UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-K


(Mark
One)




x
            Annual
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the fiscal year ended October 31, 2008
  or


o
            Transition
      report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934 for the transition period from _________ to
  _________.





Commission
File No. 0-9143


HURCO
COMPANIES, INC.


(Exact
name of registrant as specified in its charter)


Indiana
                  35-1150732(State
      or other jurisdiction of
                  (I.R.S.
      Employer Identification Number)incorporation
      or organization)One
      Technology WayIndianapolis, Indiana
                  46268(Address
      of principal executive offices)
                  (Zip
      code)





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




Securities
      registered pursuant to Section 12(b) of the Act:
                        NoneSecurities
      registered pursuant to Section 12(g) of the Act:
                        Common Stock, No Par
  Value(Title
      of Class)


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


Yes o  No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section
15(d).


o 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.


x o




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 o
              Accelerated filer
      x
              Non-accelerated
      filer o
              Smaller Reporting
      Company o(Do not check if a
      smaller reporting company)


Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act).


o x


The
aggregate market value of the registrant’s voting stock held by non-affiliates
as of April 30, 2008 (the last day of our most recently completed second
quarter) was $294,011,000.





The
number of shares of the registrant’s common stock outstanding as of January 7,
2009 was 6,420,851.





DOCUMENTS
INCORPORATED BY REFERENCE: Portions of the registrant’s Proxy Statement for its
2009 Annual Meeting of Shareholders (Part III).









Disclosure Concerning
Forward-looking Statements





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




PART I





Item1.BUSINESS





General





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





Since our
founding in 1968, we have been a leader in the introduction of interactive
computer control systems that automate manufacturing processes and improve
productivity in the metal parts manufacturing industry. Hurco pioneered the
application of microprocessor technology and conversational programming software
for use in 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 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 subsidiaries are located in Mississauga, Canada;
Shanghai, China; High Wycombe, England; Paris, France; Munich, Germany; Chennai,
India; Milan, Italy; and Singapore, along with manufacturing operations in
Taiwan and China. Products are sold through independent agents and distributors
in North America, Europe and Asia.  We also have direct sales forces
in Canada, France, Germany, Italy, Singapore and the United
Kingdom.  Distribution facilities are located in Los Angeles,
California, Venlo, the Netherlands, and Singapore. In August, we held the
official grand opening ceremony for our newest sales, application engineering
and service subsidiary, Hurco India, Ltd. The event was held at our Technical
Center in Chennai and was an opportunity to illustrate the capabilities of Hurco
technology and machining centers to this growing market. Hurco machine tools are
advantageous to customers in India because the user-friendly control and
conversational programming enables machine shop owners to hire workers with less
technical skill sets.





Our
strategy is to design, manufacture and sell to the global metalworking market a
comprehensive line of computerized machine tools that incorporate our
proprietary, interactive computer control technology.  Our technology
is designed to enhance the machine tool user's productivity through ease of
operation and higher levels of machine performance (speed, accuracy and surface
finish quality).  We use an open system software architecture that
permits our computer control systems and software to be produced and employed
using standard PC hardware. We have emphasized a “user-friendly” design that
employs both interactive conversational and graphical programming software. Each
year we have expanded our product offering to meet customer needs, which has led
us to design and manufacture more complex machining centers with advanced
capabilities.  We bring a disciplined approach to strategically enter
new geographic markets, as appropriate.  Our introduction of new,
technologically advanced products, combined with our expansion into new markets,
has resulted in our significant growth over the last several
years.  In addition to this strong organic growth, we have the
capability to pursue opportunistic acquisitions that are consistent with our
strategic focus on expanding our product line and entering new
markets.  At present, we are not engaged in negotiations, and have no
current plans, for any acquisitions.




1




Industry




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




Although,
industry association data for the U.S. machine tool market is available, that
market accounts for only 9% of worldwide consumption.  Reports available
for the U.S. machine tool market include:




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




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




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




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




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




Products




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




2





The
following table sets forth the contribution of each of our product groups to our
total sales and service fees during each of the past three fiscal
years:




Net
      Sales and Service Fees by Product Category(Dollars
      in thousands)
                  
                  Year
      ended October 31,2008
                  
                  
                  2007
                  
                  
                  2006Continuing
      Products and ServicesComputerized
      Machine Tools
                  
                  $
                  199,238
                  
                  
                  
                  89.0
                  %
                  
                  $
                  165,832
                  
                  
                  
                  88.2
                  %
                  
                  $
                  128,946
                  
                  
                  
                  86.8
                  %Computer
      Control Systems and Software *
                  
                  
                  5,678
                  
                  
                  
                  2.5
                  %
                  
                  
                  5,291
                  
                  
                  
                  2.8
                  %
                  
                  
                  4,694
                  
                  
                  
                  3.2
                  %Service
      Parts
                  
                  
                  13,240
                  
                  
                  
                  5.9
                  %
                  
                  
                  12,096
                  
                  
                  
                  6.4
                  %
                  
                  
                  10,494
                  
                  
                  
                  7.0
                  %Service
      Fees
                  
                  
                  5,838
                  
                  
                  
                  2.6
                  %
                  
                  
                  4,828
                  
                  
                  
                  2.6
                  %
                  
                  
                  4,383
                  
                  
                  
                  3.0
                  %Total
                  
                  $
                  223,994
                  
                  
                  
                  100
                  %
                  
                  $
                  188,047
                  
                  
                  
                  100
                  %
                  
                  $
                  148,517
                  
                  
                  
                  100
                  %
  *Amounts
shown do not include computer control systems sold as integrated components of
computerized machine tools.





Computerized Machine Tools –
Machining andTurningCenters





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





In the
intensely competitive global manufacturing marketplace, increases in
productivity are being derived from control and software technologies. Companies
using computer controlled machine tools are better able to:





·
            maximize
      the efficiency of their human
resources


·
            continue
      to expand their capability to make more advanced and complex parts from a
      wide range of materials using multiple
processes


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


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





Our
Windows®** based
control facilitates our ability to meet these customer needs. 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-making
programs without incurring the incremental overhead of specialized computer
aided design and computer aided manufacturing programmers. With the ability to
transfer most computer aided design data directly into a Hurco program,
programming time becomes minutes instead of hours.





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





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




3




VM
Product Line





The VM
product line consists of moderately priced vertical machining centers for the
entry-level market. Their design premise of a machining center with a large work
cube and a small footprint optimizes the use of available floor space. The VM
line consists of five models in three sizes with X-axis (horizontal) travels of
26, 40, and 50 inches. The base prices of the VM machines range from $40,000 to
$80,000.





VMX
Product Line





The VMX
product line consists of higher performing vertical machining centers aimed at
manufacturers that require greater part accuracy. It is our flagship series of
machining centers. The VMX line consists of 14 models in seven sizes with X-axis
travels of 24, 30, 40, 50, 60, 64, and 84 inches. The base prices of VMX
machines range from $50,000 to $200,000.





Five-Axis
Product Line





The
five-axis product line is targeted at manufacturers seeking to produce complex
multi-sided parts in a single setup. Machines in this product line can yield
significant productivity gains for operations that previously processed each
side of a part individually.  Due to market demand for increased
processing efficiency, we focused on five-axis technology in 2008 and introduced
four new five-axis machining centers in September. In total, we now have six
Hurco five-axis machining centers to offer customers. The base prices of the
five-axis machines range from $100,000 to $180,000.





TM/TMM
Product Line





Since its
introduction in fiscal 2005, we have continued to expand the TM turning center
(horizontal slant-bed lathe) product line. The TM series is designed for
entry-level job shops and contract manufacturers seeking efficient processing of
small to medium lot sizes. The TM is offered in 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 motorized
tooling on the lathe turret. Designated as the TMM product line, these machines
allow our customers to complete a number of secondary milling, drilling and
tapping operations, while the part is still held in the chuck after the turning
operations are complete. This ability to “mill/turn” or “multi-task” on the same
machine in a single setup can provide significant productivity gains. Two TMM
models with this capability are being offered.  The base prices of the
TM/TMM machines range from $40,000 to $85,000.





TMX
Product Line





Introduced
in September 2008, the TMX product line consists of high performance turning
centers. There are three TMX models, all with chucks of 8 inches, but two of the
models are equipped with an additional axis and motorized live tooling, and one
of those models has an additional spindle. The base prices of TMX turning
centers range from $80,000 to $180,000.





Specialty
Product Lines





Two new
specialty products were introduced in September 2008: the dual-column machining
center and the zone machining center. Both of these machines are designed to
facilitate production of large parts and molds. The horizontal machining center
is also included in this category as it facilitates efficient and accurate
machining of complex production parts. The base prices of these machines range
from $235,000 to $350,000.





*Pentium® is a
registered trademark of Intel Corporation.


**Windows® 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.





Software
Products





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





Our Swept
Surface software option simplifies programming of 3D contours and significantly
reduces programming time. SelectSurface Finish Quality (SFQ) lets the customer
control surface finish quality and run time in one easy step.





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





UltiNetÔ 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.





UltiPocketTM
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.





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





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




5




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.





Manufacturing





Our
computerized metal cutting machine tools are manufactured to our specifications
primarily by our wholly owned subsidiary in Taiwan, Hurco Manufacturing Limited
(HML).  This subsidiary has increased our overall capacity and reduced
our dependence on other manufacturers.  HML conducts final assembly
operations and is supported by a network of contract suppliers of components and
sub-assemblies who manufacture components for our products in accordance with
our proprietary designs, quality standards and cost specifications. 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.  In 2006, we
opened a new manufacturing facility in Ningbo, China, that focuses on the
machining of castings and components to support HML’s production 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 Hurco
Automation, Ltd., a Taiwanese company in which we have a 35% ownership
interest.  This company produces all of our computer control systems
to our specifications, sources industry standard computer components and our
proprietary parts, performs final assembly and conducts test
operations.





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





Marketing and
Distribution





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





Approximately
91% of the worldwide demand for computerized machine tools and computer control
systems is outside the United States.  In fiscal 2008, more than 75%
of our revenues were from overseas customers.  No single end-user or
distributor of our products accounted for more than 5% of our total sales and
service fees.





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




6




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





Demand





We
believe 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


·
            the
      declining supply of skilled
machinists





Demand
for our products is also highly dependent upon economic conditions and the
general level of business confidence, as well as such factors as production
capacity utilization and changes in governmental policies regarding tariffs,
corporate taxation, and other investment incentives.  By marketing and
distributing our products on a worldwide basis, we seek to reduce the impact of
adverse changes in economic conditions that might occur in a particular
geographic region.  For additional information regarding current
economic conditions and their impact on our results of operation and financial
condition, refer to Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.





Competition





We
compete with many other machine tool producers in the United States and foreign
countries.  Most of our competitors are larger and have greater
financial resources than our company.  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 MAG
Industrial Automation Systems.  There are also a large number of other
foreign manufacturers, including Okuma Machinery Works Ltd., Mori Seiki Co.,
Ltd., Mazak and Matsuura Machinery Corporation.





We strive
to compete effectively by incorporating into our products unique, patented
software and other proprietary features that offer enhanced productivity,
technological capabilities and ease of use.  We offer our products in
a range of prices and capabilities to target a broad potential
market.  We also believe that our competitiveness is aided by our
reputation for reliability and quality, our strong international sales and
distribution organization, and our extensive customer service
organization.





Intellectual
Property





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




7




Research and
Development




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




Fiscal Year
                
                Non-capitalized
                  research
      and
                  development
                
                
                Capitalized
                  software
                  development2008
                
                $
                3,000
                
                
                $
                9002007
                
                
                3,100
                
                
                
                1,2002006
                
                
                2,500
                
                
                
                2,100


Employees





We had
approximately 430 full-time employees at the end of fiscal 2008, none of whom
were covered by a collective-bargaining agreement or represented by a
union.  We have experienced no employee-generated work stoppages or
disruptions and we consider our employee relations to be
satisfactory.





Geographic
Areas





Financial
information about geographic areas in which we sell our products is set forth in
Note 15 of Notes to Consolidated Financial Statements.





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





Backlog





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





Availability of Reports and
Other Information





Our
website 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





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





The current
global economic crisis is adversely affecting overall demand and our customers’
ability to purchase our products and services.





The
current global economic crisis has severely impacted banks and other lenders,
limiting the ability of many businesses to access the credit
markets.  As a result of the credit crisis and the overall decline in
economic activity, the ability of our customers to purchase our products and
services has been adversely affected, the initial impact of which was reflected
in our results for the fourth quarter of fiscal 2008.  An overall
decline in economic activity may also have an adverse affect on our customers
and distributors ability to pay us for the products they purchased.  A
prolonged recession or further decline in the global economy will materially
adversely affect our results of operations and financial
condition.  For additional information regarding current economic
conditions and their impact on our results of operations and financial
condition, refer to Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.




8


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





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





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





During
the fiscal year ended October 31, 2008, more than 75% of our revenues were
derived from sales to customers located outside the United States.  We
also have manufacturing facilities and assets located outside of the United
States.  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


·
            tax
      implications from repatriation of
funds





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, the Netherlands, and
Singapore.  Changes in customs requirements, as a result of national
security or other constraints put upon these ports, may also have an adverse
impact on our results of operations.





We
depend on limited sources for our products.





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




9




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





Our
international sales divisions generate more than 75% 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 for 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 Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations and Note 1 of Notes to
Consolidated Financial Statements for the impact of translation of foreign
currencies and hedging on 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, customers’ requirements and competitors’ product offerings and to
develop and introduce new and enhanced products on a timely basis that are
accepted in the market, will be significant factors in maintaining and improving
our competitive position and growth prospects.  If the technologies or
standards used in our products become obsolete or fail to gain widespread
commercial acceptance, our business would be materially adversely affected.
Although we believe that we have the technological capabilities to remain
competitive, developments by others may render our products or technologies
obsolete or noncompetitive.





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





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




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 can change 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 results
of operations.





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





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




10




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





Although
we are not currently engaged in negotiations, and have no current plans for any
acquisitions, we may seek to expand our product offerings or the markets we
serve by acquiring other companies, product lines, technologies and
personnel.  Acquisitions involve numerous risks, including the
following:





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


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


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


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


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


·
            insufficient
      revenues to offset increased expenses associated with
      acquisitions


·
            the
      potential loss of key employees of the acquired
  companies





Acquisitions
may also cause us to:





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


·
            assume
      liabilities


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


·
            incur
      amortization expenses related to certain intangible
  assets


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


·
            become
      subject to litigation





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





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





Intangible
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.  Intangible assets and our investment
accounted for under the equity method are required to be tested for impairment
at least annually.  We could be required to record a significant
charge to earnings in our financial statements for the period in which any
impairment of these assets is determined, which would adversely affect our
results of operations for that period.





