persuasive evidence of an arrangement exists, delivery has occurred, the selling
      price is fixed and determinable and collectibility is reasonably assured. In
      certain foreign locations, we retain title after shipment under a “retention of
      title” clause solely to protect collectibility. The retention of title is
      similar to UCC filings in the United States and provides the creditor with
      additional rights to the machine if the customer fails to pay. Revenue
      recognition at the time of shipment is appropriate in this instance as long
      as
      all risks of ownership have passed to the buyer. Our computerized machine tools
      are general-purpose computer controlled machine tools that are typically used
      in
      stand-alone operations. Transfer of ownership and risk of loss are not
      contingent upon contractual customer acceptance. Prior to shipment, we test
      each
      machine to ensure the machine’s compliance with standard operating
      specifications as listed in our sales literature.





Depending
      upon geographic location, after shipment a machine may be installed at the
      customer’s facilities by a distributor, independent contractor or Hurco service
      technician. In most instances where a machine is sold through a distributor,
      Hurco has no installation involvement. If sales are direct or through sales
      agents, Hurco will typically complete the machine installation, which consists
      of the reassembly of certain parts that were removed for shipping and the
      re-testing of the machine to ensure that it is performing within the standard
      specifications. We consider the machine installation process inconsequential
      and
      perfunctory.





Service
      fees from maintenance contracts are deferred and recognized in earnings on
      a pro
      rata basis over the term of the contract. Sales related to software products
      are
      recognized when shipped in conformity with American Institute of Certified
      Public Accountants’ Statement of Position 97-2.





33





**HURCO
      COMPANIES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**





*Software
      Revenue Recognition.* The
      software does not require production, modification or customization. At the
      time
      of shipment, persuasive evidence of an arrangement exists, delivery has
      occurred, the selling price is fixed and determinable and collectibility is
      reasonably assured.





*Product
      Warranty* .
      Expected future product warranty expense is recorded when the product is sold.
      See Note 11 of Notes to Consolidated Financial Statements on further
      discussion of warranties.





*Research
      and Development Costs.* The
      costs associated with research and development programs for new products and
      significant product improvements are expensed as incurred and are included
      in
      Selling, General and Administrative Expenses. Research and development expenses
      totaled $2.5 million, $2.4 million, and $2.0 million, in fiscal 2006, 2005,
      and
      2004, respectively.





Costs
      incurred to develop computer software products and significant enhancements
      to
      software features of existing products to be sold or otherwise marketed are
      capitalized, after technological feasibility is established. Software
      development costs are amortized to Cost of Sales on a straight-line basis over
      the estimated product life of the related software, which ranges from three
      to
      five years. We capitalized costs of $2,089,000 in 2006, $1,161,000 in 2005,
      and
      $1,290,000 in 2004 related to software development projects. Amortization
      expense was $363,000, $329,000, and $291,000, for the years ended October 31,
      2006, 2005, and 2004, respectively. Accumulated amortization at October 31,
      2006
      and 2005 was $3.0 million and $2.6 million, respectively. Any impairment of
      the
      carrying value of the capitalized software development costs would be recognized
      based on an assessment of future operations (including cash flows) to ensure
      that assets are appropriately valued.





Estimated
      amortization expense for the existing amortizable intangible assets for the
      years ending October 31, is as follows:





Fiscal
                Year
            
            Amortization
                Expense2007
            
            $
            8882008
            
            
            1,1122009
            
            
            1,1122010
            
            
            1,0032011
            
            
            1,003





*Earnings
      Per Share.* Basic
      and
      diluted earnings per common share are based on the weighted average number
      of
      our shares of common stock outstanding. Diluted earnings per common share give
      effect to outstanding stock options using the treasury method. The impact of
      stock options on weighted average shares for the years ended October 31, 2006,
      2005 and 2004 was 80,000, 165,000, and 242,000 respectively.





*Income
      Taxes* .
      We
      record income taxes under SFAS 109 “Accounting for Income Taxes.” SFAS 109
      utilizes the liability method for computing deferred income taxes.





34





**HURCO
      COMPANIES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**





In
      the
      ordinary course of global business, there may be many transactions and
      calculations where the ultimate tax outcome is uncertain. The calculation of
      tax
      liabilities involves dealing with uncertainties in the application of complex
      tax laws. The company recognizes potential liabilities for anticipated tax
      audit
      issues in the U.S. and other tax jurisdictions based on an estimate of the
      ultimate resolution of whether, and the extent to which, additional taxes will
      be due. Although the company believes the estimates are reasonable, no assurance
      can be given that the final outcome of these matters will not be different
      than
      what is reflected in the historical income tax provisions and accruals. Such
      differences could have a material impact on the income tax provision and
      operating results in the period in which such determination is
      made.





As
      part
      of its financial process, the company must assess the likelihood that its
      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, and taxable income in future
      years. The company’s judgment regarding future profitability may change due to
      future market conditions, changes in U.S. or international 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 effective
      tax rate reflected in forward-looking statements is based on current enacted
      tax
      law. Significant changes during the year in enacted tax law could materially
      affect these estimates.





*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* - Prior
      to fiscal 2006, we applied the provisions of Accounting Principles Board (APB)
      Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for
      stock-based compensation. As a result, no compensation expense was recognized
      for stock options granted with exercise prices equivalent to the fair market
      value of the stock on the date of grant. Effective November 1, 2005, we adopted
      SFAS No. 123(R), “Share Based Payment,” using the modified prospective method.
      As of November 1, 2005, we began applying the provisions of SFAS No. 123(R)
      to
      option grants (of which there have been none), as well as to the nonvested
      portion of outstanding options granted before that date. Compensation expense
      is
      determined at the date of grant using the Black-Scholes valuation model. We
      expect to record additional compensation expense of approximately $5,000 ratably
      through the first quarter of fiscal 2007 for the remaining options that vest
      during the period November 1, 2006 through January 31, 2007.





35




**HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**





The
      adoption of this pronouncement had no effect on compensation cost recorded
      in
      fiscal 2005 and 2004 related to stock options, which will continue to be
      disclosed on a pro forma basis only.





(in
                thousands, except per share data)
            
            2005
            
            2004**Net
                income, as reported**
            
            $
            16,443
            
            $
            6,269Deduct:
                Total stock-based employee compensation expense determined under
                fair
                value based method for all awards, net of related tax
                effects
            
            
            (23
            )
            
            (95
            )Pro
                forma net income
            
            
            16,420
            
            
            6,174**Earnings
                (loss) per share:**Basic
                as reported
            
            $
            2.66
            
            $
            1.08Basic
                pro forma
            
            $
            2.66
            
            $
            1.07Diluted
                as reported
            
            $
            2.60
            
            $
            1.04Diluted
                pro forma
            
            $
            2.59
            
            $
            1.02




As
      of
      October 31, 2006, there were no outstanding non-qualified options that had
      been
      granted outside of the 1990 and 1997 plans to current members of the Board
      of
      Directors.





