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, 2009
  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).                                                                                                       Yes
o  No
x





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





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-


accelerated
filer. See definition of “accelerated filer” 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).                                                                                                           Yes
o  No
x





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


Yes o  No o


The
aggregate market value of the registrant’s voting stock held by non-affiliates
as of April 30, 2009 (the last day of our most recently completed second
quarter) was $98,432,000.





The
number of shares of the registrant’s common stock outstanding as of January 7,
2010 was 6,440,851.





DOCUMENTS
INCORPORATED BY REFERENCE: Portions of the registrant’s Proxy Statement for its
2010 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. We 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 and Guangzhou, China; High Wycombe, England; Paris, France; Munich,
Germany; Chennai, India; Milan, Italy; Singapore; Benoni, South Africa
and Bilbao, Spain, 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, China,
France, Germany, Italy, Poland, Singapore, South Africa, Spain, the United
Kingdom and certain parts of the United States.  Distribution
facilities are located in Los Angeles, California, Venlo, the Netherlands, and
Singapore.





Our
strategy is to design, manufacture and sell a comprehensive line of computerized
machine tools that incorporate our proprietary, interactive, computer control
technology for the global metalworking market.  Our technology is
designed to enhance the machine tool user's productivity through ease of
operation and higher levels of machine performance (speed, accuracy and surface
finish quality).  We use an open system software architecture that
permits our computer control systems and software to be produced and employed
using standard PC hardware. We have emphasized a “user-friendly” design that
employs both interactive conversational and graphical programming software. Each
year we have expanded our product offering to meet customer needs, which has led
us to design and manufacture more complex machining centers with advanced
capabilities.  We bring a disciplined approach to strategically enter
new geographic markets, as appropriate.  Combined with a strong
worldwide demand for machine tools, our introduction of new, technologically
advanced products and expansion into new markets resulted in significant growth
between the beginning of fiscal 2003 and the end of fiscal
2008.  Since the beginning of fiscal 2009, that growth trend reversed
as the global machine tool market was significantly impacted by the global
recession.


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 6 to 12 months
and therefore is unreliable for forecasting purposes.




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




Products




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




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





Net
      Sales and Service Fees by Product Category(Dollars
      in thousands)
                                
                                Year
      ended October 31,2009
                                
                                
                                2008
                                
                                
                                2007Continuing Products and
      ServicesComputerized
      Machine Tools
                                
                                $
                                75,213
                                
                                
                                
                                82.7
                                %
                                
                                $
                                199,238
                                
                                
                                
                                89.0
                                %
                                
                                $
                                165,832
                                
                                
                                
                                88.2
                                %Computer
      Control Systems and Software*
                                
                                
                                2,546
                                
                                
                                
                                2.8
                                %
                                
                                
                                5,678
                                
                                
                                
                                2.5
                                %
                                
                                
                                5,291
                                
                                
                                
                                2.8
                                %Service
      Parts
                                
                                
                                8,851
                                
                                
                                
                                9.7
                                %
                                
                                
                                13,240
                                
                                
                                
                                5.9
                                %
                                
                                
                                12,096
                                
                                
                                
                                6.4
                                %Service
      Fees
                                
                                
                                4,406
                                
                                
                                
                                4.8
                                %
                                
                                
                                5,838
                                
                                
                                
                                2.6
                                %
                                
                                
                                4,828
                                
                                
                                
                                2.6
                                %Total
                                
                                $
                                91,016
                                
                                
                                
                                100
                                %
                                
                                $
                                223,994
                                
                                
                                
                                100
                                %
                                
                                $
                                188,047
                                
                                
                                
                                100
                                %


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


2


Computerized Machine Tools –
Machining and Turning Centers





We
design, manufacture and sell computerized machine tools equipped with a fully
integrated interactive computer control system that features our WinMax®software. Our computer control system enables a machine tool operator to
create complex two-dimensional or three-dimensional machining programs directly
from an engineering drawing or computer aided design geometry file. An operator
with little or no machine tool programming experience can successfully create a
program with minimal training and begin machining the part in a short period of
time.  The control features an operator console with a liquid crystal
display (LCD), and incorporates an upgradeable personal computer (PC) platform
using a 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.