11




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





Our
future success depends in part upon our ability to protect our intellectual
property.  We rely principally on nondisclosure agreements, other
contractual arrangements, trade secret law, trademark 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.




12




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 and engineering, product testing, sales and
      marketing, application engineering and customer serviceLos
      Angeles, California
                                                                                              
                                                                                              
                                                                                              13,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Warehouse,
      distribution, sales, application engineering and customer
      serviceDexter,
      Michigan
                                                                                              
                                                                                              
                                                                                              3,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Sales,
      design engineering, product testing and customer
serviceMississauga,
      Canada
                                                                                              
                                                                                              
                                                                                              3,600
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Sales,
      application engineering andcustomer
      serviceHigh
      Wycombe, England
                                                                                              
                                                                                              
                                                                                              12,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Sales,
      application engineering andcustomer
      serviceParis,
      France
                                                                                              
                                                                                              
                                                                                              9,700
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Sales,
      application engineering andcustomer
      serviceMunich,
      and Rodermark, Germany
                                                                                              
                                                                                              
                                                                                              26,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Sales,
      application engineering andcustomer
      serviceMilan
      and Venice, Italy
                                                                                              
                                                                                              
                                                                                              13,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Sales,
      application engineering andcustomer
      serviceSingapore
                                                                                              
                                                                                              
                                                                                              9,300
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Sales,
      application engineering andcustomer
      serviceShanghai,
      China
                                                                                              
                                                                                              
                                                                                              8,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Sales,
      application engineering andcustomer
      serviceGuangzhou,
      China
                                                                                              
                                                                                              
                                                                                              2,400
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Sales,
      application engineering andcustomer
      serviceChennai,
      India
                                                                                              
                                                                                              
                                                                                              5,400
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Sales,
      application engineering andcustomer
      serviceLiegnitz,
      Poland
                                                                                              
                                                                                              
                                                                                              2,900
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Sales,
      application engineering andcustomer
      serviceTaichung,
      Taiwan
                                                                                              
                                                                                              
                                                                                              221,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              ManufacturingNingbo,
      China
                                                                                              
                                                                                              
                                                                                              34,000
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              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 September 2009 to May
2017.  We believe that all of our facilities are well maintained and
are adequate for our needs now and in the foreseeable future.  We do
not believe that we would experience any difficulty in replacing any of the
present facilities if any of our leases were not renewed at
expiration.




13




Item 3.LEGAL
PROCEEDINGS




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





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





None.





Executive Officers of the
Registrant





Executive
officers are elected each year by the Board of Directors at the first board
meeting following the Annual Meeting of Shareholders to serve during the ensuing
year and until their respective successors are elected and
qualified.  There are no family relationships between any of our
executive officers or between any of them and any of the members of the Board of
Directors.





The
following information sets forth as of October 31, 2008, 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
                
                53
                
                Chairman of the Board
      and Chief Executive OfficerJames
      D. Fabris
                
                57
                
                President
      and Chief Operating OfficerJohn
      G. Oblazney
                
                40
                
                Vice
      President, Secretary, Treasurer and Chief Financial
  OfficerSonja
      K. McClelland
                
                37
                
                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.  Prior to joining us, Mr. Oblazney served
as the Chief Financial Officer of Carrier Corporation’s Light Commercial
Business, a division of United Technologies Corporation, since December 2005.
Prior to that, Mr. Oblazney served in various other financial positions with
Carrier Corporation from 2000 to 2005.  Prior to joining Carrier
Corporation, Mr. Oblazney was employed for six years with Cooper Industries and
employed three years by an international public accounting firm.





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.




14




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.





2008
                  
                  
                  2007Fiscal Quarter Ended:
                  
                  High
                  
                  
                  Low
                  
                  
                  High
                  
                  
                  LowJanuary
      31
                  
                  $
                  58.68
                  
                  
                  $
                  30.24
                  
                  
                  $
                  33.18
                  
                  
                  $
                  24.61April
      30
                  
                  
                  52.12
                  
                  
                  
                  33.41
                  
                  
                  
                  47.86
                  
                  
                  
                  33.07July
      31
                  
                  
                  49.30
                  
                  
                  
                  23.11
                  
                  
                  
                  56.28
                  
                  
                  
                  39.12October
      31
                  
                  
                  38.24
                  
                  
                  
                  16.92
                  
                  
                  
                  60.44
                  
                  
                  
                  39.77





At
January 7, 2009, the closing price of our common stock on the Nasdaq Global
Select Market was $14.76.





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





There
were186 holders of record of our common stock as of January 7,
2009.





During
the period covered by this report, we did not sell any equity securities that
were not registered under the Securities Act of 1933, as
amended.




The
disclosure under the caption “Equity Compensation Plan Information” is included
in Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.




15




Item 6.SELECTED FINANCIAL
DATA







The
Selected Financial Data presented below has been derived from our consolidated
financial statements for the years indicated and should be read in conjunction
with the consolidated financial statements and related notes set forth elsewhere
herein and Management’s Discussion and Analysis of Financial Condition and
Results of Operations.





Year
      Ended October 312008
                            
                            
                            2007
                            
                            
                            2006
                            
                            
                            2005
                            
                            
                            2004Statement
      of Operations Data:
                            
                            (Dollars
      in thousands, except per share amounts)Sales and service
      fees
                            
                            $
                            223,994
                            
                            
                            $
                            188,047
                            
                            
                            $
                            148,517
                            
                            
                            $
                            125,509
                            
                            
                            $
                            99,572Gross
      profit
                            
                            
                            82,617
                            
                            
                            
                            71,082
                            
                            
                            
                            53,325
                            
                            
                            
                            42,558
                            
                            
                            
                            30,298Selling, general
      andadministrative
      expenses
                            
                            
                            46,811
                            
                            
                            
                            40,124
                            
                            
                            
                            30,697
                            
                            
                            
                            26,057
                            
                            
                            
                            21,401Restructuring expense
      (credit)And
      other expense, net
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            --
                            
                            
                            
                            465Operating
      income
                            
                            
                            35,806
                            
                            
                            
                            30,958
                            
                            
                            
                            22,628
                            
                            
                            
                            16,501
                            
                            
                            
                            8,432Other income
      (expense)*
                            
                            
                            (1,640
                            )
                            
                            
                            1,742
                            
                            
                            
                            745
                            
                            
                            
                            (64
                            )
                            
                            
                            (396
                            )Net
      income
                            
                            
                            22,520
                            
                            
                            
                            20,889
                            
                            
                            
                            15,479
                            
                            
                            
                            16,443
                            
                            
                            
                            6,269Earnings per
      commonshare-diluted
                            
                            
                            3.49
                            
                            
                            
                            3.24
                            
                            
                            
                            2.42
                            
                            
                            
                            2.60
                            
                            
                            
                            1.04Weighted average
      commonshares
      outstanding-diluted
                            
                            
                            6,444
                            
                            
                            
                            6,440
                            
                            
                            
                            6,397
                            
                            
                            
                            6,336
                            
                            
                            
                            6,026




As
      of October 312008
                
                
                2007
                
                
                2006
                
                
                2005
                
                
                2004Balance
      Sheet Data:
                
                (Dollars
      in thousands)Current assets*
                
                $
                151,312
                
                
                $
                139,265
                
                
                $
                103,434
                
                
                $
                73,818
                
                
                $
                56,472Current
liabilities
                
                
                51,129
                
                
                
                63,215
                
                
                
                44,340
                
                
                
                30,761
                
                
                
                30,125Working capital*
                
                
                100,183
                
                
                
                76,050
                
                
                
                59,094
                
                
                
                43,057
                
                
                
                26,347Current ratio
                
                
                3.0
                
                
                
                2.2
                
                
                
                2.3
                
                
                
                2.4
                
                
                
                1.9Total assets*
                
                
                177,444
                
                
                
                163,781
                
                
                
                125,545
                
                
                
                94,114
                
                
                
                73,446Non-current
      liabilities*
                
                
                2,838
                
                
                
                2,963
                
                
                
                5,830
                
                
                
                4,409
                
                
                
                4,866Total debt
                
                
                --
                
                
                
                --
                
                
                
                4,010
                
                
                
                4,136
                
                
                
                4,600Shareholders’
    equity
                
                
                123,477
                
                
                
                97,603
                
                
                
                75,375
                
                
                
                58,944
                
                
                
                38,455




*Certain information for prior year has
been reclassified to reflect current year presentation.




16




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





EXECUTIVE
OVERVIEW





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





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





The
primary drivers of our operational performance in the past three years have been
improved worldwide demand for our products, the increasing acceptance of our
expanded product line and our success in selling and manufacturing outside of
the United States.





The
market for machine tools is an international market.  We have both
significant foreign sales and manufacturing operations.  During fiscal
2008, more than 75% of our revenues were attributable to customers located
abroad.  The percentage of revenues to customers located abroad has
increased during the last fiscal year due in part to deterioration of the North
American market for machine tool products, as well as the effect of a weaker
U.S. Dollar when translating foreign sales to U.S. Dollars for financial
reporting purposes.  We sell our products through more than 100
independent agents and distributors in countries throughout North America,
Europe and Asia.  We also have our own direct sales and service
organizations in Canada, France, Germany, Italy, Singapore and the United
Kingdom.  Our computerized metal cutting machine tools are
manufactured in Taiwan to our specifications by our wholly owned subsidiary,
Hurco Manufacturing Limited (HML).





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 exchange rates prevailing during the
period covered by those financial statements), 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.





We
experienced changes in material costs from inflation in fiscal 2008, which
caused our gross margin to decline.  While some material costs have
recently declined, our production cycle of approximately six months requires us
to establish material costs at the time a purchase order is accepted, when costs
may have been higher.




17




Government
sources have confirmed that the U.S. economy has been in a recession since
December 2007.  We first experienced a decline in sales orders in our
North American market during the first quarter of fiscal 2008.  The
deterioration in that market continued and became more severe in subsequent
quarters.  During the second half of calendar year 2008, the recession
became global in scope, impacting every market we serve and significantly
affecting our sales and orders during the fourth fiscal quarter.  Our
sales in the fourth quarter of fiscal 2008 were 5.3% lower than in the
corresponding quarter of fiscal 2007 and, most significantly, 17.2% below those
of the third quarter of 2008.  Similarly, our new orders in the fourth
quarter of fiscal 2008 declined 27.0% from their level in the corresponding
quarter of fiscal 2007 and 23.7% below the third quarter of fiscal
2008.  Economic conditions have continued to worsen since the
beginning of fiscal 2009.  Many economists have indicated that the
current deterioration in the global markets will remain or become more severe
and continue for a prolonged period of time.





During
the fourth quarter, we implemented various initiatives to reduce expenses while
staying committed to our strategic plan of product innovation and penetration of
developing markets.   We have also taken steps to reduce our
inventories to reflect the decline in customer demand.  Since our
production lead time is approximately six months, the impact of reduced
production levels on our inventories may take several quarters to be fully
realized.





We
believe that, notwithstanding the severity of the current economic crisis, our
company remains fundamentally stable.  We have a broad product line
due to recent new product introductions, no outstanding debt and a strong cash
position.





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 our worldwide
sales and service fees and the year-to-year percentage changes in the dollar
amounts of those items.





Percentage
      of Revenues
                  
                  
                  Year-to-Year
      % Change2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  Increase
      (Decrease)’08
      vs. ’07
                  
                  
                  ’07
      vs. ’06Sales
      and service fees
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  19.1
                  %
                  
                  
                  26.6
                  %Gross
      profit
                  
                  
                  36.9
                  %
                  
                  
                  37.8
                  %
                  
                  
                  35.9
                  %
                  
                  
                  16.2
                  %
                  
                  
                  33.3
                  %Selling,
      general andadministrative
      expenses
                  
                  
                  20.9
                  %
                  
                  
                  21.3
                  %
                  
                  
                  20.7
                  %
                  
                  
                  16.7
                  %
                  
                  
                  30.7
                  %Operating
      income
                  
                  
                  16.0
                  %
                  
                  
                  16.5
                  %
                  
                  
                  15.2
                  %
                  
                  
                  15.7
                  %
                  
                  
                  36.8
                  %Other
      income (expense)*
                  
                  
                  (0.7
                  %)
                  
                  
                  0.9
                  %
                  
                  
                  0.5
                  %
                  
                  
                  (194.1
                  %)
                  
                  
                  133.8
                  %Net
      income
                  
                  
                  10.1
                  %
                  
                  
                  11.1
                  %
                  
                  
                  10.4
                  %
                  
                  
                  7.8
                  %
                  
                  
                  35.0
                  %




*Certain
information for prior years has been reclassified to reflect current year
presentation.





Fiscal 2008 Compared to
Fiscal 2007





Sales and Service Fees.Notwithstanding the severe decline in the fourth quarter of fiscal 2008,
annual sales and service fees were the highest in our 40-year history, totaling
$224.0 million, an increase of $35.9 million, or 19.1%, over fiscal
2007.  Of this increase, $22.7 million was attributable to operational
growth and approximately $13.2 million was due to the favorable effect of a
weakening U.S. Dollar on currency translation.  Computerized machine
tool sales, which also were the highest in our history, totaled $199.2 million,
an increase of 20.1% from the $165.8 million recorded in 2007, primarily driven
by strong customer demand in European markets during the first nine months of
the fiscal year, particularly for our higher end VMX product line.




18




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, 2008 and 2007 (in thousands):





October
      31,
                            
                            
                            Increase
      (Decrease)2008
                            
                            
                            2007
                            
                            
                            
                            Amount
                            
                            
                            
                            %North
      America
                            
                            $
                            48,373
                            
                            
                            
                            21.6
                            %
                            
                            $
                            52,133
                            
                            
                            
                            27.7
                            %
                            
                            $
                            (3,760
                            )
                            
                            
                            (7.2
                            %)Europe
                            
                            
                            163,807
                            
                            
                            
                            73.1
                            %
                            
                            
                            125,446
                            
                            
                            
                            66.7
                            %
                            
                            
                            38,361
                            
                            
                            
                            30.6
                            %Asia
      Pacific
                            
                            
                            11,814
                            
                            
                            
                            5.3
                            %
                            
                            
                            10,468
                            
                            
                            
                            5.6
                            %
                            
                            
                            1,346
                            
                            
                            
                            12.9
                            %Total
                            
                            $
                            223,994
                            
                            
                            
                            100.0
                            %
                            
                            $
                            188,047
                            
                            
                            
                            100.0
                            %
                            
                            $
                            35,947
                            
                            
                            
                            19.1
                            %





In North
America, sales and service fees decreased 7.2% as unit volumes decreased by
14.9% primarily in the second half of the year as a result of the global
economic slowdown.  This decrease in volume was partially offset by
improved product mix.