36





**HURCO
      COMPANIES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**





**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
      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 in countries throughout North America, Europe and Asia.
      We also maintain direct sales operations in England, France, Germany, Italy,
      Singapore and China.





*Credit
      Risk* .
      We sell
      products to customers located throughout the world. We perform ongoing credit
      evaluations of customers and generally do not require collateral. Allowances
      are
      maintained for potential credit losses. Concentration of credit risk with
      respect to trade accounts receivable is limited due to the large number of
      customers and their dispersion across many geographic areas. Although a
      significant amount of trade receivables are with distributors primarily located
      in the United States, no single distributor or region represents a significant
      concentration of credit risk.





*Manufacturing
      Risk* .
      Our
      computerized machine tools and integrated computer controls are produced
      primarily in Taiwan by our wholly owned subsidiary and our affiliated contract
      manufacturers. We also source one of the proprietary UltiMax ® and
      Max ® computer
      components from a single domestic supplier. Any interruption from these sources
      would restrict the availability of our computerized machine tool systems and
      would adversely affect operating results.





37





**HURCO
      COMPANIES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**





**3.**
            **INVENTORIES**





Inventories
      as of October 31, 2006 and 2005 are summarized below (in
      thousands):





2006
            
            2005Purchased
                parts and sub assemblies
            
            $
            7,645
            
            $
            6,561Work-in-process
            
            
            7,608
            
            
            5,403Finished
                goods
            
            
            28,090
            
            
            17,566$
            43,343
            
            $
            29,530





**4.**
            **DEBT
                AGREEMENTS**





Long-term
      debt as of October 31, 2006 and 2005, consisted of (in thousands):





2006
            
            2005Domestic
                bank revolving credit facility
            
            $
            --
            
            $
            --European
                bank credit facility
            
            
            --
            
            
            --First
                Mortgage
            
            
            4,010
            
            
            4,1364,010
            
            
            4,136Less
                current portion
            
            
            136
            
            
            126$
            3,874
            
            $
            4,010





As
      of
      October 31, 2006, long-term debt was payable as follows (in
      thousands):





Fiscal
                2007
            
            $
            136Fiscal
                2008
            
            
            145Fiscal
                2009
            
            
            3,729Fiscal
                2010
            
            
            --Thereafter
            
            
            --$
            4,010





As
      of
      October 31, 2006 and 2005, we had $262,000 and $829,000, respectively, of
      outstanding letters of credit issued to non-U.S. suppliers for inventory
      purchase commitments. As of October 31, 2006, we had unutilized credit
      facilities of $11.6 million available for either direct borrowings or commercial
      letters of credit.





*Domestic
      Bank Credit Facility.* We
      had no
      borrowings outstanding under our domestic bank credit facility at October 31,
      2006 and 2005. Interest on the domestic bank credit facility was at rates
      ranging from 6.0% to 7.5% at October 31, 2006 and from 4.0% to 6.25% at October
      31, 2005.





Effective
      October 26, 2004, we amended our $8.0 million domestic bank credit agreement
      to
      extend the maturity date to January 31, 2008, and convert it to an unsecured
      facility except for a continuation of the pledge of stock of two subsidiaries.
      Borrowings may be made in U.S. Dollars, Euros or Pounds Sterling. Interest
      on
      all outstanding borrowings is payable at LIBOR for the respective currency
      plus
      an applicable margin, or, at our option, the bank’s prime rate plus a specified
      margin based on the ratio of our Total Funded Debt to EBITDA (Earnings Before
      Interest, Taxes, Depreciation and Amortization) ratio, as follows:





Ratio
                of Total Funded Debt/EBITDA ratio
            
            LIBOR
                Margin
            
            Prime
                MarginGreater
                than 3.0
            
            2.75%
            
            0%Greater
                than 2.5 and less than or equal to 3.0
            
            2.0%
            
            (.25%)Greater
                than 2.0 and less than or equal to 2.5
            
            1.5%
            
            (.50%)Less
                than or equal to 2.0
            
            1.0%
            
            (.75%)





38





**HURCO
      COMPANIES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**





The
      ratio
      of our Total Funded Debt to EBITDA at October 31, 2006 was .16. The applicable
      margin is adjusted on the first day of the month following the month after
      each
      quarter end. The availability under the facility is not limited by a borrowing
      base, unless the ratio exceeds 3.0.





The
      agreement requires that Maximum Consolidated Total Indebtedness to Consolidated
      Total Capitalization, as defined in the agreement, not exceed 0.275 to 1.0
      and
      our fixed charge coverage ratio not be less than 1.25 to 1.0. The agreement
      also
      requires that we have positive net income for the four previous quarters.





*First
      Mortgage.* On
      April
      30, 2002, we obtained a $4.5 million first mortgage loan on our Indianapolis
      corporate headquarters. The loan bears interest at a rate of 73⁄8% and matures in
      April 2009. We are required to make principal payments over the seven-year
      term
      of the loan, based on a twenty-year amortization schedule. The proceeds from
      the
      first mortgage loan, together with other available cash, were used to repay
      bank
      debt.





*European
      Bank Credit Facility.* The
      terms
      and conditions of the October 2004 domestic bank credit facility amendment
      also
      apply to the revolving credit and overdraft facility for our U.K.
      subsidiary.





On
      January 11, 2006, we renewed this credit facility with a European bank for
€1.5
      million. The termination date is unspecified. Interest on the facility is
      payable at a floating rate, 6.63% at October 31, 2006. Although the facility
      is
      uncollateralized, the bank reserves the right to require collateral in the
      event
      of increased risk evaluation. Borrowings outstanding under this facility at
      October 31, 2006 and 2005 were $0.





*Economic
      Development Revenue Bonds.* The
      remaining installment of the Economic Development Revenue Bonds was paid on
      September 1, 2005.





Total
      debt at October 31, 2006 was $4.0 million, representing 5.0% of total
      capitalization, which aggregated $79.4 million, compared to $4.1 million, or
      6.6% of total capitalization, at October 31, 2005. We were in compliance with
      all loan covenants and had unused credit availability of $11.6 million at
      October 31, 2006. We believe that cash flow from operations and borrowings
      available to us under our credit facilities will be sufficient to meet our
      anticipated cash requirements in fiscal 2007.