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





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:





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 fourteen 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.


3


Five-Axis
Product Line





The
five-axis product line is targeted at manufacturers seeking to produce complex
multi-sided parts in a single setup. Machines in this product line can yield
significant productivity gains for operations that previously processed each
side of a part individually.  Due to market demand for increased
processing efficiency, we continued our focus on five-axis technology in fiscal
2009 and introduced two new five-axis machining centers. In total, we now have
eight five-axis machining centers to offer customers. The base prices of the
five-axis machines range from $100,000 to $250,000.





TM/TMM
Product Line





Since its
introduction in fiscal 2005, we have continued to expand the TM turning center
(horizontal slant-bed lathe) product line. The TM series is designed for
entry-level job shops and contract manufacturers seeking efficient processing of
small to medium lot sizes. The TM is offered in 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. We offer
two TMM models with this capability.  The base prices of the TM/TMM
machines range from $40,000 to $100,000.





TMX
Product Line





The TMX
product line consists of high performance turning centers.  We added
one TMX model in 2009, which means we have four TMX models, three with chucks of
8 inches and one with a chuck of 10 inches. 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





This
category includes three product series: the dual column DCX Series, the zone
VTXZ Series, and the horizontal HTX Series. In 2009, we added a second machining
center to the DCX Series. This 3-meter DCX32 machining center surpassed the
DCX22 as the largest machining center we have ever made. The zone VTXZ machining
center is designed for production flexibility. The VTXZ can work as a dual work
zone machine to support continuous production or a single zone to produce long,
structural parts. Both the DCX Series and VTXZ Series are designed to facilitate
production of large parts and molds often required by the aerospace and energy
industries. The horizontal machining center (HTX) is also included in this
category as it facilitates efficient and accurate machining of complex
production parts. The base prices of these machines range from $235,000 to
$350,000.





*Pentium® is a
registered trademark of Intel Corporation.


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





Computer Control Systems and
Software





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





Autobend®





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


4


Software
Products





In
addition to our standard computer control features, we offer software option
products for two-dimensional 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 our 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.





Parts and
Service





Our
service organization provides installation, warranty, operator training and
customer support for our products on a worldwide basis.  In the United
States, our principal distributors have primary responsibility for machine
installation and warranty service and support for product sales.  Our
service organization also sells software options, computer control upgrades,
accessories and replacement parts for our products.  Our after-sales
parts and service business strengthens our customer relationships and provides
continuous information concerning the evolving requirements of
end-users.


5


Manufacturing





Our
computerized metal cutting machine tools are manufactured to our specifications
primarily by our wholly owned subsidiary in Taiwan, Hurco Manufacturing Limited
(HML).  HML conducts final assembly operations and is supported by a
network of contract suppliers of components and sub-assemblies who manufacture
components for our products in accordance with our proprietary designs, quality
standards and cost specifications. This has enabled us to lower our production
costs, reduce our working capital per sales dollar and adjust our worldwide
manufacturing capacity without significant incremental investment in capital
equipment or personnel.  Our manufacturing facility in Ningbo, China,
focuses on the machining of castings to support HML’s production in
Taiwan.  In the fourth quarter of fiscal 2009, we expanded the Ningbo
facility to produce VM and TM machines specifically for the Chinese
market.





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





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





Marketing and
Distribution





We sell
our products through more than 100 independent agents and distributors
throughout North America, Europe and Asia.  Although some distributors
carry competitive products, we are the primary line for the majority of our
distributors globally.  We also have direct sales personnel in Canada,
China, France, Germany, Italy, Poland, Singapore, South Africa, Spain, the
United Kingdom and certain parts of the United States, 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 2009, more than 70%
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.





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





Other
factors affecting demand include:





·
            the
      need to continuously improve productivity and shorten cycle
      time


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


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


·
            the
      declining supply of skilled
machinists


6


Demand
for our products is also highly dependent upon economic conditions and the
general level of business confidence, as well as such factors as production
capacity utilization and changes in governmental policies regarding tariffs,
corporate taxation, and other investment incentives. For additional
information 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.