European
sales and service fees increased by 30.6%, which includes a favorable impact due
to changing currency rates of $12.4 million, or 9.9%.  Unit sales
increased by 11.5% in fiscal 2008 compared to fiscal 2007 as a result of a
strong European market during the first three quarters of the fiscal year and
continued expansion into eastern European markets.  The remaining 9.2%
of growth in European sales and service fees was primarily derived by continued
demand for our higher end VMX product line.





Sales and
service fees in the Asia Pacific region increased by 12.9%, due to penetration
into new markets along with the favorable impact of changes due to currency
exchange rates of $778,000, or 7.4%.





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, 2008 and 2007 (in thousands):





October
      31,
                                    
                                    
                                    Increase2008
                                    
                                    
                                    2007
                                    
                                    
                                    
                                    Amount
                                    
                                    
                                    
                                    %ComputerizedMachine
      Tools
                                    
                                    $
                                    199,238
                                    
                                    
                                    
                                    88.9
                                    %
                                    
                                    $
                                    165,832
                                    
                                    
                                    
                                    88.2
                                    %
                                    
                                    $
                                    33,406
                                    
                                    
                                    
                                    20.1
                                    %Service
      Fees, Partsand
      Other
                                    
                                    
                                    24,756
                                    
                                    
                                    
                                    11.1
                                    %
                                    
                                    
                                    22,215
                                    
                                    
                                    
                                    11.8
                                    %
                                    
                                    
                                    2,541
                                    
                                    
                                    
                                    11.4
                                    %Total
                                    
                                    $
                                    223,994
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    $
                                    188,047
                                    
                                    
                                    
                                    100.0
                                    %
                                    
                                    $
                                    35,947
                                    
                                    
                                    
                                    19.1
                                    %





Sales of computerized machine tools
totaled $199.2 million in fiscal 2008, an increase of $33.4 million, or 20.1%,
primarily driven by a strong European market and continued demand for our higher
end VMX product line.





Orders and
Backlog.New order bookings in fiscal 2008, were $212.5
million, an increase of $13.6 million, or 6.8%, over the prior
year.  Orders for fiscal 2008 compared to fiscal 2007 were favorably
affected by approximately $11.7 million, or 5.9%, due to changes in currency
exchange rates.  Unit orders increased 1.1% in Europe and decreased by
18.0% and 11.5% in North America and Asia Pacific,
respectively.  These order rates were significantly impacted by an
overall fourth quarter decline in unit orders of 32.4%.  Orders
declined in all regions as our customers reacted to the sudden downturn in the
markets they serve and limitations on their own ability to access the credit
markets.  Backlog was $15.7 million at October 31, 2008, compared to
$29.4 million at October 31, 2007.  We do not believe backlog is a
useful measure of past performance or indicative of future
performance.  Backlog orders as of October 31, 2008 are expected to be
fulfilled in fiscal 2009.




19




Gross
Margin.  Gross margin for fiscal 2008 was 36.9%, a decrease
from the 37.8% margin realized in the corresponding 2007 period, reflecting the
impact of higher material costs.





Operating
Expenses.  Selling, general and administrative expenses for
fiscal 2008 increased $6.7 million, or 16.7%, from those of fiscal 2007 and
includes the unfavorable effect of currency translation of $2.2 million, or
5.6%.  The remaining increase of $4.5 million was attributable to
increased global sales and marketing expenditures, which include increased
expenses for trade shows, European agent sales commissions and marketing
expenses for expansion of sales into emerging markets.





Operating
Income.  Operating income for fiscal 2008 totaled $35.8
million, or 16.0% of sales, compared to $31.0 million, or 16.5%, of sales, in
fiscal 2007.   The increase in operating income year-over-year
primarily reflected growth in foreign sales and an improved product mix
partially offset by higher material costs and operating expenses to support
sales growth initiatives.





Other Income
(Expense).  The decrease in other income of $3.4 million for
fiscal 2008 compared to fiscal 2007 was primarily due to $2.3 million of
currency exchange losses on inter-company receivables and payables denominated
in foreign currencies, net of gains or losses on forward exchange
contracts.  Included in this decrease was approximately $220,000 of
net losses related to cash flow hedges of forecasted inter-company sales and
purchases that were de-designated as production levels steeply declined in the
fourth quarter of fiscal 2008.  Additionally, fiscal 2007 included
income from our equity investment in a Taiwan contract manufacturer, which was
sold during the fourth quarter of that year.





Provision for Income
Taxes.The effective tax rate for fiscal 2008 was 34.1%,
compared to 36.2% for the same period in the prior year.  The
reduction in the effective tax rate was primarily due to the utilization of tax
credits and tax rates of international jurisdictions that were less than U.S.
statutory rates.





Net Income.  Net
income for fiscal 2008 was $22.5 million, or $3.49 per share, which is an
increase of 7.8% over fiscal 2007 net income of $20.9 million, or $3.24 per
share.





Fiscal 2007 Compared to
Fiscal 2006





Sales and Service Fees.Sales
and service fees for fiscal 2007 were $188.0 million, an increase of $39.5
million, or 26.6%, over fiscal 2006.  Of this increase, $28.5 million
was attributable to operational growth and approximately $11.0 million was due
to the favorable effect of a weakening U.S. Dollar on currency
translation.  Computerized machine tool sales totaled $165.8 million,
an increase of 28.6% from the $128.9 million recorded in 2006, primarily driven
by strong worldwide demand for our products and an increase in the percentage of
sales attributable to higher price machines as a result of our expanded product
line.





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, 2007 and 2006 (in thousands):





October
      31,
                          
                          
                          Increase2007
                          
                          
                          2006
                          
                          
                          
                          Amount
                          
                          
                          
                          %North
      America
                          
                          $
                          52,133
                          
                          
                          
                          27.7
                          %
                          
                          $
                          50,563
                          
                          
                          
                          34.0
                          %
                          
                          $
                          1,570
                          
                          
                          
                          3.1
                          %Europe
                          
                          
                          125,446
                          
                          
                          
                          66.7
                          %
                          
                          
                          87,735
                          
                          
                          
                          59.1
                          %
                          
                          
                          37,711
                          
                          
                          
                          43.0
                          %Asia
      Pacific
                          
                          
                          10,468
                          
                          
                          
                          5.6
                          %
                          
                          
                          10,219
                          
                          
                          
                          6.9
                          %
                          
                          
                          249
                          
                          
                          
                          2.4
                          %Total
                          
                          $
                          188,047
                          
                          
                          
                          100.0
                          %
                          
                          $
                          148,517
                          
                          
                          
                          100.0
                          %
                          
                          $
                          39,530
                          
                          
                          
                          26.6
                          %





In North
America, sales and service fees increased 3.1% primarily due to improved mix as
unit sales volumes decreased by 4.7% a result of general weakening in demand for
the domestic machine tool market.




20




European
sales and service fees increased by 43.0%, which includes a favorable impact due
to changing currency rates of $10.5 million, or 11.9%.  Unit sales
increased by 28.0% in fiscal 2007 compared to fiscal 2006 as a result of a
strong European market and continued expansion into eastern European
markets.  The remaining 15.0% of growth in European sales and service
fees was primarily derived by continued demand for our higher end VMX product
line.





Sales and
service fees in the Asia Pacific region increased by 2.4%, due to increased
volume of larger higher priced machines, partially offset by a 10.1% decline in
overall unit volume.  The effect of a weaker U.S. Dollar when
translating foreign sales for financial reporting purposes had a favorable
impact of approximately $539,000, or 5.3%, on this region’s sales comparison for
the full year.





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, 2007 and 2006 (in thousands):





October
      31,
                                  
                                  
                                  Increase2007
                                  
                                  
                                  2006
                                  
                                  
                                  
                                  Amount
                                  
                                  
                                  
                                  %ComputerizedMachine
      Tools
                                  
                                  $
                                  165,832
                                  
                                  
                                  
                                  88.2
                                  %
                                  
                                  $
                                  128,946
                                  
                                  
                                  
                                  86.8
                                  %
                                  
                                  $
                                  36,886
                                  
                                  
                                  
                                  28.6
                                  %Service
      Fees, Partsand
      Other
                                  
                                  
                                  22,215
                                  
                                  
                                  
                                  11.8
                                  %
                                  
                                  
                                  19,571
                                  
                                  
                                  
                                  13.2
                                  %
                                  
                                  
                                  2,644
                                  
                                  
                                  
                                  13.5
                                  %Total
                                  
                                  $
                                  188,047
                                  
                                  
                                  
                                  100.0
                                  %
                                  
                                  $
                                  148,517
                                  
                                  
                                  
                                  100.0
                                  %
                                  
                                  $
                                  39,530
                                  
                                  
                                  
                                  26.6
                                  %





Sales of computerized machine tools
totaled $165.8 million in fiscal 2007, an increase of $36.9 million, or 28.6%,
primarily driven by a strong European market and continued demand for our higher
end VMX product line.





Orders and
Backlog.New order bookings in fiscal 2007 were $199.0
million, an increase of $44.2 million, or 28.6%, over the prior
year.  New order bookings increased by 6.1%, 43.6% and 5.2% in North
America, Europe and Asia Pacific, respectively.  Europe was the
primary contributor to the increased orders, driven by a strong market,
expansion into new markets and favorable product mix.  Unit orders
increased 26.1% in Europe and decreased by 6.7% and 10.7% in North America and
Asia Pacific, respectively.  The reduction in North America was
primarily due to a general weakening in demand for the domestic machine tool
market, while Asia Pacific orders were down slightly due to continued
development of the selling channels in China and India.  Orders for
fiscal 2007 compared to fiscal 2006 were favorably affected by approximately
$11.7 million, or 7.5%, due to changes in currency exchange
rates.  Backlog was $29.4 million at October 31, 2007, compared to
$16.1 million at October 31, 2006.  We do not believe backlog is a
useful measure of past performance or indicative of future
performance.  Backlog orders as of October 31, 2007 are expected to be
fulfilled in fiscal 2008.





Gross
Margin.  Gross margin for fiscal 2007 was 37.8%, an increase
over the 35.9% margin realized in the corresponding 2006 period, reflecting the
impact of higher sales and improved mix.





Operating
Expenses.  Selling, general and administrative expenses for
fiscal 2007 of $40.1 million increased $9.4 million, or 30.7%, from those of
fiscal 2006 and includes the unfavorable effect of currency translation of $1.5
million, or 5.0%.  The increase was attributable to a $571,000
increase in product development expenses, a $4.5 million increase in global
sales and marketing expenditures and a $4.4 million increase in general and
administrative expenses.  The increased global sales and marketing
expenditures include increased expenses for local trade shows, increased
European agent sales commissions and marketing expenses for expansion of sales
into emerging markets.  General and administrative expenses increased
primarily as a result of incentive compensation, incremental healthcare related
benefits, and increases in other miscellaneous administrative
expenses.




21




Operating
Income.  Operating income for fiscal 2007 totaled $31.0
million, or 16.5% of sales, compared to $22.6 million or 15.2% of sales, in
fiscal 2006.  The increase in operating income year-over-year
primarily reflected growth in foreign sales and service fees and improved mix
partially offset by higher operating expenses.





Other Income
(Expense).  Other income (expense), net in fiscal 2007 relates
primarily to increased income from investments in minority-owned contract
manufacturers in Taiwan accounted for under the equity method, tax deferred
income earned on investments of cash, and currency exchange gains on
inter-company receivables and payables denominated in foreign currencies, net of
gains or losses on related forward contracts.





Provision for Income
Taxes.The effective tax rate for fiscal 2007 was 36.2%,
compared to 33.0% for the same period in the prior year.  The 2006
lower effective tax rate was primarily due to a deduction generated from a
change in tax code.





Net Income.  Net
income for fiscal 2007 was $20.9 million, or $3.24 per share, which is an
increase of 35.0% over fiscal 2006 net income of $15.5 million, or $2.42 per
share.





Liquidity and Capital
Resources





At
October 31, 2008, we had cash and cash equivalents of $26.4 million compared to
$29.8 million at October 31, 2007.  Approximately 54.9% of the $26.4
million of cash and cash equivalents is denominated in U.S.
Dollars.  The remaining balances are denominated in the local
currencies of our various foreign entities and are subject to fluctuations in
currency exchange rates.





Working
capital, excluding cash and short-term debt, was $67.1 million at October 31,
2008, compared to $36.3 million at October 31, 2007.  The increase in
working capital primarily relates to increased derivative assets related to
unrealized gains on forward exchange contracts, increased accounts receivable,
increased inventory due to the recent decline in demand and the introduction of
new products, and a reduction in accounts payable as a result of the cutback in
production volume.





Capital
expenditures were $5.5 million in fiscal 2008, $4.5 million in fiscal 2007, and
$3.3 million in fiscal 2006.  Capital expenditures were primarily for
an integrated computer system, software development projects and purchases of
equipment related to expansion of our manufacturing facilities.  We
funded these expenditures with cash flow from operations.




As of
October 31, 2008, we had no debt or borrowings outstanding under any of our bank
credit facilities.




We have
an effective “shelf” registration statement on file with the SEC that allows us
to offer and sell a variety of securities, including common stock, preferred
stock, warrants, depositary shares and debt securities, up to an aggregate
amount of $200.0 million, if and when authorized by the Board of
Directors.





As of
October 31, 2008 we had $6.7 million in investments of auction rate
securities.  During December 2008, our auction rates securities were
sold at par value.





Although
we have not made any significant acquisitions in the recent past, we continue to
receive information on businesses and assets, including intellectual property
assets that are being sold.  Should attractive opportunities arise, we
believe that our earnings, cash flow from operations, borrowings under our bank
credit facilities, and the sale of securities from our shelf registration would
provide sufficient resources to finance a possible acquisition.