**5.**
            **FINANCIAL
                INSTRUMENTS**





The
      carrying amounts for trade receivables and payables approximate their fair
      values. The fair value of long-term debt, including the current portion, is
      estimated based on quoted market prices for similar issues or on current rates
      offered to us for debt with the similar terms and maturities.





We
      also
      have financial instruments in the form of foreign currency forward exchange
      contracts as described in Note 1 of Notes to Consolidated Financial
      Statements. The U.S. Dollar equivalent notional amount of these contracts was
      $112.7 million at October 31, 2006. The net fair value of these derivative
      instruments recorded in Accrued Expenses at October 31, 2006 was $289,000.
      Current market prices were used to estimate the fair value of the foreign
      currency forward exchange contracts.





The
      future value of the foreign currency forward exchange contracts and the related
      currency positions are subject to offsetting market risk resulting from foreign
      currency exchange rate volatility. The counterparties to these contracts are
      substantial and creditworthy financial institutions. We do not consider either
      the risk of counterparty non-performance or the economic consequences of
      counterparty non-performance as material risks.





39





**HURCO
      COMPANIES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**




**6.**
            **INCOME
                TAXES**




Deferred
      tax assets and liabilities are determined based on the difference between the
      U.S. Generally Accepted Accounting Principles financial statements and tax
      basis
      of assets and liabilities using enacted tax rates in effect for the year in
      which the differences are expected to reverse. Significant components of our
      deferred tax assets and liabilities at October 31, 2006 and 2005 were as follows
      (in thousands):





October
                312006
            
            2005Tax
                effects of future tax deductible items related to:Current:Inter-company
                profit in inventory
            
            $
            3,307
            
            $
            1,672Accrued
                inventory reserves
            
            
            968
            
            
            834Accrued
                warranty expenses
            
            
            136
            
            
            164Deferred
                compensation
            
            
            185
            
            
            151Other
                accrued expenses
            
            
            736
            
            
            498Total
                current deferred tax assets
            
            
            5,332
            
            
            3,319Non-current:Goodwill
            
            
            54
            
            
            61Total
                deferred tax assets
            
            
            5,386
            
            
            3,380Tax
                effects of future taxable differences related to:Accelerated
                tax deduction and other tac over book deductions related to property,
                equipment and software
            
            
            (2,552
            )
            
            (1,699
            )Total
                deferred tax liabilities
            
            
            (2,552
            )
            
            (1,699
            )Net
                tax effects of temporary differences
            
            
            2,834
            
            
            1,682Tax
                effects of carryforward benefits:U.S.
                federal and state net operating loss carryforwards, expiring
                2007-2027
            
            
            34
            
            
            312Foreign
                net operating loss carryforwards, with no expiration
            
            
            1,033
            
            
            1,544U.S.
                federal and state general business tax credits, expiring
                2006-2026
            
            
            100
            
            
            882U.S.
                Alternative minimum tax credit with no expiration
            
            
            --
            
            
            190Tax
                effects of carryforwards
            
            
            1,167
            
            
            2,928Tax
                effects of temporary differences and carryforwards, net
            
            
            4,001
            
            
            4,610Less
                valuation allowance
            
            
            112
            
            
            221Net
                deferred tax asset
            
            $
            3,889
            
            $
            4,389





Except
      as
      indicated above, our carryforwards and tax credits expire at specific future
      dates and utilization of certain carryforwards and tax credits are limited
      to
      specific amounts each year. Realization is entirely dependent upon generating
      sufficient future earnings in specific tax jurisdictions prior to the expiration
      of the loss carryforwards and tax credits. Net operating losses utilized were
      approximately $3.2 million in 2006 and approximately $9.8 million in
      2005.





40





**HURCO
      COMPANIES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**





We
      operate in a highly cyclical industry and incurred significant operating losses
      in fiscal 2001 and 2002 for which a valuation allowance was maintained. During
      the fourth quarter of fiscal 2005, after examining a number of factors,
      including historical results and near term earning projections, this valuation
      allowance was reduced to $221,000. The valuation allowance on our remaining
      deferred tax assets at the end of fiscal 2006 is $112,000.





In
      the
      fiscal year ended October 31, income (loss) before income taxes and the
      provision (benefit) for income taxes consisted of the following:





Income
                (loss) before income taxes (in thousands):
            
            Year
                Ended October 312006
            
            2005
            
            2004Domestic
            
            $
            13,688
            
            $
            9,834
            
            $
            3,424Foreign
            
            
            9,426
            
            
            6,248
            
            
            4,144$
            23,114
            
            $
            16,082
            
            $
            7,568The
                provision for income taxes consists of:Current:Federal
            
            $
            4,306
            
            $
            3,457
            
            $
            --State
            
            
            1,053
            
            
            279
            
            
            11Foreign
            
            
            2,767
            
            
            2,259
            
            
            1,2408,126
            
            
            5,995
            
            
            1,251Deferred:Federal
            
            
            (787
            )
            
            (4,685
            )
            
            48State
            
            
            --
            
            
            (553
            )
            
            --Foreign
            
            
            296
            
            
            (1,118
            )
            
            --(491
            )
            
            (6,356
            )
            
            48$
            7,635
            
            $
            (361
            )
            $
            1,299Differences
                between the effective tax rate and U.S. federal income tax rate were
                (in
                thousands):Tax
                at U.S. statutory rate
            
            $
            7,858
            
            $
            5,468
            
            $
            2,649Effect
                of tax rates of international jurisdictions In excess (less than)
                of U.S.
                statutory rates
            
            
            (37
            )
            
            81
            
            
            8State
                income taxes
            
            
            883
            
            
            279
            
            
            11Deferred
                tax asset valuation adjustment
            
            
            109
            
            
            (2,342
            )
            
            --Utilization
                of net operating loss carryforwards
            
            
            --
            
            
            (3,740
            )
            
            (1,369
            )Permanent
                items
            
            
            (632
            )
            
            (155
            )
            
            --Others
            
            
            (546
            )
            
            48
            
            
            --Provision
                (benefit) for income taxes
            
            $
            7,635
            
            $
            (361
            )
            $
            1,299





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, 2006 are approximately
      $18.7
      million. In the event these earnings are later distributed to the U.S., such
      distributions could result in additional U.S. tax that may be offset, at least
      in part by associated foreign tax credits.





41





**HURCO
      COMPANIES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**





**7.**
            **EMPLOYEE
                BENEFITS**





We
      have
      defined contribution plans that include a majority of our employees, under
      which
      our contributions are discretionary. The purpose of these plans is generally
      to
      provide additional financial security during retirement by providing employees
      with an incentive to save throughout their employment. Our contributions to
      the
      plans are based on employee contributions or compensation. Our contributions
      totaled $382,300, $243,800, and $253,900, for the years ended October 31, 2006,
      2005 and 2004, respectively.