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
                    development2009
                  
                  $
                  2,500
                  
                  
                  $
                  2,0002008
                  
                  
                  3,000
                  
                  
                  
                  9002007
                  
                  
                  3,100
                  
                  
                  
                  1,200




Employees





We had
approximately 390 full-time employees at the end of fiscal 2009, 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.


7


Backlog





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





Availability of Reports and
Other Information





Our
website 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
recent global economic crisis and the overall decline in economic activity
severely impacted banks and other lenders, limiting the ability of many
businesses, including our customers, to access the credit markets. 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.





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





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





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





During
fiscal 2009, more than 70% of our revenues were derived from sales to customers
located outside the United States.  In addition, our manufacturing
facilities are located outside of the United States.  Our
international operations are subject to a number of risks,
including:





·
            trade
      barriers


·
            regional
      economic uncertainty


·
            differing
      labor regulation


·
            governmental
      expropriation


·
            domestic
      and foreign customs and tariffs


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


·
            difficulty
      in obtaining distribution support


·
            difficulty
      in staffing and managing widespread
operations


·
            differences
      in the availability and terms of
financing


·
            political
      instability and unrest


·
            changes
      in tax regulations and rates in foreign
  countries


8


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





We
depend on limited sources for our products.





Our
wholly owned subsidiary in Taiwan, Hurco Manufacturing Ltd. (HML) produces the
vast majority of our machine tools.  Unplanned 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
in service by one of our key component suppliers could also have a material
adverse effect on our results of operations and financial
condition.





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





Our
international sales divisions generate more than 70% of our revenues, which are
invoiced and received in several foreign currencies, primarily the Euro and
Pound Sterling. Therefore, our results of operations and financial condition are
affected by fluctuations in exchange rates between these currencies and the U.S.
Dollar, both for purposes of actual conversion and for financial reporting
purposes. In addition, our exchange risk associated with our product purchases
primarily relates to 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 our consolidated
financial statements.





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





The
machine tool industry is subject to technological change, evolving industry
standards, changing customer requirements, and improvements in and expansion of
product offerings. Our ability to anticipate changes in technology, industry
standards, customers’ requirements and competitors’ product offerings and to
develop and introduce new and enhanced products on a timely basis that are
accepted in the market, 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.


9


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





We
manufacture products with a high iron and steel content for which worldwide
prices 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, our results of operations would be
adversely affected.





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





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





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





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





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


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


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


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


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


·
            insufficient
      revenues to offset increased expenses associated with
      acquisitions


·
            the
      potential loss of key employees of the acquired
  companies





Acquisitions
may also cause us to:





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


·
            assume
      liabilities


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


·
            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.


10


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





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





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





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





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





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





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


11


Item
1B. UNRESOLVED STAFF
COMMENTS





None.




Item
2.PROPERTIES





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





PrincipalUses
              
              Locations
              
              SquareFootageCorporate
      headquarters, design and engineering, product testing, sales and
      marketing, application engineering and customer service.
              
              Indianapolis,
      Indiana, USA   (1)
              
              165,000Manufacturing
              
              Taichung,
      Taiwan
              
              229,000Ningbo,
      China
              
              34,700Sales,
      design engineering, product testing and customer service.
              
              Dexter,
      Michigan, USA
              
              3,000Sales,
      application engineering & customer service.
              
              Mississauga,
      Canada
                High
      Wycombe, England
              
              3,600
                12,000Benoni,
      South Africa
              
              2,500Paris
      and Toulouse France
              
              11,100Munich,  Hagen
      and Roedermark, Germany
              
              26,000Milan
      and Venice, Italy
              
              13,000Bilbao,
      Spain
              
              3,500Singapore
              
              6,300Shanghai,
      China
              
              8,000Guangzhou,
      China
              
              4,700Chennai,
      India
              
              5,400Liegnitz,
      Poland
              
              2,900Grand
      Rapids, Michigan, USA
              
              5,000Warehouse,
      distribution, sales, application engineering and customer
      service
              
              Los
      Angeles, California, USA
              
              13,000








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




We own
the Indianapolis facility and lease all other facilities.  The leases
have terms expiring at various dates ranging from January 2010 to May
2017.  We believe that all of our facilities are well maintained and
are adequate for our needs now and in the foreseeable future.  We do
not believe that we would experience any difficulty in replacing any of the
present facilities if any of our leases were not renewed at
expiration.