22




Contractual Obligations and
Commitments





The
following is a table of contractual obligations and commitments as of October
31, 2008 (all amounts in thousands):





Payments
      Due by PeriodTotal
                
                
                Less
      than
                  1
      Year
                
                
                1-3
                  Years
                
                
                3-5
                  Years
                
                
                More
      than 5
                  YearsOperating
      Leases
                
                $
                6,500
                
                
                $
                2,533
                
                
                $
                2,410
                
                
                $
                1,017
                
                
                $
                540Deferred
      Credits and Other
                
                
                782
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                782Total
                
                $
                7,282
                
                
                $
                2,533
                
                
                $
                2,410
                
                
                $
                1,017
                
                
                $
                1,332





In
addition to the contractual obligations and commitments disclosed above, we also
have a variety of other obligations for the procurement of materials and
services, none of which subject us to any material non-cancelable
commitments.  While some of these obligations arise under long-term
supply agreements, we are not committed under these agreements to accept or pay
for requirements that are not needed to meet our production needs.  We
have no material minimum purchase commitments or “take-or-pay” type agreements
or arrangements.  Unrecognized tax benefits in the amount of
approximately $613,000 have been excluded from the table above because we are
unable to determine a reasonably reliable estimate of the timing of future
payment.





We expect
capital spending in fiscal 2009 to be approximately $4.4 million, which includes
investments for capitalized software, capital equipment and costs to continue
implementation of our integrated computer system.  We will fund these
commitments with cash on hand and income from operations.





Off Balance Sheet
Arrangements





From time
to time, our subsidiaries guarantee third party payment obligations in
connection with the sale of machines to customers that use
financing.  At October 31, 2008, 56 such guarantees were outstanding
totaling approximately $1.7 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
and Estimates





Our
discussion and analysis of financial condition and results of operations is
based upon our consolidated financial statements, which have been prepared in
accordance with U.S. Generally Accepted Accounting Principles.  The
preparation of financial statements in conformity with those accounting
principles require us to make judgments and estimates that affect the amounts
reported in the consolidated financial statements and accompanying
notes.  Those judgments and estimates have a significant effect on the
financial statements because they result primarily from the need to make
estimates about the effects of matters that are inherently
uncertain.  Actual results could differ from those
estimates.  We frequently re-evaluate our judgments and estimates that
are based upon historical experience and on various other assumptions that are
believed to be reasonable under the circumstances.  We do not believe
we have any critical accounting policies or estimates.  We have
evaluated our significant accounting policies and estimates that are disclosed
in Note 1 of the Notes to Consolidated Financial Statements.




23




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, 2008 and
have not borrowed from our bank credit facilities since February
2005.  Note 5 of Notes to Consolidated Financial Statements set forth
the interest rates related to our current credit facilities.





Foreign Currency Exchange
Risk





In fiscal
2008, we derived more than 75% of our revenues, including export sales, 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 components are sourced from foreign suppliers and built to our
specifications by our wholly owned subsidiary in Taiwan.  Our
purchases are predominantly in foreign currencies and in some cases our
arrangements with these suppliers include foreign currency risk sharing
agreements, which reduce (but do not eliminate) the effects of currency
fluctuations on product costs. The predominant portion of the exchange rate risk
associated with our product purchases relates to the New Taiwan
Dollar.





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





Forward
contracts for the sale or purchase of foreign currencies as of October 31, 2008,
which are designated as cash flow hedges under FASB Statement 133, “Accounting
Standards for Derivative Instruments and Hedging Activities,” were as
follows:


Contract
      Amount at
                                  Forward
      Rates in
                                  U.S.
      DollarsForward
                                  Contracts
                                
                                Notional
      Amount
                                  in
      Foreign
                                  Currency
                                
                                
                                Weighted
                                  Avg.
                                  Forward
                                  Rate
                                
                                
                                Contract
                                  Date
                                
                                
                                October
      31,
                                  2008
                                
                                Maturity
                                  DatesSale
      Contracts:Euro
                                
                                
                                33,400,000
                                
                                
                                $
                                1.5046
                                
                                
                                $
                                52,252,730
                                
                                
                                $
                                42,500,042
                                
                                Nov
      2008-Oct 2009Sterling
                                
                                
                                4,215,000
                                
                                
                                $
                                1.9247
                                
                                
                                $
                                8,112,611
                                
                                
                                $
                                6,756,793
                                
                                Nov
      2008-Oct 2009Purchase
      Contracts:New
      Taiwan Dollar
                                
                                
                                990,000,000
                                
                                
                                
                                30.15
                                *
                                
                                $
                                32,834,950
                                
                                
                                $
                                30,266,754
                                
                                Nov
      2008-Oct
2009


*NT
Dollars per U.S. Dollar




24




Forward
contracts for the sale or purchase of foreign currencies as of October 31, 2008,
which were entered into to protect against the effects of foreign currency
fluctuations on receivables and payables and are not designated as hedges under
Statement 133 denominated in foreign currencies, were as
follows:




Contract
      Amount at
                                Forward
      Rates in
                                U.S.
      DollarsForward
                                Contracts
                              
                              Notional
      Amount
                                in
      Foreign
                                Currency
                              
                              
                              WeightedAvg.
                                Forward
                                Rate
                              
                              
                              Contract
                                Date
                              
                              
                              October
      31,
                                2008
                              
                              Maturity
                                DatesSale
      Contracts:Euro
                              
                              
                              18,403,269
                              
                              
                              $
                              1.4094
                              
                              
                              $
                              25,937,568
                              
                              
                              $
                              23,437,198
                              
                              Nov
      2008-Mar 2009Singapore
      Dollar
                              
                              
                              1,116,718
                              
                              
                              $
                              1.4139
                              
                              
                              $
                              789,814
                              
                              
                              $
                              753,305
                              
                              Nov
      2008Sterling
                              
                              
                              1,755,731
                              
                              
                              $
                              1.6809
                              
                              
                              $
                              2,951,168
                              
                              
                              $
                              2,825,637
                              
                              Nov
      2008-Jan 2009Purchase
      Contracts:New
      Taiwan Dollar
                              
                              
                              94,155,000
                              
                              
                              
                              32.36
                              *
                              
                              $
                              2,909,327
                              
                              
                              $
                              2,852,891
                              
                              Nov
      2008


*  NT
Dollars per U.S. Dollar





We are
exposed to foreign currency exchange risks related to our investment in net
assets in foreign countries.  To manage this risk, we entered into a
forward contract on November 26, 2007, with a notional amount of €3.0
million.  We have designated this forward contract as a hedge of our
net investment in Euro denominated assets.  We have selected the
forward method under the guidance of the Derivatives Implementation Group
Statement 133 Issue H8, “Foreign Currency Hedges: Measuring the Amount of
Ineffectiveness in a Net Investment Hedge.” The forward method requires all
changes in the fair value of the forward to be reported as a cumulative
translation adjustment in Accumulated Other Comprehensive Loss in the same
manner as the underlying hedged net assets.  As of October 31, 2008,
we had a gain of $624,000, net of tax, recorded as a cumulative translation
adjustment in Accumulated Other Comprehensive Income (Loss) related to the
forward contract.





Forward
contracts for the sale or purchase of foreign currencies as of October 31, 2008,
which are designated as net investment hedges under Statement 133 were as
follows:





Contract
      Amount at
                        Forward
      Rates in
                        U.S. DollarsForward
                        Contracts
                      
                      Notional
      Amount
                        in
      Foreign
                        Currency
                      
                      
                      WeightedAvg.
                        Forward
                        Rate
                      
                      
                      Contract
                        Date
                      
                      
                      October
      31,
                        2008
                      
                      Maturity
                        DateSale
      Contracts:Euro
                      
                      
                      3,000,000
                      
                      
                      $
                      1.4837
                      
                      
                      $
                      4,451,100
                      
                      
                      $
                      3,827,010
                      
                      November
      2008




25




Management’s
Annual Report on Internal Control Over Financial Reporting





Tothe Shareholders
and


Board of
Directors


of Hurco
Companies, Inc.:





Management
of Hurco Companies, Inc. (the “Company”), has assessed the effectiveness of
internal controls over financial reporting as of October 31, 2008, based on
criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO).  Management is responsible for thesefinancial statements,
for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial
reporting.





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





In
management’s opinion, the Company’s internal controls over financial reporting
as of October 31, 2008, are effective based on the criteria specified
above.





Our
independent registered accounting firm, Crowe Horwath, LLP, who also audited our
consolidated financial statements, audited the effectiveness of our internal
control over financial reporting.  Crowe Horwath LLP has issued their
attestation report, which is included in Part II, Item 8 of this Annual Report
on Form 10-K.








/s/
Michael Doar


Michael
Doar,


Chairman
of the Board & Chief Executive Officer





/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, 2009




26




Item
8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA





Report
of Independent Registered Public Accounting Firm





Tothe Shareholders
and


Board of
Directors


of Hurco
Companies, Inc.





We have
audited the accompanying consolidated balance sheets of Hurco Companies, Inc.
and Subsidiaries as of October 31, 2008, and 2007, and the related
consolidated statements of income, changes in shareholders’ equity and cash
flows for each of the three years in the period ended October 31,
2008.  In connection with our audits of the consolidated financial
statements, we also have audited the consolidated financial statement schedule
listed in the index under Item 15.  We also have audited the Company’s
internal control over financial reporting as of October 31, 2008, 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 included in the
accompanying management’s annual report on internal control over financial
reporting.  Our responsibility is to express an opinion on these
financial statements and the financial statement schedule and an opinion on the
company’s internal control over financial reporting based on our
audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits 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 audits 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, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audits provide 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.




27




In our
opinion, the 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, 2008 and 2007, and the results of their
operations and their cash flows for each of the three years in the period ended
October 31, 2008 in conformity with accounting principles generally accepted in
the United States of America.  Also, in our opinion, the related
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.  Also, in
our opinion, Hurco Companies, Inc. and Subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of
October 31, 2008, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO).








/s/Crowe
Horwath LLP





Indianapolis,
Indiana


January
12, 2009




28




HURCO
COMPANIES, INC.


CONSOLIDATED
STATEMENTS OF INCOME





Year
      Ended October 312008
                
                
                2007
                
                
                2006(Dollars
      in thousands, except per share amounts)Sales
      and service
      fees
                
                $
                223,994
                
                
                $
                188,047
                
                
                $
                148,517Cost
      of sales and
      service
                
                
                141,377
                
                
                
                116,965
                
                
                
                95,192Gross
      profit
                
                
                82,617
                
                
                
                71,082
                
                
                
                53,325Selling,
      general and administrative
      expenses
                
                
                46,811
                
                
                
                40,124
                
                
                
                30,697Operating
      income
                
                
                35,806
                
                
                
                30,958
                
                
                
                22,628Interest
      expense
                
                
                63
                
                
                
                201
                
                
                
                359Interest
      income
                
                
                542
                
                
                
                699
                
                
                
                527Investment
      income
                
                
                465
                
                
                
                339
                
                
                
                9Earnings
      from equity
      investments
                
                
                12
                
                
                
                1,048
                
                
                
                865Other
      income (expense),
      net
                
                
                (2,596
                )
                
                
                (78
                )
                
                
                (556
                )Income before income
      taxes
                
                
                34,166
                
                
                
                32,765
                
                
                
                23,114Provision
      for income taxes (Note
      7)
                
                
                11,646
                
                
                
                11,876
                
                
                
                7,635Net
      income
                
                $
                22,520
                
                
                $
                20,889
                
                
                $
                15,479Earnings
      per common share –
      basic
                
                $
                3.51
                
                
                $
                3.27
                
                
                $
                2.45Weighted
      average common shares outstanding – basic
                
                
                6,415
                
                
                
                6,382
                
                
                
                6,317Earnings
      per common share –
      diluted
                
                $
                3.49
                
                
                $
                3.24
                
                
                $
                2.42Weighted
      average common shares outstanding – diluted
                
                
                6,444
                
                
                
                6,440
                
                
                
                6,397





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




29




HURCO
COMPANIES, INC.


CONSOLIDATED
BALANCE SHEETS





ASSETS




As
      of October 312008
                          
                          
                          2007Current
      assets:
                          (Dollars
      in thousands, except per share amounts)Cash
      and cash
      equivalents
                          
                          $
                          26,394
                          
                          
                          $
                          29,760Short-term
      investments
                          
                          
                          6,674
                          
                          
                          
                          10,000Accounts
      receivable, less allowance for doubtful accountsof  $678
      in 2008 and $751 in
      2007
                          
                          
                          31,952
                          
                          
                          
                          28,625Inventories
                          
                          
                          66,368
                          
                          
                          
                          61,121Deferred
      tax assets,
      net
                          
                          
                          5,444
                          
                          
                          
                          8,258Derivative
      assets
                          
                          
                          12,463
                          
                          
                          
                          485Other
                          
                          
                          2,017
                          
                          
                          
                          1,016Total current
      assets
                          
                          
                          151,312
                          
                          
                          
                          139,265Property
      and equipment:Land
                          
                          
                          782
                          
                          
                          
                          776Building
                          
                          
                          7,127
                          
                          
                          
                          7,135Machinery and
      equipment
                          
                          
                          14,885
                          
                          
                          
                          13,629Leasehold
      improvements
                          
                          
                          1,765
                          
                          
                          
                          1,47324,559
                          
                          
                          
                          23,013Less accumulated depreciation and
      amortization
                          
                          
                          (10,961
                          )
                          
                          
                          (11,617
                          )13,598
                          
                          
                          
                          11,396Software
      development costs, less accumulated amortization
                          
                          
                          5,711
                          
                          
                          
                          5,960Investments
      and other
      assets
                          
                          
                          6,823
                          
                          
                          
                          7,160$
                          177,444
                          
                          
                          $
                          163,781LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                          
                          $
                          26,691
                          
                          
                          $
                          33,056Accounts payable-related
      parties
                          
                          
                          1,612
                          
                          
                          
                          2,430Accrued expenses and
      other
                          
                          
                          17,598
                          
                          
                          
                          21,558Accrued warranty
      expenses
                          
                          
                          2,536
                          
                          
                          
                          2,449Derivative
      liabilities
                          
                          
                          2,692
                          
                          
                          
                          3,722Total current
      liabilities
                          
                          
                          51,129
                          
                          
                          
                          63,215Non-current
      liabilities:Deferred
      tax liability,
      net
                          
                          
                          2,056
                          
                          
                          
                          1,956Deferred credits and
      other
                          
                          
                          782
                          
                          
                          
                          1,0072,838
                          
                          
                          
                          2,963Commitments
      and contingencies (Notes 11 and 12)Shareholders’
      equity:Preferred
      stock: no par value per share, 1,000,000 sharesauthorized,
      no shares
      issued
                          
                          
                          --
                          
                          
                          
                          --Common
      stock: no par value, $.10 stated value per share, 13,250,000shares
      authorized, 6,420,851 and 6,392,220 shares issued andoutstanding
      in 2008 and 2007, respectively
                          
                          
                          642
                          
                          
                          
                          639Additional paid-in
      capital
                          
                          
                          51,690
                          
                          
                          
                          50,971Retained
      earnings
                          
                          
                          71,889
                          
                          
                          
                          49,369Accumulated other comprehensive
      loss
                          
                          
                          (744
                          )
                          
                          
                          (3,376
                          )Total shareholders’
      equity
                          
                          
                          123,477
                          
                          
                          
                          97,603$
                          177,444
                          
                          
                          $
                          163,781






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




30




HURCO
COMPANIES, INC.