We
      also
      have life insurance agreements with our executive officers. In fiscal 2005,
      we
      purchased the insurance policies from the executive officers. The insurance
      premiums we paid will be repaid from the cash surrender value of the policies
      when the policies are terminated or exercised.





**8.**
            **STOCK
                OPTIONS**





In
      March
      1997, we adopted the 1997 Stock Option and Incentive Plan (the 1997 Plan), which
      allows us to grant awards of options to purchase shares of our common stock,
      stock appreciation rights, restricted shares and performance shares. In March
      2005, an amendment to the plan increased the number of shares available for
      grant by 250,000 shares. Under the provision of the amended 1997 Plan, 1,000,000
      shares of common stock may be issued and the maximum number of shares of common
      stock that may be granted to any individual is 200,000 shares. Options granted
      under the 1997 Plan are exercisable for a period up to ten years after date
      of
      grant and vest in equal annual installments as specified by the Compensation
      Committee of our Board of Directors at the time of grant. The exercise price
      of
      options intended to qualify as incentive stock options may not be less than
      100%
      of the fair market value of a share of common stock on the date of grant. As
      of
      October 31, 2006, options to purchase 87,700 shares had been granted and
      remained unexercised under the 1997 Plan.





In
      1990,
      we adopted the 1990 Stock Option Plan (the 1990 Plan), which allowed us to
      grant
      options to purchase shares of our common stock and related stock appreciation
      rights and limited rights to officers and our key employees. Under the
      provisions of the 1990 Plan, the maximum number of shares of common stock,
      which
      could be issued under options and related rights, was 500,000. There was no
      annual limit on the number of such shares with respect to which options and
      rights could be granted. Options granted under the 1990 Plan are exercisable
      for
      a period up to ten years after the date of grant and vested in equal
      installments over a period of three to five years from the date of grant. The
      option price could not be less than 100% of the fair market value of a share
      of
      common stock on the date of grant and no options or rights could be granted
      under the 1990 Plan after April 30, 2001. As of October 31, 2006, options to
      purchase 1,000 shares had been granted and remained unexercised under the 1990
      Plan.





42





**HURCO
      COMPANIES, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**





A
      summary
      of the status of the options under the 1990 and 1997 Plans as of October 31,
      2006, 2005 and 2004 and the related activity for the year is as
      follows:





Shares
                Under Option
            
            Weighted
                Average Exercise Price Per ShareBalance
                October 31, 2003
            
            
            788,600
            
            $
            3.69Granted
            
            
            --
            
            
            --Cancelled
            
            
            --
            
            
            --Expired
            
            
            (2,000
            )
            
            2.13Exercised
            
            
            (383,607
            )
            
            3.67Balance
                October 31, 2004
            
            
            403,053
            
            $
            3.71Granted
            
            
            --
            
            
            --Cancelled
            
            
            --
            
            
            --Expired
            
            
            (2,000
            )
            
            2.15Exercised
            
            
            (185,653
            )
            
            3.82Balance
                October 31, 2005
            
            
            215,400
            
            $
            3.63Granted
            
            
            --
            
            
            --Cancelled
            
            
            --
            
            
            --Expired
            
            
            (400
            )
            
            2.15Exercised
            
            
            (126,300
            )
            
            4.45Balance
                October 31, 2006
            
            
            88,700
            
            $
            2.46





The
      total
      intrinsic value of stock options exercised during the twelve months ended
      October 31, 2006 and 2005 was approximately $2.7 million and $2.6 million,
      respectively.





As
      of
      October 31, 2006, the total intrinsic value of outstanding stock options already
      vested and expected to vest was $2.1 million. The intrinsic value of options
      that are outstanding and exercisable as of October 31, 2006 was $1.9 million.
      Stock options outstanding and exercisable on October 31, 2006 are as
      follows:




Range
                      of Exercise Prices Per Share
                  
                  Shares
                      Under Option
                  
                  
                  
                  Weighted
                      Average Exercise Price Per Share
                  
                  Weighted
                      Average Remaining Contractual Life in YearsOutstanding$
                  
                  2.125
                      - 5.125
                  
                  88,300
                  
                  
                  
                  $2.44
                  
                  4.85.813
                      - 8.250
                  
                  400
                  
                  
                  
                  5.81
                  
                  2.1$
                  
                  2.125
                      - 8.250
                  
                  88,700
                  
                  
                  
                  $2.46
                  
                  4.8Exercisable$
                  
                  2.125
                      - 5.125
                  
                  86,740
                  
                  
                  
                  $2.45
                  
                  --5.813
                      - 8.250
                  
                  400
                  
                  
                  
                  5.81
                  
                  --$
                  
                  2.125
                      - 8.250
                  
                  87,140
                  
                  
                  
                  $2.46
                  
                  --


During
        fiscal 2006, options to purchase 126,300 shares were exercised resulting
        in cash
        proceeds of approximately $562,500. The tax benefit from the exercise of
        stock options is approximately $744,000.
  43
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
  Prior
        to
        fiscal 2006, we applied the provisions of Accounting Principles Board (APB)
        Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting for
        stock-based compensation. As a result, no compensation expense was recognized
        for stock options granted with exercise prices equivalent to the fair market
        value of the stock on the date of grant. Effective November 1, 2005, we adopted
        SFAS No. 123(R), “Share Based Payment,” using the modified prospective method.
        As of November 1, 2005, we began applying the provisions of SFAS No. 123(R)
        to
        option grants (of which there have been none), as well as to the nonvested
        portion of outstanding options granted before that date. Compensation expense
        is
        determined at the date of grant using the Black-Scholes valuation model.
        We
        expect to record additional compensation expense of approximately $5,000
        ratably
        through the first quarter of fiscal 2007 for the remaining options that vest
        during the period November 1, 2006 through January 31, 2007.
 
 As
        a
        result of adopting SFAS No. 123(R), our income before taxes and net income
        for
        the year ended October 31, 2006 were reduced by approximately $20,000 and
        $12,000, respectively, as compared to the amounts that would have been reported
        if we continued to account for share-based compensation under APB Opinion
        No.
        25. There was no effect on basic and diluted earnings per share as a result
        of
        the adoption of SFAS No. 123(R).
 