12


Item
3.LEGAL
PROCEEDINGS




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





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





None.





Executive Officers of the
Registrant





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





The
following information sets forth as of December 31, 2009, 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
            
            54
            
            Chairman of the Board,
      Chief Executive Officer and PresidentJohn
      G. Oblazney
            
            41
            
            Vice
      President, Secretary, Treasurer and Chief Financial
  OfficerSonja
      K. McClelland
            
            38
            
            Corporate
      Controller, Assistant Secretary




Michael
Doar was elected
Chairman of the Board and Chief Executive Officer on November 14, 2001,
and, upon the resignation of Jim Fabris as President, effective October 31,
2009, Mr. Doar was elected to fill that office.  Mr. Doar had held
various management positions with Ingersoll Milling Machine Company from 1989
until 2001.  Mr. Doar has been a director of Hurco since
2000.





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





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


13


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.





2009
                
                
                2008Fiscal Quarter Ended:
                
                High
                
                
                Low
                
                
                High
                
                
                LowJanuary
      31
                
                $
                24.68
                
                
                $
                11.81
                
                
                $
                58.68
                
                
                $
                30.24April
      30
                
                
                16.97
                
                
                
                8.30
                
                
                
                52.12
                
                
                
                33.41July
      31
                
                
                19.89
                
                
                
                12.01
                
                
                
                49.30
                
                
                
                23.11October
      31
                
                
                20.45
                
                
                
                15.26
                
                
                
                38.24
                
                
                
                16.92





On
January 7, 2010, the closing price of our common stock on the Nasdaq Global
Select Market was $18.30





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





There
were 182 holders of record of our common stock as of January 7,
2010.





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





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




14


Item
6.SELECTED FINANCIAL
DATA




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





Year Ended October 312009
                                                                                                            
                                                                                                            
                                                                                                            2008
                                                                                                            
                                                                                                            
                                                                                                            2007
                                                                                                            
                                                                                                            
                                                                                                            2006
                                                                                                            
                                                                                                            
                                                                                                            2005Statement
      of Operations Data:
                                                                                                            
                                                                                                            (Dollars
      in thousands, except per share amounts)Sales
      and service fees
                                                                                                            
                                                                                                            $
                                                                                                            91,016
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            223,994
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            188,047
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            148,517
                                                                                                            
                                                                                                            
                                                                                                            $
                                                                                                            125,509Gross
      profit
                                                                                                            
                                                                                                            
                                                                                                            25,828
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            82,617
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            71,082
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            53,325
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            42,558Selling,
      general and administrative expenses
                                                                                                            
                                                                                                            
                                                                                                            30,874
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            46,811
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            40,124
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            30,697
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            26,057Operating
      income (loss)
                                                                                                            
                                                                                                            
                                                                                                            (5,046
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            35,806
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            30,958
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            22,628
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            16,501Other
      income (expense)
                                                                                                            
                                                                                                            
                                                                                                            1,234
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (1,640
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            1,742
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            745
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            (64
                                                                                                            )Net
      income (loss)
                                                                                                            
                                                                                                            
                                                                                                            (2,321
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            22,520
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            20,889
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            15,479
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            16,443Earnings
      (loss) per common share- diluted
                                                                                                            
                                                                                                            
                                                                                                            (0.36
                                                                                                            )
                                                                                                            
                                                                                                            
                                                                                                            3.49
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            3.24
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            2.42
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            2.60Weighted
      average common shares outstanding-diluted
                                                                                                            
                                                                                                            
                                                                                                            6,429
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            6,444
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            6,440
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            6,397
                                                                                                            
                                                                                                            
                                                                                                            
                                                                                                            6,336





As
      of October 312009
                                                                                
                                                                                
                                                                                2008
                                                                                
                                                                                
                                                                                2007
                                                                                
                                                                                
                                                                                2006
                                                                                
                                                                                
                                                                                2005Balance
      Sheet Data:
                                                                                
                                                                                (Dollars
      in thousands)Current
      assets
                                                                                
                                                                                $
                                                                                118,264
                                                                                