CONSOLIDATED
STATEMENTS OF CASH FLOWS




Year
      Ended October 312008
                                                                    
                                                                    
                                                                    2007
                                                                    
                                                                    
                                                                    2006Cash
      flows from operating activities:
                                                                    
                                                                    (Dollars
      in thousands)Net
      income
                                                                    
                                                                    $
                                                                    22,520
                                                                    
                                                                    
                                                                    $
                                                                    20,889
                                                                    
                                                                    
                                                                    $
                                                                    15,479Adjustments
      to reconcile net income toNet
      cash provided by operating activities:Provision for doubtful
      accounts
                                                                    
                                                                    
                                                                    (73
                                                                    )
                                                                    
                                                                    
                                                                    116
                                                                    
                                                                    
                                                                    
                                                                    (207
                                                                    )Deferred Tax
      Provision
                                                                    
                                                                    
                                                                    1,048
                                                                    
                                                                    
                                                                    
                                                                    1,216
                                                                    
                                                                    
                                                                    
                                                                    491Equity in income of
      affiliates
                                                                    
                                                                    
                                                                    (12
                                                                    )
                                                                    
                                                                    
                                                                    (1,048
                                                                    )
                                                                    
                                                                    
                                                                    (865
                                                                    )Depreciation and
      amortization
                                                                    
                                                                    
                                                                    3,023
                                                                    
                                                                    
                                                                    
                                                                    2,106
                                                                    
                                                                    
                                                                    
                                                                    1,504Stock-based
      Compensation
                                                                    
                                                                    
                                                                    535
                                                                    
                                                                    
                                                                    
                                                                    480
                                                                    
                                                                    
                                                                    
                                                                    17Change in
      assets/liabilities(Increase) decrease in accounts
      receivable
                                                                    
                                                                    
                                                                    (6,260
                                                                    )
                                                                    
                                                                    
                                                                    (1,742
                                                                    )
                                                                    
                                                                    
                                                                    (1,312
                                                                    )(Increase) decrease in
      inventories
                                                                    
                                                                    
                                                                    (11,832
                                                                    )
                                                                    
                                                                    
                                                                    (14,116
                                                                    )
                                                                    
                                                                    
                                                                    (12,726
                                                                    )Increase (decrease) in accounts
      payable
                                                                    
                                                                    
                                                                    (7,649
                                                                    )
                                                                    
                                                                    
                                                                    7,821
                                                                    
                                                                    
                                                                    
                                                                    9,318Increase (decrease) in accrued
      expenses
                                                                    
                                                                    
                                                                    3,304
                                                                    
                                                                    
                                                                    
                                                                    6,474
                                                                    
                                                                    
                                                                    
                                                                    3,423Other
                                                                    
                                                                    
                                                                    (4,443
                                                                    )
                                                                    
                                                                    
                                                                    (8,003
                                                                    )
                                                                    
                                                                    
                                                                    (1,076
                                                                    )Net cash provided by operating
      activities
                                                                    
                                                                    
                                                                    161
                                                                    
                                                                    
                                                                    
                                                                    14,193
                                                                    
                                                                    
                                                                    
                                                                    14,046Cash
      flows from investing activities:Proceeds from sale of property and
      equipment
                                                                    
                                                                    
                                                                    17
                                                                    
                                                                    
                                                                    
                                                                    --
                                                                    
                                                                    
                                                                    
                                                                    16Purchase of property and
      equipment
                                                                    
                                                                    
                                                                    (4,580
                                                                    )
                                                                    
                                                                    
                                                                    (3,325
                                                                    )
                                                                    
                                                                    
                                                                    (1,212
                                                                    )Purchase
      of
      investments
                                                                    
                                                                    
                                                                    (9,100
                                                                    )
                                                                    
                                                                    
                                                                    (24,000
                                                                    )
                                                                    
                                                                    
                                                                    --Sale
      of
      investments
                                                                    
                                                                    
                                                                    12,100
                                                                    
                                                                    
                                                                    
                                                                    14,000
                                                                    
                                                                    
                                                                    
                                                                    --Software development
      costs
                                                                    
                                                                    
                                                                    (934
                                                                    )
                                                                    
                                                                    
                                                                    (1,185
                                                                    )
                                                                    
                                                                    
                                                                    (2,089
                                                                    )Other proceeds
      (investments)
                                                                    
                                                                    
                                                                    (80
                                                                    )
                                                                    
                                                                    
                                                                    1,898
                                                                    
                                                                    
                                                                    
                                                                    (335
                                                                    )Net cash used for investing
      activities
                                                                    
                                                                    
                                                                    (2,577
                                                                    )
                                                                    
                                                                    
                                                                    (12,612
                                                                    )
                                                                    
                                                                    
                                                                    (3,620
                                                                    )Cash
      flows from financing activities:Repayment
      of first
      mortgage
                                                                    
                                                                    
                                                                    --
                                                                    
                                                                    
                                                                    
                                                                    (4,010
                                                                    )
                                                                    
                                                                    
                                                                    (126
                                                                    )Tax
      benefit from exercise of stock options
                                                                    
                                                                    
                                                                    36
                                                                    
                                                                    
                                                                    
                                                                    298
                                                                    
                                                                    
                                                                    
                                                                    744Proceeds
      from exercise of common stock options
                                                                    
                                                                    
                                                                    151
                                                                    
                                                                    
                                                                    
                                                                    186
                                                                    
                                                                    
                                                                    
                                                                    562Net cash provided by (used for)
      financing activities
                                                                    
                                                                    
                                                                    187
                                                                    
                                                                    
                                                                    
                                                                    (3,526
                                                                    )
                                                                    
                                                                    
                                                                    1,180Effect
      of exchange rate changes on
      cash
                                                                    
                                                                    
                                                                    (1,137
                                                                    )
                                                                    
                                                                    
                                                                    1,859
                                                                    
                                                                    
                                                                    
                                                                    681Net increase (decrease) in
      cash
                                                                    
                                                                    
                                                                    (3,366
                                                                    )
                                                                    
                                                                    
                                                                    (86
                                                                    )
                                                                    
                                                                    
                                                                    12,287Cash
      and cash equivalents at beginning of year
                                                                    
                                                                    
                                                                    29,760
                                                                    
                                                                    
                                                                    
                                                                    29,846
                                                                    
                                                                    
                                                                    
                                                                    17,559Cash
      and cash equivalents at end of
      year
                                                                    
                                                                    $
                                                                    26,394
                                                                    
                                                                    
                                                                    $
                                                                    29,760
                                                                    
                                                                    
                                                                    $
                                                                    29,846Supplemental
      disclosures:Cash paid
      for:Interest
                                                                    
                                                                    $
                                                                    12
                                                                    
                                                                    
                                                                    $
                                                                    157
                                                                    
                                                                    
                                                                    $
                                                                    314Income
      taxes
                                                                    
                                                                    $
                                                                    15,799
                                                                    
                                                                    
                                                                    $
                                                                    9,971
                                                                    
                                                                    
                                                                    $
                                                                    3,920








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




31




HURCO
COMPANIES, INC.


CONSOLIDATED
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY





Common
      Stock
              
              
              Additional
              
              
              
              
              
              Accumulated
                Other
                Comprehensive(Dollars
      in thousands, except Shares Issued and Outstanding)
              
              Shares
      Issued
                &
      Outstanding
              
              
              Amount
              
              
              Paid-In
                Capital
              
              
              Retained
                Earnings
              
              
              Income
                (Loss)
              
              
              TotalBalances,
      October 31, 2005
              
              
              6,220,220
              
              
              $
              622
              
              
              $
              48,701
              
              
              $
              13,001
              
              
              $
              (3,380
              )
              
              $
              58,944Net
      income
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              15,479
              
              
              
              --
              
              
              
              15,479Translation
      of foreign currency financial statements
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,288
              
              
              
              ,288Unrealized
      loss of derivative instruments, net of tax
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (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
              
              
              
              --
              
              
              
              --
              
              
              
              17Balances,
      October 31, 2006
              
              
              6,346,520
              
              
              
              635
              
              
              
              50,011
              
              
              
              28,480
              
              
              
              (3,751
              )
              
              
              75,375Net
      income
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              20,889
              
              
              
              --
              
              
              
              20,889Translation
      of foreign currency financial statements
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              2,568
              
              
              
              2,568Unrealized
      loss of derivative instruments, net of tax
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (2,193
              )
              
              
              (2,193
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              21,264Exercise
      of common stock options
              
              
              45,700
              
              
              
              4
              
              
              
              182
              
              
              
              --
              
              
              
              --
              
              
              
              186Tax
      benefit from exercise of stock options
              
              
              --
              
              
              
              --
              
              
              
              298
              
              
              
              --
              
              
              
              --
              
              
              
              298Stock-based
      compensation expense
              
              
              --
              
              
              
              --
              
              
              
              480
              
              
              
              --
              
              
              
              --
              
              
              
              480Balances,
      October 31, 2007
              
              
              6,392,220
              
              
              
              639
              
              
              $
              50,971
              
              
              
              49,369
              
              
              
              (3,376
              )
              
              
              97,603Net
      income
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              22,520
              
              
              
              --
              
              
              
              22,520Translation
      of foreign currency financial statements
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (3,747
              )
              
              
              (3,747
              )Unrealized
      gain of derivative instruments, net of tax
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              6,581
              
              
              
              6,581Unrealized
      loss on investments, net of tax
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (202
              )
              
              
              (202
              )Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              25,152Exercise
      of common stock options
              
              
              28,631
              
              
              
              3
              
              
              
              148
              
              
              
              --
              
              
              
              --
              
              
              
              151Tax
      benefit from exercise of stock options
              
              
              --
              
              
              
              --
              
              
              
              36
              
              
              
              --
              
              
              
              --
              
              
              
              36Stock-based
      compensation expense
              
              
              --
              
              
              
              --
              
              
              
              535
              
              
              
              --
              
              
              
              --
              
              
              
              535Balances,
      October 31, 2008
              
              
              6,420,851
              
              
              $
              642
              
              
              $
              51,690
              
              
              $
              71,889
              
              
              $
              (744
              )
              
              $
              123,477







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




32




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% ownership interest in a Taiwan affiliate
that is accounted for using the equity method.  Our investment in that
affiliate was approximately $2.6 million and $2.4 million as of October 31, 2008
and 2007, respectively. That investment is 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 with a stated
maturity of three months or less to be cash equivalents.  Cash flows
from purchases and sales of auction rate securities are classified as investing
activities.  Cash flows from hedges are classified consistent with the
items being hedged.





Translation of Foreign
Currencies.  All balance sheet accounts of non-U.S.
subsidiaries are translated at the exchange rate as of the end of the year and
recorded as a component of Accumulated Other Comprehensive Income (Loss) in
shareholders' equity.  Income and expenses are translated at the
average exchange rates during the year.  Cumulative foreign currency
translation adjustments as of October 31, 2008, were a net loss of $4,479,000
and are included in Accumulated Other Comprehensive Loss. Foreign currency
transaction gains and losses are recorded as income or expense as
incurred.





Hedging.We
periodically enter into foreign currency forward exchange contracts 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 Sheets at fair
value in Derivative Assets and Derivative Liabilities.  Gains and
losses resulting from changes in the fair value of these hedge contracts are
deferred in Accumulated Other Comprehensive Loss and recognized as an adjustment
to cost of sales 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, 2008, we had approximately $3.3 million of gains, net of tax,
related to cash flow hedges deferred in Accumulated Other Comprehensive Loss. Of
this amount, $3.8 million represents unrealized gains, net of tax, related to
open positions that remained subject to currency fluctuation
risk.  These deferred gains will be recorded as an adjustment to Cost
of Sales in future periods through fiscal 2009, in which sales of the related
hedged items are recognized, as described above.  At October 31, 2007,
we had $2.6 million of losses, net of tax, related to cash flow hedges deferred
in Accumulated Other Comprehensive Income (Loss).  Net losses on cash
flow hedge contracts, which we reclassified from Accumulated Other Comprehensive
Loss to Cost of Sales, were $4.4 million for the period ended October 31, 2008,
compared to net losses of $1.9 million and net gains of $698,000 reclassified in
the periods ending October 31, 2007 and 2006, respectively.




33


HURCO
COMPANIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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 and non-hedged foreign currency gains
and losses.  We recognized a net transaction loss of $2.3 million for
the year ended October 31, 2008, compared to a net transaction gain of $19,000
for the year ended October 31, 2007 and a net transaction loss of $423,000 for
the year ended October 31, 2006.





We are
exposed to foreign currency exchange risks related to our investment in net
assets in foreign countries.   To manage this risk, we entered
into a forward contract on November 26, 2007, with a notional amount of €3.0
million.  We have designated this forward contract as a hedge of our
net investment in Euro-denominated assets.  We have selected the
forward method under the guidance of the Derivatives Implementation Group
Statement 133 Issue H8, “Foreign Currency Hedges: Measuring the Amount of
Ineffectiveness in a Net Investment Hedge.” The forward method requires all
changes in the fair value of the forward contract to be reported as a cumulative
translation adjustment in Accumulated Other Comprehensive Loss in the same
manner as the underlying hedged net assets.  As of October 31, 2008,
we had a gain of $624,000, net of tax, recorded as a cumulative translation
adjustment in Accumulated Other Comprehensive Loss related to this forward
contract.





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, 2008, 2007 and 2006 was
$1.5 million, $1.4 million, and $1.1 million, respectively.