 Prior
        to
        our adoption of SFAS No. 123(R), we presented all tax benefits of deduction
        resulting from the exercise of stock options as operating cash flows in the
        Condensed Consolidated Statement of Cash Flows. SFAS 123(R) requires cash
        flows
        resulting from tax deductions in excess of recognized compensation cost from
        the
        exercise of stock options (excess tax benefits) to be classified as financing
        cash flows.
 
 On
        November 11, 2001, our former CEO was granted 110,000 options at $2.11 and
        all
        of his previous option grants were cancelled. These options were subject
        to
        variable plan accounting, which resulted in a charge to expense in fiscal
        2004
        of $322,000. As of October 31, 2006, all options subject to variable plan
        accounting have been exercised.
  44
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 **9.**
              **RELATED
                  PARTY TRANSACTIONS**
 
 We
        own
        approximately 24% of one of our Taiwanese-based contract manufacturers. This
        investment of $1.3
        million is
        accounted for using the equity method and is included in Investments and
        Other
        Assets on the Consolidated Balance Sheets. Purchases of product from this
        contract manufacturer totaled $2.0 million, $2.7 million and $4.4 million
        for
        the years ended October 31, 2006, 2005 and 2004, respectively. Sales of product
        to this contract manufacturer were $70,000, $117,000 and $199,000 in fiscal
        2006, 2005 and 2004 respectively. Trade payables to this contract manufacturer
        were $256,000 at October 31, 2006, and $509,000 at October 31, 2005. Trade
        receivables were $32,000 at October 31, 2006, and $136,000 at October 31,
        2005.
 
 As
        of
        October 31, 2006, we owned 35% of Hurco Automation, Ltd. (HAL), a Taiwan
        based
        company. HAL’s scope of activities includes the design, manufacture, sales and
        distribution of industrial automation products, software systems and related
        components, including control systems and components produced under contract
        for
        sale exclusively to us. We are accounting for this investment using the equity
        method. The investment of $2.0 million at October 31, 2006 is included in
        Investments and Other Assets on the Consolidated Balance Sheets. Purchases
        of
        product from this supplier amounted to $10.5 million, $7.7 million and $6.6
        million in 2006, 2005 and 2004, respectively. Sales of product to this supplier
        were $2.0 million, $1.8 million and $1.9 million for the years ended October
        31,
        2006, 2005 and 2004, respectively. Trade payables to HAL were $1.9 million
        and
        $1.6 million at October 31, 2006 and 2005, respectively. Trade receivables
        from
        HAL were $235,000 and $242,000 at October 31, 2006 and 2005,
        respectively.
 
 Summary
        financial information for the two affiliates accounted for using the equity
        method of accounting is as follows:
 
 (in
                  thousands)
              
              2006
              
              2005
              
              2004Net
                  Sales
              
              $
              58,286
              
              $
              50,896
              
              $
              23,469Gross
                  Profit
              
              
              10,932
              
              
              8,947
              
              
              7,780Operating
                  Income
              
              
              4,209
              
              
              2,676
              
              
              2,210Net
                  Income
              
              
              3,727
              
              
              2,313
              
              
              1,479Current
                  Assets
              
              $
              27,903
              
              $
              21,553
              
              $
              16,194Non-current
                  Assets
              
              
              7,684
              
              
              1,824
              
              
              2,031Current
                  Liabilities
              
              
              20,156
              
              
              14,857
              
              
              17,215
 
 **10.**
              **CONTINGENCIES
                  AND LITIGATION**
 
 We
        are
        involved in various claims and lawsuits arising in the normal course of
        business. We do not expect any of these claims, individually or in the
        aggregate, to have a material adverse effect on our consolidated financial
        position or results of operations.
 
 **11.**
              **GUARANTEES**
  During
        fiscal 2003, we adopted Financial Accounting Standards Board (FASB)
        Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure
        Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
        of
        Others, an interpretation of FASB Statements No. 5, 57 and 107 and Rescission
        of
        FASB Interpretation No. 34.” FIN 45 clarifies the requirements of FASB Statement
        No. 5, Accounting for Contingencies, relating to the guarantor’s accounting for,
        and disclosures of, the issuance of certain types of guarantees.
  45
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
  From
        time
        to time, our subsidiaries guarantee third party payment obligations in
        connection with the sale of certain machines to customers that use financing.
        At
        October 31, 2006, we had 58 outstanding third party guarantees totaling
        approximately $1.8 million. The terms of our subsidiaries guarantees are
        consistent with the underlying customer financing terms. Upon shipment, the
        customer has the risk of ownership. The customer does not obtain title until
        the
        machine is paid in full. A retention of title clause allows us to obtain
        the
        machine if the customer defaults on the lease. We believe that the proceeds
        obtained from liquidation of the machine would cover any payments required
        by
        the guarantee.
 
 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):
 
 10/31/06
              
              10/31/05Balance,
                  beginning of period
              
              $
              1,618
              
              $
              1,750Provision
                  for warranties during the period
              
              
              2,139
              
              
              1,709Charges
                  to the accrual
              
              
              (1,893
              )
              
              (1,778
              )Impact
                  of foreign currency translation
              
              
              62
              
              
              (63
              )Balance,
                  end of period
              
              $
              1,926
              
              $
              1,618
 
 **12.**
              **OPERATING
                  LEASES**
  We
        lease
        facilities, certain equipment and vehicles under operating leases that expire
        at
        various dates through 2014. Future payments required under operating leases
        as
        of October 31, 2006, are summarized as follows (in thousands):
  2007
              
              $
              1,4252008
              
              
              1,0162009
              
              
              7282010
              
              
              530Thereafter
              
              
              219Total
              
              $
              3,918
 
 Lease
        expense for the years ended October 31, 2006, 2005, and 2004 was $1.9 million,
        $1.8 million, and $1.5 million, respectively.
 