                                                                                
                                                                                $
                                                                                151,312
                                                                                
                                                                                
                                                                                $
                                                                                139,265
                                                                                
                                                                                
                                                                                $
                                                                                103,434
                                                                                
                                                                                
                                                                                $
                                                                                73,818Current
      liabilities
                                                                                
                                                                                
                                                                                20,807
                                                                                
                                                                                
                                                                                
                                                                                51,129
                                                                                
                                                                                
                                                                                
                                                                                63,215
                                                                                
                                                                                
                                                                                
                                                                                44,340
                                                                                
                                                                                
                                                                                
                                                                                30,761Working
      capital
                                                                                
                                                                                
                                                                                97,457
                                                                                
                                                                                
                                                                                
                                                                                100,183
                                                                                
                                                                                
                                                                                
                                                                                76,050
                                                                                
                                                                                
                                                                                
                                                                                59,094
                                                                                
                                                                                
                                                                                
                                                                                43,057Current
      ratio
                                                                                
                                                                                
                                                                                5.7
                                                                                
                                                                                
                                                                                
                                                                                3.0
                                                                                
                                                                                
                                                                                
                                                                                2.2
                                                                                
                                                                                
                                                                                
                                                                                2.3
                                                                                
                                                                                
                                                                                
                                                                                2.4Total
      assets
                                                                                
                                                                                
                                                                                144,743
                                                                                
                                                                                
                                                                                
                                                                                177,444
                                                                                
                                                                                
                                                                                
                                                                                163,781
                                                                                
                                                                                
                                                                                
                                                                                125,545
                                                                                
                                                                                
                                                                                
                                                                                94,114Non-current
      liabilities
                                                                                
                                                                                
                                                                                3,560
                                                                                
                                                                                
                                                                                
                                                                                2,838
                                                                                
                                                                                
                                                                                
                                                                                2,963
                                                                                
                                                                                
                                                                                
                                                                                5,830
                                                                                
                                                                                
                                                                                
                                                                                4,409Total
      debt
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                —
                                                                                
                                                                                
                                                                                
                                                                                4,010
                                                                                
                                                                                
                                                                                
                                                                                4,136Shareholders’
      equity
                                                                                
                                                                                
                                                                                120,376
                                                                                
                                                                                
                                                                                
                                                                                123,477
                                                                                
                                                                                
                                                                                
                                                                                97,603
                                                                                
                                                                                
                                                                                
                                                                                75,375
                                                                                
                                                                                
                                                                                
                                                                                58,944


15


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





EXECUTIVE
OVERVIEW





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





The
following overview is intended to provide a brief explanation of the principal
factors that have contributed to our 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.





We
experienced significant growth in our sales and earnings between the beginning
of fiscal 2003 and the end of fiscal 2008.  The primary drivers of
this growth were the strong worldwide demand for machine tools during that
period, the expansion of our product line to include higher-price and
higher-margin products, increased customer acceptance of our products, and the
strength of our selling and manufacturing operations outside the United States.
Our operational performance for fiscal 2009 was adversely affected by the recent
global economic recession and its impact on our customers’ ability to attain
credit combined with their cautious attitude about future growth
opportunities.





The
market for machine tools is international in scope. We have both significant
foreign sales and foreign manufacturing operations. During fiscal 2008, more
than 75% of our revenues were attributable to customers located abroad. That
percentage decreased to approximately 70% in fiscal 2009, due primarily to
deterioration of the European and Asian markets for machine tool products as a
result of the recent global recession. We sell our products through more than
100 independent agents and distributors in countries throughout North America,
Europe and Asia. We also have our own direct sales and service organizations in
Canada, China, France, Germany, Italy, Poland, Singapore, South Africa, Spain,
the United Kingdom, and certain areas of the United States. The vast majority of
our machine tools are manufactured in Taiwan to our specifications by our wholly
owned subsidiary, Hurco Manufacturing Limited (HML).  Machine castings
and components to support HML’s production are manufactured at our facility in
Ningbo, China.  We also manufacture machine tools for the Chinese
market at the Ningbo plant.