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




34




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





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





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





Product
Warranty.  Expected future product warranty expense is recorded
when the product is sold. See Note 12 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 $3.0 million,
$3.1 million, and $2.5 million, in fiscal 2008, 2007, and 2006,
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 $934,000 in 2008, $1.2 million in
2007, and $2.1 million in 2006 related to software development
projects.  Amortization expense was $1.2 million, $702,000, and
$363,000, for the years ended October 31, 2008, 2007, and 2006,
respectively.  Accumulated amortization at October 31, 2008 and 2007
was $4.9 million and $3.7 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
                          Expense2009
                        
                        $
                        1,2112010
                        
                        
                        1,1022011
                        
                        
                        1,1022012
                        
                        
                        6512013
                        
                        
                        28





Earnings Per
Share.Basic and diluted earnings per common share are based
on the weighted average number of shares of our common stock
outstanding.  Diluted earnings per common share give effect to
outstanding stock options using the treasury method.  The impact of
stock options on our weighted average number of shares for the years ended
October 31, 2008, 2007 and 2006 was 29,000, 58,000, and 80,000 shares,
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.




35


HURCO
COMPANIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


The
determination of our provision for income taxes requires judgment, the use of
estimates and the interpretation and application of complex tax
laws.  Our provision for income taxes reflects a combination of income
earned and taxed at the federal and state level in the U.S., as well as in
various foreign jurisdictions.  We have not provided for any U.S.
income taxes on the undistributed earnings of our foreign subsidiaries or equity
method investments based upon our determination that such earnings will be
indefinitely reinvested abroad.  On November 1, 2008, we adopted
FIN 48, and we currently account for uncertain tax positions in accordance
with the provisions of FIN 48 guidance. Refer to Note 7, Income Taxes,
for information related to the effect of adoption of FIN 48, and the
accounting for the Company's uncertain tax positions.





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





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





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.  In fiscal 2006 we adopted SFAS No. 123(R),
“Share Based Payment,” using the modified prospective method.  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.  Compensation expense is determined at the date of grant using
the Black-Scholes valuation model.  We recorded $535,000, $480,000 and
$17,000 of compensation expense during the fiscal years ending October 31, 2008,
2007 and 2006, respectively for vested options.  We expect to record
additional compensation expense of approximately $57,000 per quarter, ratably,
through the fourth quarter of fiscal 2009 for the options granted in November
2006.




Reclassifications.Certain
prior year amounts have been reclassified to conform to the current year
presentation. We reclassified auction rate securities previously classified as
cash and cash equivalents to short-term investments in the amount of $10.0
million as of October 31, 2007.  This reclassification was made in the
Consolidated Balance Sheets and net cash used in investing activities on the
Consolidated Statements of Cash Flows.  This reclassification had no
impact on previously reported net income or shareholders’
equity.




36


HURCO
COMPANIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




2.           BUSINESS
OPERATIONS





Nature of
Business.  We design and manufacture computer control systems,
software and computerized machine tools for sale through our own distribution
system to the worldwide machine tool industry.  The machine tool
industry is highly cyclical and declines in demand can and will occur abruptly
in the geographic markets we serve.  As a result, we have recently
experienced a significant decline in our sales and orders during the fourth
quarter of fiscal 2008 that significantly adversely affected our results of
operations.  For additional information regarding current economic
conditions and their impact on our results of operation and financial condition,
refer to Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations.





The end
market for our products consists primarily of precision tool, die and mold
manufacturers, independent job shops, and specialized short-run production
applications within large manufacturing operations.  Industries served
include: aerospace, defense, medical equipment, energy,
automotive/transportation, electronics and computer industries.  Our
products are sold through independent agents and distributors throughout North
America, Europe and Asia.  We also maintain direct sales operations in
Canada, 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 wholly
owned subsidiary in Taiwan, Hurco Manufacturing Ltd. (HML) produces all of our
machine tools.  Any interruption in manufacturing at HML would have an
adverse effect 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. Any interruption
with our contract manufacturer or one of our key component suppliers may also
have an adverse effect on our operating results and our financial
condition.




3.           INVESTMENTS





As of
October 31, 2008 and October 31, 2007, we held $6.7 million and $10.0 million,
respectively, of investments in auction rate securities, which represented
investments in student loan obligations and municipal bonds.  Auction
rate securities are intended to provide liquidity via an auction process that
resets the applicable interest rate at predetermined intervals allowing us to
either roll over the holdings or sell the investment at par
value.  All income generated from these auction rate securities was
recorded as Investment Income.





During
fiscal 2008, the uncertainties in the credit markets adversely affected the
liquidity of our holdings in auction rate securities, and multiple auctions for
these securities were unsuccessful.  All of the auction rate
securities were “AAA” rated and were in compliance with our investment policy at
the time of the acquisition.  As of October 31, 2008, these securities
were classified as Short-term Investments on our Consolidated Balance Sheets and
had a weighted average tax exempt interest rate of approximately
4.7%.




37




HURCO
COMPANIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


During
fiscal 2008, we classified our auction rate securities as “available for sale”
in accordance with the provisions of Statement of Financial Accounting Standards
No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Due
to the lack of observable quotes in the market, we engaged an independent
registered investment advisor to provide expert investment information in order
to estimate the fair value of our auction rate securities.  In
estimating the fair value of these securities, each prospectus was researched,
recent auction history was reviewed, and current collateral performance was
examined. The underlying collateral for these securities was compared to other
securities currently trading in the market, as well as, non-auction based debt
with similar characteristics.  Although these securities continued to
pay interest according to their stated terms, during the second quarter of
fiscal 2008 we recorded an unrealized loss of $202,000, net of tax in
Accumulated Other Comprehensive Loss, reflecting adjustments to our auction rate
securities to record what we concluded was a temporary decline in estimated fair
value. We deemed this impairment temporary because the underlying reason for the
impairment was primarily related to liquidity, as there had not been a change in
credit risk of the investment since acquisition, the severity of the impairment
was not significant compared to the total investment balance, and we did not
expect to sell these investments for less than par value.





Subsequent
to October 31, 2008, we sold all of our holdings of auction rate securities,
totaling $6.7 million, at par value.





4.           INVENTORIES





Inventories
as of October 31, 2008 and 2007 are summarized below (in
thousands):





2008
                            
                            
                            2007Purchased
      parts and sub assemblies
                            
                            $
                            13,098
                            
                            
                            $
                            10,956Work-in-process
                            
                            
                            11,243
                            
                            
                            
                            11,692Finished
      goods
                            
                            
                            42,027
                            
                            
                            
                            38,473$
                            66,368
                            
                            
                            $
                            61,121




5. DEBT
AGREEMENTS





We are
party to an unsecured domestic credit agreement that provides us with a $30.0
million unsecured revolving credit facility and a separate letter of credit
facility in the amount of 100.0 million New Taiwan Dollars.  We are also
party to a Taiwan revolving credit agreement of 100.0 million New Taiwan
Dollars, which is an uncommitted demand credit facility. In the event the Taiwan
facility is not available, the Taiwan letter of credit facility from the
domestic agreement would enable us to provide credit enhancement to a
replacement lender in Taiwan. We also entered into a £1.0 million revolving
credit facility in the United Kingdom.




The
domestic and U.K. facilities mature on December 7, 2012.




Borrowings
under the domestic facility may be used for general corporate purposes and will
bear interest at a LIBOR-based rate or an alternate base rate, in each case,
plus an applicable margin determined by reference to the ratio of the
interest-bearing debt and obligations and the undrawn face amount of all letters
of credit outstanding, on a consolidated basis, to consolidated EBITDA. 
The domestic facility contains customary affirmative and negative covenants and
events of default for an unsecured commercial bank credit facility, including,
among other things, limitations on consolidations, mergers and sales of assets.
The financial covenants are a minimum quarterly consolidated net income covenant
and a covenant establishing a maximum ratio of consolidated total indebtedness
to total indebtedness and net worth.




As of
October 31, 2008 we had no debt or borrowings outstanding under our domestic or
European credit facilities.  As of October 31, 2008 and 2007, we had
$615,000 and $1,081,000, respectively, of outstanding letters of credit issued
to non-U.S. suppliers for inventory purchase commitments.  As of
October 31, 2008 we had unutilized credit facilities of $36.0 million available
for either direct borrowings or commercial letters of credit.




38


HURCO
COMPANIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


6.           FINANCIAL
INSTRUMENTS





The
carrying amounts for trade receivables and payables approximate their fair
values.  We also have financial instruments in the form of foreign
currency forward exchange contracts as described in Note 1 of Notes to
Consolidated Financial Statements.  The U.S. Dollar equivalent
notional amount of these contracts was $128.2 million and $133.1 million at
October 31, 2008 and 2007, respectively.  The net fair value of
Derivative Assets recorded on our Consolidated Balance Sheets at October 31,
2008 and 2007 was $12.5 million and $485,000, respectively.  The net
fair value of Derivative Liabilities recorded on our Consolidated Balance Sheets
at October 31, 2008 and 2007 was $2.7 million and $3.7 million,
respectively.  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.





7.           INCOME
TAXES





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





Year
      Ended October 312008
                
                
                2007
                
                
                2006Current:U.S. taxes
                
                $
                8,768
                
                
                $
                9,290
                
                
                $
                5,359Foreign taxes
                
                
                3,926
                
                
                
                3,802
                
                
                
                2,76712,694
                
                
                
                13,092
                
                
                
                8,126Deferred:U.S. taxes
                
                
                (1,163
                )
                
                
                (1,657
                )
                
                
                (787
                )Foreign taxes
                
                
                115
                
                
                
                441
                
                
                
                296(1,048
                )
                
                
                (1,216
                )
                
                
                (491
                )$
                11,646
                
                
                $
                11,876
                
                
                $
                7,635
  A
comparison of income tax expense at the U.S. statutory rate of 35% in 2008, 2007
and 2006, to the Company’s effective tax rate is as follows:
  Income
      before income taxes (in thousands):
                      
                      Year
      Ended October 312008
                      
                      
                      2007
                      
                      
                      2006Domestic
                      
                      $
                      20,856
                      
                      
                      $
                      20,463
                      
                      
                      $
                      13,688Foreign
                      
                      $
                      13,310
                      
                      
                      $
                      12,302
                      
                      
                      $
                      9,426Earnings
      before taxes on income
                      
                      $
                      34,166
                      
                      
                      $
                      32,765
                      
                      
                      $
                      23,114Tax
      rates:U.S.
      statutory rate
                      
                      
                      35.0
                      %
                      
                      
                      35.0
                      %
                      
                      
                      35.0
                      %Effect
      of tax rate of international jurisdictions In excess of (less than) U.S.
      statutory rates
                      
                      
                      (1.9
                      )%
                      
                      
                      0.1
                      %
                      
                      
                      (0.2
                      )%State
      income taxes
                      
                      
                      1.9
                      %
                      
                      
                      2.4
                      %
                      
                      
                      3.8
                      %Permanent
      items
                      
                      
                      0.1
                      %
                      
                      
                      0.8
                      %
                      
                      
                      (2.7
                      )%All
      other
                      
                      
                      (1.0
                      )%
                      
                      
                      (2.1
                      )%
                      
                      
                      (1.9
                      )%Effective
      tax rate
                      
                      
                      34.1
                      %
                      
                      
                      36.2
                      %
                      
                      
                      34.0
                      %




39


HURCO
COMPANIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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, 2008 are approximately $29.6
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.





Deferred
tax assets and liabilities are determined based on the difference between the
amounts used for financial reporting purposes and tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.  Significant components of our
deferred tax assets and liabilities at October 31, 2008 and 2007 were as follows
(in thousands):





October
      312008
                  
                  
                  2007Deferred
      Tax Assets:Current:Inter-company profit in
      inventory
                  
                  $
                  5,575
                  
                  
                  $
                  5,176Derivative
      liabilities(assets)
                  
                  
                  (2,477
                  )
                  
                  
                  1,451Accrued inventory
      reserves
                  
                  
                  1,070
                  
                  
                  
                  991Accrued warranty
      expenses
                  
                  
                  148
                  
                  
                  
                  158Deferred
    compensation
                  
                  
                  264
                  
                  
                  
                  214Other accrued
    expenses
                  
                  
                  864
                  
                  
                  
                  280Other
                  
                  
                  -
                  
                  
                  
                  (12
                  )Current deferred tax assets,
      net
                  
                  
                  5,444
                  
                  
                  
                  8,258Deferred
      Tax Liabilities:Non-current:Depreciation and
      amortization
                  
                  
                  (2,717
                  )
                  
                  
                  (2,730
                  )Other
                  
                  
                  661
                  
                  
                  
                  774Non-current
      deferred tax liabilities, net
                  
                  
                  (2,056
                  )
                  
                  
                  (1,956
                  )Net
      deferred tax assets
                  
                  $
                  3,388
                  
                  
                  $
                  6,302





On
November 1, 2007, we adopted the provisions of FASB Interpretation No. 48, which
clarifies the accounting for uncertainty in income tax positions.  As
a result of adoption, there was no change to beginning retained
earnings.  A reconciliation of the beginning and ending amount of
unrecognized tax benefits, excluding the related accrual for interest or
penalties, is as follows (in thousands):





Balance,
      at November 1, 2007
                                      
                                      $
                                      576Additions
      based on tax positions related to the current year
                                      
                                      
                                      -Additions
      for tax positions of prior years
                                      
                                      
                                      40Reduction
      for tax positions of prior years
                                      
                                      
                                      -Settlements
                                      
                                      
                                      -Reductions
      due to statute expiration
                                      
                                      
                                      (3
                                      )Balance,
      at October 31, 2008
                                      
                                      $
                                      613





We had
$613,000 of unrecognized tax benefits at October 31, 2008, that if recognized,
would favorably affect the effective tax rate in future periods. Any adjustments
to our reserves for income taxes will be recorded as an increase or decrease to
our provision for income taxes and would impact our effective tax
rate.




40


HURCO
COMPANIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


We
recognize accrued interest and penalty related to unrecognized tax benefits as
components of our income tax provision.  We believe there is
substantial support for taking these tax benefits and therefore have estimated
no tax penalties.  As of October 31, 2008, the gross amount of
interest accrued, reported in other liabilities, was approximately $82,000,
which did not include the federal tax benefit of interest
deductions.





We do not
currently anticipate that our existing reserves related to uncertain tax
positions as of October 31, 2008 will significantly increase or decrease during
the twelve-month period ending October 31, 2009; however, various events could
cause our current expectations to change in the future.  The statute
of limitation with respect to unrecognized tax benefits related to FIN 48 will
expire between July 2009 and July 2012.  We anticipate a reduction of
$105,000 due to statute expiration during the next fiscal year.