 We
        recorded $180,000 of lease income from subletting 50,000 square feet of our
        Indianapolis facility. The sublease expires on April 30, 2010.
  46
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 **13.**
              **QUARTERLY
                  HIGHLIGHTS (Unaudited)**
 
 First
                  Quarter
              
              Second
                  Quarter
              
              Third
                  Quarter
              
              Fourth
                  Quarter**2006
                  (In thousands, except per share data)**Sales
                  and service fees
              
              $
              31,894
              
              $
              36,861
              
              $
              36,597
              
              $
              43,164Gross
                  profit
              
              
              10,927
              
              
              13,179
              
              
              12,835
              
              
              16,384Gross
                  profit margin
              
              
              34.3
              %
              
              35.8
              %
              
              35.1
              %
              
              38.0
              %Selling,
                  general and administrative expenses
              
              
              6,296
              
              
              7,140
              
              
              7,392
              
              
              9,869Operating
                  income
              
              
              4,631
              
              
              6,039
              
              
              5,443
              
              
              6,515Provision
                  (benefit) for income taxes
              
              
              1,618
              
              
              2,250
              
              
              1,646
              
              
              2,120Net
                  income
              
              
              3,033
              
              
              3,929
              
              
              3,802
              
              
              4,714Income
                  per common share - basic
              
              $
              0.49
              
              $
              0.62
              
              $
              0.60
              
              $
              0.75Income
                  per common share - diluted
              
              $
              0.48
              
              $
              0.62
              
              $
              0.59
              
              $
              0.74
 
 First
                  Quarter
              
              Second
                  Quarter
              
              Third
                  Quarter
              
              FourthQuarter**2005
                  (In thousands, except per share data)**Sales
                  and service fees
              
              $
              30,246
              
              $
              30,990
              
              $
              29,555
              
              $
              34,718Gross
                  profit
              
              
              9,740
              
              
              10,767
              
              
              9,863
              
              
              12,188Gross
                  profit margin
              
              
              32.2
              %
              
              34.7
              %
              
              33.3
              %
              
              35.1
              %Selling,
                  general and administrative expenses
              
              
              6,187
              
              
              6,363
              
              
              6,637
              
              
              6,870Operating
                  income
              
              
              3,553
              
              
              4,404
              
              
              3,226
              
              
              5,318Provision
                  (benefit) for income taxes
              
              
              369
              
              
              781
              
              
              317
              
              
              (1,828
              )Net
                  Income
              
              
              3,030
              
              
              3,299
              
              
              2,879
              
              
              7,235Income
                  per common share - basic
              
              $
              0.50
              
              $
              0.53
              
              $
              0.46
              
              $
              1.16Income
                  per common share - diluted
              
              $
              0.48
              
              $
              0.52
              
              $
              0.45
              
              $
              1.13
 
 (1)
              The
                  fourth quarter included a $2.3 million adjustment to the tax provision
                  to
                  reverse our deferred tax asset valuation allowance. See Note 6
                  of Notes to
                  Consolidated Financial
                  Statements.
  47
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 **14.**
              **SEGMENT
                  INFORMATION**
 
 We
        operate in a single segment: industrial automation equipment. We design and
        produce interactive computer control systems and software and computerized
        machine tools for sale through our own distribution network to the worldwide
        metal working market. We also provide software options, control upgrades,
        accessories and replacement parts for our products, as well as customer service
        and training support.
 
 We
        sell
        our products through more than 150 independent agents and distributors in
        countries throughout North America, Europe and Asia. The Hurco 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 personnel in
        England, France, Germany, Italy, Singapore and China, which are among the
        world's principal machine tool consuming countries. During fiscal 2006, no
        distributor accounted for more than 5% of our sales and service fees.
        Approximately ---88% of the worldwide demand for computerized machine tools
        and
        computer control systems comes from outside the U.S. In fiscal 2006,
        approximately two-thirds of our revenues were from overseas customers and
        no
        single end-user of our products accounted for more than 5% of our total sales
        and service fees.
 
 The
        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,****2006**
                
                **2005**
                
                **2004**Computerized
                    Machine Tools
                
                $
                128,946
                
                $
                107,313
                
                $
                83,663Computer
                    Control Systems and Software *
                
                
                4,694
                
                
                4,129
                
                
                3,604Service
                    Parts
                
                
                10,494
                
                
                9,991
                
                
                8,696Service
                    Fees
                
                
                4,383
                
                
                4,076
                
                
                3,609Total
                
                $
                148,517
                
                $
                125,509
                
                $
                99,572
 
 *Amounts
        shown do not include CNC systems sold as an integrated component of computerized
        machine systems.
  The
        following table sets forth revenues by geographic area, based on customer
        location, for each of the past three fiscal years were (in
        thousands):
 
 **Revenues
                  by Geographic Area**
              
              **Year
                  Ended October 31****2006**
              
              **2005**
              
              **2004**United
                  States
              
              $
              50,563
              
              $
              40,666
              
              $
              30,654Germany
              
              
              54,570
              
              
              36,039
              
              
              31,206United
                  Kingdom
              
              
              17,781
              
              
              11,917
              
              
              8,818Other
                  Europe
              
              
              15,383
              
              
              26,061
              
              
              20,361Total
                  Europe
              
              
              87,734
              
              
              74,017
              
              
              60,385Asia
                  and Other
              
              
              10,220
              
              
              10,826
              
              
              8,533Total
                  Foreign
              
              
              97,954
              
              
              84,843
              
              
              68,918$
              148,517
              
              $
              125,509
              
              $
              99,572
  48
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
 
 Long-lived
        tangible assets by geographic area were (in thousands):
 
 **As
                  of October 31****2006**
              
              **2005**
              
              **2004**United
                  States
              
              $
              8,308
              
              $
              8,034
              
              $
              7,458Foreign
                  countries
              
              
              2,934
              
              
              3,117
              
              
              1,489$
              11,242
              
              $
              11,151
              
              $
              8,947
 
 
 **15.**
              **RESTRUCTURING
                  EXPENSE AND OTHER EXPENSE,
                  NET**
 
 On
        November 23, 2004, we entered into a separation and release agreement with
        Roger
        J. Wolf, who retired from his position as Senior Vice President and as Chief
        Financial Officer. Under the agreement, Mr. Wolf received severance compensation
        totaling $465,000. As of October 31, 2006, all severance related to this
        agreement had been paid.
  49
  **HURCO
        COMPANIES, INC.**
 **NOTES
        TO CONSOLIDATED FINANCIAL STATEMENTS - Continued**
  **16.**
              **NEW
                  ACCOUNTING PRONOUNCEMENTS**
 
 In
        the
        first quarter of fiscal 2004 we adopted the Financial Accounting Standards
        Board
        Interpretation No. 46 (FIN 46) Consolidation of Variable Interest Entities.
        This
        Interpretation requires existing unconsolidated variable interest entities
        to be
        consolidated by their primary beneficiaries if the entities do not effectively
        disperse risks among parties. The adoption of this standard did not have
        an
        effect on the consolidated financial statements.
 
 In
        July
        2006, the FASB released Interpretation No. 48 “Accounting for Uncertainty in
        Income Taxes,” an interpretation of FASB Statement No.109 which clarifies the
        accounting and reporting for uncertainties in income taxes. The interpretation
        prescribes a recognition threshold and measurement attribute for the financial
        statement recognition and measurement of a tax position taken or expect to
        be
        taken in a tax return. FIN No. 48 also provides guidance on derecognition,
        classification, interest and penalties, accounting in interim periods,
        disclosure and transition. We will be required to adopt and report the impact
        of
        FIN No. 48 in the first quarter of fiscal year 2008. At the present time,
        we
        have not begun implementation and therefore cannot report the potential impact
        of implementation of FIN No. 48.
 
 In
        the
        first quarter of fiscal 2006, we adopted the Financial Accounting Standards
        Board Statement No. 123R, “Share Based Payment,” which requires companies to
        expense the value of director and employee stock options and similar awards
        for
        interim and annual periods beginning after June 15, 2005. As of November
        1, 2005
        we began applying the provisions of SFAS No. 123(R) to option grants, as
        well as
        to the nonvested portion of outstanding options granted before that date.
        The
        impact of adopting this statement is reflected in Note 8 of Notes to
        Consolidated Financial Statements.
 
 On
        November 24, 2004, the FASB issued Statement No. 151, “ Inventory Costs”, which
        amends the guidance on ARB No. 43, “Inventory Pricing” to clarify the accounting
        for abnormal amounts of idle facility expense, freight, handling costs and
        wasted material (spoilage). The Statement requires accounting for these costs
        be
        recognized as period costs and expensed in the current period regardless
        of
        whether or not they meet the criterion defined under ARB No. 43 as “abnormal.”
In addition, this Statement requires that allocation of fixed production
        overheads to the cost of inventory be based upon normal production capacities.
        The provisions in Statement 151 are effective for inventory costs incurred
        during fiscal years beginning after June 15, 2005. We adopted the provisions
        of
        this Statement during fiscal 2006 and the adoption did not have a material
        effect on the consolidated financial statements.
 
 During
        2006, the FASB released Statement No. 157, “Fair Value Measurements”, a new
        standard which provides further guidance on using fair value to measure assets
        and liabilities, the information used to measure fair value and the effect
        of
        fair value measurements on earnings. Statement 157 applies whenever other
        standards require (or permit) assets or liabilities to be measured at fair
        value, but does not expand the use of fair value in any new circumstances.
        We
        will be required to adopt and report the impact of Statement 157 in the first
        quarter of fiscal year 2008. At the present time, we have not begun
        implementation and therefore cannot report the potential impact of the
        implementation.
  50
 
 **Item
                  9.**
              **CHANGES
                  IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURES**
 
 None.
 
 **Item
                  9A.**
              **CONTROLS
                  AND PROCEDURES**
 
 We
        carried out an evaluation under the supervision and with participation of
        management, including the Chief Executive Officer and Chief Financial Officer,
        of the effectiveness of the design and operation of our disclosure controls
        and
        procedures as of October 31, 2006 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 control over financial reporting that
        occurred during the fourth quarter of the fiscal year ended October 31, 2006
        that have materially affected, or are reasonably likely to materially affect,
        our internal control over financial reporting.
  **Item
                  9B.**
              **OTHER
                  INFORMATION**
 
 On
        January 12, 2007, we entered into an employment agreement with our Chief
        Financial Officer, John G. Oblazney. A copy of the employment agreement is
        being
        filed as an exhibit to this report and is incorporated herein by
        reference.
 
 During
        fiscal 2006, the Audit Committee of the Board of Directors did not approve
        the
        engagement of our independent registered public accounting firm to perform
        any
        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.
  51
  **PART
        III**
 
 **Item
                  10.**
              **DIRECTORS
                  AND EXECUTIVE OFFICERS OF THE
                  REGISTRANT**
 
 The
        information required by this item is hereby incorporated by reference from
        the
        definitive proxy statement for our 2007 annual meeting of shareholders except
        that the information required by Item 10 regarding Executive Officers is
        included herein under a separate caption at the end of Part I.
 
 **Item
                  11.**
              **EXECUTIVE
                  COMPENSATION**
 
 The
        information required by this item is hereby incorporated by reference from
        the
        definitive proxy statement for our 2007 annual meeting of
        shareholders.
 
 **Item
                  12.**
              **SECURITY
                  OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS**
 
 Except
        for the information concerning equity compensation plans, the information
        required by this item is hereby incorporated by reference from the definitive
        proxy statement for our 2007 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, 2006, including the 1997 Stock Option
        and
        Incentive Plan and the 1990 Stock Option Plan.
 
 Plan
                  Category
              
              Number
                  of securities to be issued upon exercise of outstanding options,
                  warrants
                  and rights (a) (#)
              
              Weighted-average
                  exercise price of outstanding options, warrants and rights (b)
                  ($)
              
              Number
                  of securities remaining available for future issuance under equity
                  compensation plans (excluding securities reflected in column (a))
                  (c)
                  (#)Equity
                  compensation plans approved by security holders
              
              
              88,700
              
              $
              2.46
              
              
              341,900Equity
                  compensation plans not approved by security holders
              
              
              --
              
              
              --
              
              
              --Total
              
              
              88,700
              
              $
              2.46
              
              
              341,900
 
 As
        of
        October 31, 2006, there were no outstanding non-qualified options that had
        been
        granted outside of the 1990 and 1997 plans to current members of the Board
        of
        Directors.
 
 **Item
                  13.**
              **CERTAIN
                  RELATIONSHIPS AND RELATED
                  TRANSACTIONS**
 
 The
        information required by this item is hereby incorporated by reference from
        the
        definitive proxy statement for our 2007 annual meeting of
        shareholders.
  52
  **Item
                  14.**
              **PRINCIPAL
                  ACCOUNTANT FEES AND
                  SERVICES**
 
 The
        information required by this item is hereby incorporated by reference from
        the
        definitive proxy statement for our 2007 annual meeting of
        shareholders.
 