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




United
      States federal
                Fiscal
      2005 through the current periodIndiana
                Fiscal
      2005 through the current periodCalifornia
                Fiscal
      2004 through the current periodGermany1
                Fiscal
      2004 through the current periodTaiwan
                Fiscal
      2003 through the current
period





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





8.           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 $877,600,
$460,200, and $382,300, for the fiscal years ended October 31, 2008, 2007 and
2006, respectively.





We also
have life insurance agreements with certain executive officers.  The
insurance premiums we paid will be repaid from the cash surrender value of the
policies when the policies are terminated or upon the death of the
insured.





9.           STOCK
OPTIONS





In March
2008, we adopted the Hurco Companies, Inc. 2008 Equity Incentive Plan (the “2008
Plan”), which allows us to grant awards of stock options, Stock Appreciation
Rights settled in stock (SARs), restricted shares, performance shares and
performance units.  The 2008 Plan replaced the 1997 Stock Option and
Incentive Plan (the “1997 Plan”) which expired in March 2007.  The
Compensation Committee of the Board of Directors has authority to determine the
officers, directors and key employees who will be granted awards; designate the
number of shares subject to each award; determine the terms and conditions upon
which awards will be granted; and prescribe the form and terms of award
agreements.  We have granted stock options under both Plans which are
currently outstanding.  No stock option may be exercised more than ten
years after the date of grant or such shorter period as the Compensation
Committee may determine at the date of grant.  The number of shares of
our common stock currently available for issuance as awards under the 2008 Plan
is 740,000.  The market value of a share of our common stock, for
purposes of the 2008 Plan, is the closing sale price as reported by the Nasdaq
Global Select Market on the date in question or, if not a trading day, on the
last preceding trading date.




41


HURCO
COMPANIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


During
fiscal 2008, options to purchase 28,631 shares were exercised, resulting in cash
proceeds of approximately $151,000 and an additional tax benefit of
approximately $36,000, compared to 45,700 shares exercised in the prior year
period resulting in cash proceeds of $186,700 and an additional tax benefit of
approximately $298,000.





Effective
November 1, 2005, we adopted SFAS No. 123(R), “Share Based Payment,” using the
modified prospective method, and began applying its provisions to all options
granted, as well as, to the nonvested portion of previously granted options
outstanding at that date.  Compensation expense is determined at the
date of grant using the Black-Scholes valuation model.





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





On
November 16, 2006, the Compensation Committee granted options with respect to an
aggregate of 40,000 shares under the 1997 Plan to two new employees and two new
directors.  The fair value of options awarded was estimated on the
date of grant using a Black-Scholes valuation model with assumptions for
expected volatility based on the historical volatility of the Company’s stock of
110%, contractual term of the options of ten years and a risk-free interest rate
based upon a three-year U.S. Treasury yield as of the date of grant of
4.7%.  The options granted to employees vest in three equal annual
installments and the directors’ options were granted with immediate vesting as
of the date of grant.  Based upon the foregoing factors, the fair
value of the options was determined to be $22.84 and $24.97 for employees and
directors, respectively.





During
fiscal 2008, approximately $535,000 of stock-based compensation expense was
recorded related to grants under the Plans compared to $480,000 for the same
period in the prior year.  As of October 31, 2008, there was
approximately $229,000 of total unrecognized stock-based compensation cost that
we expect to recognize by the end of fiscal 2009.




42


HURCO
COMPANIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


A summary
of the status of the options as of October 31, 2008, 2007 and 2006 and the
related activity for the year is as follows:




Shares
      Under
                                Option
                              
                              
                              Weighted
      Average
                                Exercise
      Price Per ShareBalance
      October 31, 2005
                              
                              
                              215,400
                              
                              
                              $
                              3.63Granted
                              
                              
                              --
                              
                              
                              
                              --Cancelled
                              
                              
                              --
                              
                              
                              
                              --Expired
                              
                              
                              (400
                              )
                              
                              
                              2.15Exercised
                              
                              
                              (126,300
                              )
                              
                              $
                              4.45Balance
      October 31, 2006
                              
                              
                              88,700
                              
                              
                              $
                              2.46Granted
                              
                              
                              40,000
                              
                              
                              
                              26.69Cancelled
                              
                              
                              --
                              
                              
                              
                              --Expired
                              
                              
                              --
                              
                              
                              
                              --Exercised
                              
                              
                              (45,700
                              )
                              
                              $
                              4.08Balance
      October 31, 2007
                              
                              
                              83,000
                              
                              
                              $
                              13.24Granted
                              
                              
                              10,000
                              
                              
                              
                              35.83Cancelled
                              
                              
                              --
                              
                              
                              
                              --Expired
                              
                              
                              --
                              
                              
                              
                              --Exercised
                              
                              
                              (28,631
                              )
                              
                              $
                              5.26Balance
      October 31, 2008
                              
                              
                              64,369
                              
                              
                              $
                              20.29





The total
intrinsic value of stock options exercised during the twelve months ended
October 31, 2008, 2007 and 2006 was approximately $0.5 million, $2.4 million and
$2.7 million respectively.





As of
October 31, 2008, the total intrinsic value of outstanding stock options already
vested and expected to vest and the intrinsic value of options that are
outstanding and exercisable as of October 31, 2008 was
$417,000.  Stock options outstanding and exercisable on October 31,
2008, 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$
                    2.13
      – 5.13
                    
                    
                    
                    20,500
                    
                    
                    $
                    2.15
                    
                    
                    
                    3.15.81
      – 8.25
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --26.69
                    
                    
                    
                    33,869
                    
                    
                    $
                    26.69
                    
                    
                    
                    8.035.83
                    
                    
                    
                    10,000
                    
                    
                    $
                    35.83
                    
                    
                    
                    9.6$
                    2.13
      – 35.83
                    
                    
                    
                    64,369
                    
                    
                    $
                    20.29
                    
                    
                    
                    6.7Exercisable$
                    2.13
      – 5.13
                    
                    
                    
                    20,500
                    
                    
                    $
                    2.15
                    
                    
                    
                    --5.81
      – 8.25
                    
                    
                    
                    --
                    
                    
                    
                    --
                    
                    
                    
                    --26.69
                    
                    
                    
                    13,869
                    
                    
                    $
                    26.69
                    
                    
                    
                    --35.83
                    
                    
                    
                    10,000
                    
                    
                    $
                    35.83
                    
                    
                    
                    --$
                    2.13
      – 26.69
                    
                    
                    
                    44,369
                    
                    
                    $
                    17.41
                    
                    
                    
                    --




43


HURCO
COMPANIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


10.           RELATED
PARTY TRANSACTIONS





Until the
fourth quarter of fiscal 2007, we owned approximately 24% of the outstanding
shares of a Taiwanese-based contract manufacturer, Quaser Machine Tools,
Inc.  This investment was accounted for using the equity method and
was included in Investments and Other Assets on the Consolidated Balance
Sheets.  On August 16, 2007, we entered into a contract for the sale
of our shares for $2.1 million, which was approximately our carrying
value.  The sale closed during the fourth quarter of
2007.  We did not recognize any material financial gain or loss as a
result of this transaction, but, did recognize a tax gain on the sale of the
investment that resulted in a tax liability of $740,000.  Our
purchases of product from this manufacturer totaled $3.4 million and $2.0
million for the years ended October 31, 2007 and 2006,
respectively.  Our sales of product to this manufacturer were $176,000
and $70,000 in fiscal 2007 and 2006, respectively.  Our trade payables
to this manufacturer were $857,000 at October 31, 2007.  Our trade
receivables from this manufacturer were $37,000 at October 31,
2007.





As of
October 31, 2008, we owned approximately 35% of the outstanding shares of
another Taiwanese-based contract manufacturer, Hurco Automation, Ltd.
(HAL).  HAL’s scope of activities includes the design, manufacture,
sales and distribution of industrial automation products, software systems and
related components, including control systems and components produced under
contract for sale exclusively to us.  We are accounting for this
investment using the equity method.  The investment of $2.6 million
and $2.4 million at October 31, 2008 and 2007 is included in Investments and
Other Assets on the Consolidated Balance Sheets.  Purchases of product
from HAL amounted to $10.3 million, $11.7 million and $10.5 million in 2008,
2007 and 2006, respectively.  Sales of product to HAL were $2.0
million, $1.9 million and $2.0 million for the years ended October 31, 2008,
2007 and 2006, respectively.  Trade payables to HAL were $1.6 million
and $2.4 million at October 31, 2008 and 2007, respectively.  Trade
receivables from HAL were $296,000 and $426,000 at October 31, 2008 and 2007,
respectively.





Summary
financial information for these two related parties is as follows:





(in
      thousands)
                  
                  2008
                  
                  
                  2007
      (1)
                  
                  
                  2006Net
      Sales
                  
                  $
                  11,935
                  
                  
                  $
                  58,053
                  
                  
                  $
                  58,286Gross
      Profit
                  
                  
                  1,883
                  
                  
                  
                  10,061
                  
                  
                  
                  10,932Operating
      Income
                  
                  
                  159
                  
                  
                  
                  3,757
                  
                  
                  
                  4,209Net
      Income
                  
                  
                  147
                  
                  
                  
                  3,467
                  
                  
                  
                  3,727Current
      Assets
                  
                  $
                  8,658
                  
                  
                  $
                  36,945
                  
                  
                  $
                  27,903Non-current
      Assets
                  
                  
                  2,195
                  
                  
                  
                  10,636
                  
                  
                  
                  7,684Current
      Liabilities
                  
                  
                  3,176
                  
                  
                  
                  18,785
                  
                  
                  
                  20,156


(1)Financial information for Quaser Machine Tools for fiscal 2007 includes
financial information through the date of sale.




11.           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.




44


HURCO
COMPANIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


12.           GUARANTEES





During
fiscal 2003, we adopted Financial Accounting Standards Board (FASB)
Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, an interpretation of FASB Statements No. 5, 57 and 107 and Rescission of
FASB Interpretation No. 34.”  FIN 45 clarifies the requirements of
FASB Statement No. 5, Accounting for Contingencies, relating to the guarantor’s
accounting for, and disclosures of, the issuance of certain types of
guarantees.





From time
to time, our subsidiaries guarantee third party payment obligations in
connection with the sale of certain machines to customers that use
financing.  At October 31, 2008, we had 56 outstanding third party
guarantees totaling approximately $1.7 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):





10/31/08
                            
                            
                            10/31/07Balance,
      beginning of period
                            
                            $
                            2,449
                            
                            
                            $
                            1,926Provision
      for warranties during the period
                            
                            
                            2,944
                            
                            
                            
                            2,459Charges
      to the accrual
                            
                            
                            (2,666
                            )
                            
                            
                            (2,087
                            )Impact
      of foreign currency translation
                            
                            
                            (189
                            )
                            
                            
                            151Balance,
      end of period
                            
                            $
                            2,536
                            
                            
                            $
                            2,449





13.           OPERATING
LEASES




We lease
facilities, certain equipment and vehicles under operating leases that expire at
various dates through 2017.  Future payments required under operating
leases as of October 31, 2008, are summarized as follows (in
thousands):





2009
                            
                            $
                            2,5332010
                            
                            
                            1,4832011
                            
                            
                            9272012
                            
                            
                            5752013
                            
                            
                            442Thereafter
                            
                            
                            540Total
                            
                            $
                            6,500





Lease
expense for the years ended October 31, 2008, 2007, and 2006 was $2.6 million,
$2.3 million, and $1.9 million, respectively.




W e
recorded approximately $180,000 of lease income during fiscal 2008 from
subletting 50,000 square feet of our Indianapolis facility.  The
sublease expires on April 30, 2010.




45


HURCO
COMPANIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


14.  QUARTERLY
HIGHLIGHTS (Unaudited)





First
                            Quarter
                          
                          
                          Second
                            Quarter
                          
                          
                          Third
                            Quarter
                          
                          
                          Fourth
                            Quarter2008 (In thousands, except per share
      data)Sales
      and service
      fees
                          
                          $
                          60,923
                          
                          
                          $
                          58,285
                          
                          
                          $
                          57,318
                          
                          
                          $
                          47,468Gross
      profit
                          
                          
                          24,857
                          
                          
                          
                          20,331
                          
                          
                          
                          20,879
                          
                          
                          
                          16,550Gross
      profit
      margin
                          
                          
                          40.8
                          %
                          
                          
                          34.9
                          %
                          
                          
                          36.4
                          %
                          
                          
                          34.9
                          %Selling,
      general and administrative expenses
                          
                          
                          12,376
                          
                          
                          
                          11,676
                          
                          
                          
                          11,829
                          
                          
                          
                          10,930Operating
      income
                          
                          
                          12,481
                          
                          
                          
                          8,655
                          
                          
                          
                          9,050
                          
                          
                          
                          5,620Provision
      for income
      taxes
                          
                          
                          4,522
                          
                          
                          
                          3,054
                          
                          
                          
                          2,954
                          
                          
                          
                          1,116Net
      income
                          
                          
                          7,805
                          
                          
                          
                          5,467
                          
                          
                          
                          5,826
                          
                          
                          
                          3,422Income
      per common share – basic
                          
                          $
                          1.22
                          
                          
                          $
                          0.85
                          
                          
                          $
                          0.91
                          
                          
                          $
                          0.51Income
      per common share – diluted
                          
                          $
                          1.21
                          
                          
                          $
                          0.85
                          
                          
                          $
                          0.90
                          
                          
                          $
                          0.50First
                            Quarter
                          
                          
                          Second
                            Quarter
                          
                          
                          Third
                            Quarter
                          
                          
                          Fourth
                            Quarter2007 (In thousands, except per share
      data)Sales
      and service
      fees
                          
                          $
                          46,878
                          
                          
                          $
                          42,494
                          
                          
                          $
                          48,555
                          
                          
                          $
                          50,120Gross
      profit
                          
                          
                          17,324
                          
                          
                          
                          16,349
                          
                          
                          
                          18,417
                          
                          
                          
                          18,992Gross
      profit
      margin
                          
                          
                          37.0
                          %
                          
                          
                          38.5
                          %
                          
                          
                          37.9
                          %
                          
                          
                          37.9
                          %Selling,
      general and administrative expenses
                          
                          
                          9,250
                          
                          
                          
                          9,405
                          
                          
                          
                          10,228
                          
                          
                          
                          11,241Operating
      income
                          
                          
                          8,074
                          
                          
                          
                          6,944
                          
                          
                          
                          8,189
                          
                          
                          
                          7,751Provision
      for income
      taxes
                          
                          
                          2,998
                          
                          
                          
                          2,764
                          
                          
                          
                          3,659
                          
                          
                          
                          2,455Net
      income
                          
                          
                          5,395
                          
                          
                          
                          4,680
                          
                          
                          
                          5,163
                          
                          
                          
                          5,651Income
      per common share – basic
                          
                          $
                          0.85
                          
                          
                          $
                          0.73
                          
                          
                          $
                          0.81
                          
                          
                          $
                          0.88Income
      per common share – diluted
                          
                          $
                          0.84
                          
                          
                          $
                          0.73
                          
                          
                          $
                          0.80
                          
                          
                          $
                          0.88




15.           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.




46


HURCO
COMPANIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


We sell
our products through more than 100 independent agents and distributors
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 Canada, England, France, Germany, Italy, Singapore and China, which
are among the world's principal machine tool consuming
countries.  During fiscal 2008, no distributor accounted for more than
5% of our sales and service fees.  Approximately 89% of the worldwide
demand for computerized machine tools and computer control systems comes from
outside the U.S.  In fiscal 2008, more than 75% 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 31,2008
                                      
                                      
                                      2007
                                      
                                      
                                      2006Computerized
      Machine
      Tools
                                      
                                      $
                                      199,238
                                      
                                      
                                      $
                                      165,832
                                      
                                      
                                      $
                                      128,946Computer
      Control Systems and Software *
                                      
                                      
                                      5,677
                                      
                                      
                                      
                                      5,291
                                      
                                      
                                      
                                      4,694Service
      Parts
                                      
                                      
                                      13,240
                                      
                                      
                                      
                                      12,096
                                      
                                      
                                      
                                      10,494Service
      Fees
                                      
                                      
                                      5,838
                                      
                                      
                                      
                                      4,828
                                      
                                      
                                      
                                      4,383Total
                                      
                                      $
                                      223,994
                                      
                                      
                                      $
                                      188,047
                                      
                                      
                                      $
                                      148,517


*Amounts
shown do not include computer control systems and software sold as an integrated
component of computerized machine systems.





The
following table sets forth revenues by geographic area, based on customer
location, for each of the past three fiscal years (in thousands):





Revenues
      by Geographic Area
                
                Year
      Ended October 312008
                
                
                2007
                
                
                2006North
      America
                
                $
                48,087
                
                
                $
                50,010
                
                
                $
                48,711Germany
                
                
                81,945
                
                
                
                58,860
                
                
                
                39,764United
      Kingdom
                
                
                20,877
                
                
                
                19,326
                
                
                
                16,089France
                
                
                13,412
                
                
                
                11,019
                
                
                
                9,107Other
      Europe
                
                
                46,531
                
                
                
                35,245
                
                
                
                22,113Total Europe
                
                
                162,765
                
                
                
                124,450
                
                
                
                87,073Asia
                
                
                11,816
                
                
                
                12,493
                
                
                
                11,866Other
      Foreign
                
                
                1,326
                
                
                
                1,094
                
                
                
                867Total Foreign
                
                
                175,907
                
                
                
                138,037
                
                
                
                99,806$
                223,994
                
                
                $
                188,047
                
                
                $
                148,517





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





As
      of October 312008
                  
                  
                  2007
                  
                  
                  2006United
      States
                  
                  $
                  8,421
                  
                  
                  $
                  7,795
                  
                  
                  $
                  8,308Foreign
      countries
                  
                  
                  6,996
                  
                  
                  
                  5,489
                  
                  
                  
                  2,934$
                  15,417
                  
                  
                  $
                  13,284
                  
                  
                  $
                  11,242




47


HURCO
COMPANIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


16.        NEW
ACCOUNTING PRONOUNCEMENTS





During
2006, the FASB released Statement No. 157, “Fair Value Measurements,” a new
standard that 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.  The changes to current practice resulting from the
adoption of this statement relate to defining fair value, the methods used to
measure fair value and expanding our financial statement disclosures about our
fair value measurements.  We will be required to adopt and report the
impact of Statement 157 in the first quarter of fiscal 2009. In February 2008,
the FASB issued Staff Position (FSP) 157-2, “Effective Date of FASB Statement
No. 157.”  This FSP delays the effective date of Statement 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis (at least annually)
to fiscal years beginning after November 15, 2008. Although we have not adopted
this statement, we have assessed the potential impact and have concluded that
its adoption will not have a material effect on our financial position or
results of operations.





In March
2008, the FASB released Statement No. 161, “Disclosures about Derivative
Instruments and Hedging Activities,” an amendment of SFAS No.
133.”  Statement 161 will require increased disclosure of our
derivative and hedging activities, including how derivative and hedging
activities affect our consolidated statement of operations, balance sheet, and
cash flows. Statement 161 is effective for interim periods and fiscal years
beginning after November 15, 2008.  The adoption of Statement 161 will
increase the required disclosure of our derivative and hedging activities, but
is not expected to have a material impact on our financial position or results
of operations.




48




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





None.





Item 9A.CONTROLS AND
PROCEDURES





Under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, we carried out an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures as of October 31, 2008 pursuant to Rule 13a-15(b) under the
Securities Exchange Act of 1934, as amended.  Based upon that
evaluation, our management, including the Chief Executive Officer and Chief
Financial Officer, concluded that our disclosure controls and procedures were
effective as of the evaluation date.





There
have been no changes in our internal controls over financial reporting that
occurred during the fourth quarter of the fiscal year ended October 31, 2008
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.




49




Item 9B.OTHER
INFORMATION





During
the fourth quarter of fiscal 2008, the Audit Committee of the Board of Directors
did not engage 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.





The
following graph illustrates the cumulative total shareholder return on Hurco
common stock for the five-year period ended October 31, 2008, as compared to the
Russell 2000 and a peer group consisting of traded securities for U.S. companies
in the same three digit SIC group as Hurco (SIC 3540-3549 – Metal Working
Machinery and Equipment).  The comparisons in this table are required
by the SEC and are not intended to forecast or be indicative of possible future
performance of Hurco common stock.









10/03
              10/04
              10/05
              10/06
              10/07
              10/08Hurco
      Companies, Inc.
              
              100.00
              557.59
              693.77
              1014.01
              2221.79
              875.49Russell
      2000
              
              100.00
              111.73
              125.23
              150.25
              164.18
              108.09Peer
      Group - SIC Codes 3540-3549
              
              100.00
              159.75
              170.26
              177.47
              220.27
              116.68





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




50




PART
III





Item 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE





The
information required by this item is incorporated herein by reference to the
definitive proxy statement for our 2009 annual meeting of shareholders except
that the information required by Item 10 regarding our executive officers is
included herein under a separate caption at the end of Part I.





Item 11.EXECUTIVE
COMPENSATION





The
information required by this item is incorporated herein by reference to the
definitive proxy statement for our 2009 annual meeting of
shareholders.





Item 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS





Except
for the information concerning equity compensation plans, the information
required by this item is incorporated herein by reference to the definitive
proxy statement for our 2009 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, 2008:





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
                
                64,369
                
                $20.29
                
                740,000Equity
      compensation plans not approved by security holders
                
                --
                
                --
                
                --Total
                
                64,369
                
                $20.29
                
                740,000





As of
October 31, 2008, there were no outstanding non-qualified options that had been
granted other than pursuant to a plan approved by our shareholders.





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





The
information required by this item is incorporated herein by reference to the
definitive proxy statement for our 2009 annual meeting of
shareholders.





Item 14. PRINCIPAL ACCOUNTING FEES
AND SERVICES





The
information required by this item is incorporated herein by reference to the
definitive proxy statement for our 2009 annual meeting of
shareholders.




51




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 Horwath
      LLP
                        
                        27Consolidated
      Statements of Income – years endedOctober
      31, 2008, 2007 and 2006
                        
                        29Consolidated
      Balance Sheets – as of October 31, 2008 and 2007
                        
                        30Consolidated
      Statements of Cash Flows – yearsended
      October 31, 2008, 2007 and 2006
                        
                        31Consolidated
      Statements of Changes in Shareholders’ Equity –years
      ended October 31, 2008, 2007 and 2006
                        
                        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
                        
                        53
  All
      other financial statement schedules are omitted because they are not
      applicable or the required information is included in the consolidated
      financial statements or notes thereto.(b)
                            ExhibitsExhibits
      being filed with this Form 10-K or incorporated herein by reference are
      listed on page 54.
  52





Schedule
II - Valuation and Qualifying Accounts and Reserves


for
the years ended October 31, 2008, 2007, and 2006


(Dollars
in thousands)





Description
                  
                  Balance
      at
                    Beginning
                    of
      Period
                  
                  
                  Charged
      to
                    Costs
      and
                    Expenses
                  
                  
                  Charged
                    To
      Other
                    Accounts
                  
                  
                  Deductions
                  
                  
                  
                  
                  
                  Balance
                    At
      End
                    Of
      PeriodAllowance
      for doubtfulAccounts
      for the year ended:October
      31,
      2008
                  
                  $
                  751
                  
                  
                  $
                  (42
                  )
                  
                  
                  --
                  
                  
                  $
                  31
                  
                  
                  (1)
                  
                  
                  $
                  678October
      31,
      2007
                  
                  $
                  635
                  
                  
                  $
                  128
                  
                  
                  
                  --
                  
                  
                  $
                  12
                  
                  
                  (2)
                  
                  
                  $
                  751October
      31,
      2006
                  
                  $
                  842
                  
                  
                  $
                  (227
                  )
                  
                  
                  --
                  
                  
                  $
                  (20
                  )
                  
                  (3)
                  
                  
                  $
                  635Accrued
      warranty expensesFor
      the year ended:October
      31,
      2008
                  
                  $
                  2,449
                  
                  
                  $
                  2,755
                  
                  
                  
                  --
                  
                  
                  $
                  2,666
                  
                  
                  
                  
                  
                  $
                  2,536October
      31,
      2007
                  
                  $
                  1,926
                  
                  
                  $
                  2,610
                  
                  
                  
                  --
                  
                  
                  $
                  2,087
                  
                  
                  
                  
                  
                  $
                  2,449October
      31,
      2006
                  
                  $
                  1,618
                  
                  
                  $
                  2,201
                  
                  
                  
                  --
                  
                  
                  $
                  1,893
                  
                  
                  
                  
                  
                  $
                  1,926




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




(2) Receivable
write-offs of $20,000, net of cash recoveries on accounts previously written off
of $8,000.




(3)  Receivable write-offs of $5,000, net of cash recoveries on
accounts previously written off of $25,000.




53





EXHIBITS
INDEX





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





10.1*
                                    Summary
      compensation table.10.2*
                                    Form
      of restated split-dollar insurance agreement11
                                    Statement
      re: computation of per share earnings.21
                                    Subsidiaries
      of the Registrant.23.1
                                    Consent
      of Independent Registered Public Accounting Firm, Crowe Horwath
      LLP31.1
                                    Certification
      by the Chief Executive Officer, pursuant to Rule 13a-15(b) under the
      Securities and Exchange Act of 1934, as amended.31.2
                                    Certification
      by the Chief Financial Officer, pursuant to Rule 13a-15(b) under the
      Securities and Exchange Act of 1934, as amended.32.1
                                    Certification
      by the Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
                                    Certification
      by the Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
 Exhibits Incorporated by
Reference.  The following exhibits are incorporated into this
report:


3.1
                Amended
      and Restated Articles of Incorporation of the Registrant, incorporated by
      reference to Exhibit 3.1 to the Registrant's Quarterly Report on Form 10-Q
      for the quarter ended July 31, 2000.3.2
                Amended
      and Restated By-Laws of the Registrant as amended through September 27,
      2006, incorporated by reference to Exhibit 3.1 to the Registrant’s Current
      Report on Form 8-K filed on September 27, 2006.10.2
                Credit
      Agreement dated as of December 7, 2007, between Hurco Companies, Inc. And
      JP Morgan Chase Bank, N.A. incorporated by reference to Exhibit 10.1 to
      the Registrant’s Current Report on Form 8-K filed December 12,
      2007.10.3*
                Employment
      Agreement between the Registrant and John G. Oblazney dated January 12,
      2007, incorporated by reference to Exhibit 10.1 to the Registrant’s Annual
      Report on Form 10-K for the year ended October 31,
2006.10.4*
                Employment
      Agreement between the Registrant and James D. Fabris dated November 18,
      1997, incorporated by reference as Exhibit 10.15 to the Registrant's
      Quarterly Report on Form 10-Q for the quarter ended January 31,
      1998.10.5*
                Employment
      Agreement between the Registrant and Michael Doar dated November 13, 2001,
      incorporated by reference as Exhibit 10.2 to the Registrant’s Quarterly
      Report on Form 10-Q for the quarter ended January 31,
  2002.10.6*
                Amended
      1997 Stock Option and Incentive Plan incorporated by reference as Exhibit
      10 to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter
      ended July 31, 2005.10.7
                Hurco
      Companies, Inc. 2008 Equity Incentive Plan incorporated by reference to
      Appendix A of the Registrant’s definitive Proxy Statement on Schedule 14A
      filed January 28, 2008.




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




54




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 12th day of January
2009.




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




55




Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the
capacities and on the dates indicated:








Signature and Title(s)
                    
                    Date/s/ Michael Doar
                    
                    January
      12, 2009Michael
      Doar, Chairman of the Board,Chief
      Executive Officer and Directorof
      Hurco Companies, Inc.(Principal
      Executive Officer)/s/ John G.
      Oblazney
                    
                    January
      12, 2009John
      G. OblazneyVice-President,Secretary,
      Treasurer andChief
      Financial Officerof
      Hurco Companies, Inc.(Principal
      Financial Officer)/s/ Sonja
      K. McClelland
                    
                    January
      12, 2009Sonja
      K. McClellandCorporate
      Controller, Assistant Secretaryof
      Hurco Companies, Inc.(Principal
      Accounting Officer)





/s/ Stephen H. Cooper
              
              January
      12, 2009Stephen
      H. Cooper, Director/s/ Robert W. Cruickshank
              
              January
      12, 2009Robert
      W. Cruickshank, Director/s/ Philip James
              
              January
      12, 2009Philip
      James, Director/s/ Michael P. MazzaMichael
      P. Mazza, Director
              
              January
      12, 2009/s/ Richard T. Niner
              
              January
      12, 2009Richard
      T. Niner, Director/s/ Charlie Rentschler
              
              January
      12, 2009Charlie
      Rentschler, Director/s/ Janaki Sivanesan
              
              January
      12, 2009Janaki
      Sivanesan, Director




56