 **PART
        IV**
 
 **Item
                  15.**
              **EXHIBITS
                  AND FINANCIAL STATEMENT SCHEDULES**
 
 (a)
              1.
              Financial
                  Statements.
                  The following consolidated financial statements of Registrant are
                  included
                  herein under Item 8 of Part II:PageReport
                  of Independent Registered Public Accounting Firm -Crowe Chizek
                  and Company
                  LLC
              
              26Report
                  of Independent Registered Public Accounting Firm - PricewaterhouseCoopers
                  LLP
              
              28Consolidated
                  Statements of Income - years endedOctober
                  31, 2006, 2005 and 2004
              
              29Consolidated
                  Balance Sheets - as of October 31, 2006 and 2005
              
              30Consolidated
                  Statements of Cash Flows - yearsended
                  October 31, 2006, 2005 and 2004
              
              31Consolidated
                  Statements of Changes in Shareholders’ Equity -years
                  ended October 31, 2006, 2005 and 2004
              
              32Notes
                  to Consolidated Financial Statements
              
              33
  2.
              Financial
                  Statement Schedule.
                  The following financial statement schedule is included in this
                  Item.PageSchedule
                  II - Valuation and Qualifying Accounts and Reserves
              
              55All
                  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)
              ExhibitsExhibits
                  being filed with this Form 10-K or incorporated herein by reference
                  are
                  listed on pages 56 and 57.
  53
  **Schedule
        II - Valuation and Qualifying Accounts and Reserves**
 **for
        the years ended October 31, 2006, 2005, and 2004**
 (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, 2006
              
              $
              842
              
              $
              (227
              )
              
              --
              
              $
              (20
              )
              
              (1)
              
              $
              635October
                  31, 2005
              
              $
              723
              
              $
              169
              
              
              --
              
              $
              50
              
              
              (2)
              
              $
              842October
                  31, 2004
              
              $
              630
              
              $
              286
              
              $
              --
              
              $
              193
              
              
              (3)
              
              $
              723Accrued
                  warranty expenses For the year ended:October
                  31, 2006
              
              $
              1,618
              
              $
              2,201
              
              
              --
              
              $
              1,893
              
              
              
              
              $
              1,926October
                  31, 2005
              
              $
              1,750
              
              $
              1,646
              
              
              --
              
              $
              1,778
              
              
              
              
              $
              1,618October
                  31, 2004
              
              $
              1,016
              
              $
              2,323
              
              
              --
              
              $
              1,589
              
              
              
              
              $
              1,750
  (1)
              Receivable
                  write-offs of $5,000, net of cash recoveries on accounts previously
                  written off of $25,000.
  (2)
              Receivable
                  write-offs of $50,000, net of cash recoveries on accounts previously
                  written off of $0.
  (3)
              Receivable
                  write-offs of $193,000, net of cash recoveries on accounts previously
                  written off of $0.
  54
  **EXHIBITS
        INDEX**
 
 Exhibits
        Filed .
        The
        following exhibits are filed with this report:
 
 10.1
              Employment
                  Agreement between the Registrant and John G. Oblazney dated January
                  12,
                  2007.11
              Statement
                  re: computation of per share earnings.21
              Subsidiaries
                  of the Registrant.23.1
              Consent
                  of Independent Registered Public Accounting Firm, Crowe Chizek
                  and Company
                  LLC.23.2
              Consent
                  of Pricewaterhouse Coopers LLP.31.1
              Certification
                  by the Chief Executive Officer, pursuant to Rule 13a-15(b) under
                  the
                  Securities and Exchange Act of 1934, as amended.31.2
              Certification
                  by the Chief Financial Officer, pursuant to Rule 13a-15(b) under
                  the
                  Securities and Exchange Act of 1934, as amended.32.1
              Certification
                  by the Chief 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 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 September
                  27,
                  2006, incorporated by reference as Exhibit 3.1 to the Registrant’s Form
                  8-K filed on September 27, 2006.10.2
              First
                  Amendment to the Third Amended and Restated Credit Agreement between
                  the
                  Registrant and Bank One, NA dated as of October 26, 2004, incorporated
                  by
                  reference as Exhibit 10.1 to the Registrant’s Form 8-K filed on November
                  1, 2004.10.3
              Revolving
                  Credit Facility and Overdraft Facility - Supplemental Facility
                  Agreement
                  between Hurco Europe Limited and Bank One, NA dated October 26,
                  2004,
                  incorporated by reference as Exhibit 10.2 to the Registrant’s Form 8-K
                  filed on November 1, 2004.10.4
              Employment
                  Agreement between the Registrant and James D. Fabris dated November
                  18,
                  1997, incorporated by reference as Exhibit 10.15 to the Registrant's
                  Report on Form 10-Q for the quarter ended January 31,
                  1998.10.5
              Mortgage
                  dated April 30, 2002, between the Registrant and American Equity
                  Investment Life Insurance Company incorporated by reference as
                  Exhibit
                  10.2 to the Registrant’s Report on Form 10-Q for the quarter ended April
                  30, 2002.10.6
              Employment
                  Agreement between the Registrant and Michael Doar dated November
                  13, 2001,
                  incorporated by reference as Exhibit 10.2 to the Registrant’s Report on
                  Form 10-Q dated January 31,
                  2002.
  55
 
 10.7*
              Amended
                  1997 Stock Option and Incentive Plan incorporated by reference
                  as Exhibit
                  10 to the Registrant’s Report on Form 10-Q filed for the quarter ended
                  July 31, 2005.10.8*
              Form
                  of option agreement relating to the Amended 1997 Stock Option and
                  Incentive Plan incorporated by reference as Exhibit 10.1 to the
                  Registrant’s Annual Report on Form 10-K dated October 31,
                  2004.
 
 *
              The
                  indicated exhibit is a management contract, compensatory plan or
                  arrangement required to be listed by Item 601 of Regulation S-K.
  56
  **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 16th day of January
        2007.
 
 HURCO
                COMPANIES, INC.By:
              /s/
                  John G. OblazneyJohn
                  G. OblazneyVice-President,
                  Secretary,Treasurer
                  andChief
                  Financial Officer
  57
  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
                  16, 2007Michael
                  Doar, Chairman of the Board, Chief Executive Officer and Director
                  of Hurco
                  Companies, Inc.(Principal
                  Executive Officer)/s/
                  John G. Oblazney
              
              January
                  16, 2007John
                  G. OblazneyVice-President,
                  Secretary, Treasurer and Chief Financial Officer of Hurco Companies,
                  Inc.(Principal
                  Financial Officer)/s/
                  Sonja K. McClelland
              
              January
                  16, 2007Sonja
                  K. McClellandCorporate
                  Controller, Assistant Secretary of Hurco Companies, Inc.(Principal
                  Accounting Officer)
   /s/
                  Stephen H. Cooper
              
              January
                  16, 2007Stephen
                  H. Cooper, Director/s/
                  Robert W. Cruickshank
              
              January
                  16, 2007Robert
                  W. Cruickshank, Director/s/
                  Michael P. MazzaMichael
                  P. Mazza, Director
              
              January
                  16, 2007/s/
                  Richard T. Niner
              
              January
                  16, 2007Richard
                  T. Niner, Director/s/
                  O. Curtis Noel
              
              January
                  16, 2007O.
                  Curtis Noel, Director/s/
                  Charlie Rentschler
              
              January
                  16, 2007Charlie
                  Rentschler, Director/s/
                  Gerald V. Roch
              
              January
                  16, 2007Gerald
                  V. Roch, Director






58