Our sales
to foreign customers are denominated, and payments by those customers are made,
in the prevailing currencies—primarily the Euro and Pound Sterling—in the
countries in which those customers are located. Our product costs are incurred
and paid primarily in the New Taiwan Dollar and the U.S.
Dollar.  Changes in currency exchange rates may have a material effect
on our operating results and consolidated balance sheets as reported under the
U.S. Generally Accepted Accounting Principles. For example, when the U.S. Dollar
strengthens in value relative to a foreign currency, as has been the case since
the beginning of fiscal 2009, sales made, and expenses incurred, in that
currency when translated to U.S. Dollars for reporting in our financial
statements, are lower than would be the case when the U.S. Dollar is weaker. In
our comparison of period-to-period results, we discuss the effect of currency
translation on those results including the increases or decreases in those
results as reported in our financial statements (which reflect translation to
U.S. Dollars at exchange rates prevailing during the period covered by those
financial statements) and also the effect that changes in exchange rates had on
those results. 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.


16


During
periods of adverse economic conditions, manufacturers and suppliers of capital
goods, such as our company, are often the first to experience reductions in
demand, as their customers defer or eliminate investments in capital equipment.
Additionally, customers who might otherwise want to purchase capital goods found
it difficult to obtain financing due to disruptions in the credit markets.
During fiscal 2009, these conditions had the greatest impact on our European
sales region, which is the primary market for our more expensive, higher-margin
machines. As a result, we experienced overall declines of 59% in sales and
62% in orders during fiscal 2009 compared to fiscal 2008. The European sales
region experienced declines of 63% in sales and 65% in orders in fiscal 2009
compared to fiscal 2008.





In
response to these adverse market conditions, we implemented various initiatives
to reduce expenses, including management and employee pay reductions, workforce
reductions, suspension of the company’s contribution to the 401(k) plan and
restrictions on travel expenditures, while staying committed to our strategic
plan of product innovation and penetration of developing markets. Monthly unit
production levels for the third and fourth quarters of fiscal 2009 were reduced
by more than 80% from fiscal 2008 levels in an effort to decrease
inventories.





We
believe that, notwithstanding the impact of the recent global economic
recession, our company remains fundamentally stable. We have a broad product
line due to our ability to keep all product development schedules intact, 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 Operations expressed as a percentage of our
worldwide sales and service fees and the year-to-year percentage changes in the
dollar amounts of those items.





Percentage of Revenues
                      
                      
                      Year-to-Year % Change2009
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      Increase (Decrease)’09
      vs. ’08
                      
                      
                      ’08
      vs. ’07Sales
      and service fees
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
                      
                      
                      (59.4
                      )%
                      
                      
                      19.1
                      %Gross
      profit
                      
                      
                      28.4
                      %
                      
                      
                      36.9
                      %
                      
                      
                      37.8
                      %
                      
                      
                      (68.7
                      )%
                      
                      
                      16.2
                      %Selling,
      general and administrative expenses
                      
                      
                      33.9
                      %
                      
                      
                      20.9
                      %
                      
                      
                      21.3
                      %
                      
                      
                      (34.0
                      )%
                      
                      
                      16.7
                      %Operating
      income (loss)
                      
                      
                      (5.5
                      )%
                      
                      
                      16.0
                      %
                      
                      
                      16.5
                      %
                      
                      
                      (114.1
                      )%
                      
                      
                      15.7
                      %Other
      income (expense)
                      
                      
                      1.4
                      %
                      
                      
                      (0.7
                      )%
                      
                      
                      0.9
                      %
                      
                      
                      175.2
                      %
                      
                      
                      (194.1
                      )%Net
      income (loss)
                      
                      
                      (2.6
                      )%
                      
                      
                      10.1
                      %
                      
                      
                      11.1
                      %
                      
                      
                      (110.3
                      )%
                      
                      
                      7.8
                      %





Fiscal 2009 Compared to
Fiscal 2008





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





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


17




Net
Sales and Service Fees by Geographic Region





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




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




During
fiscal 2009, these conditions had the greatest impact on our European sales
region, the primary market for our more expensive, higher-margin machines. The
European sales region accounted for 66% of sales in fiscal 2009 and 73% in
fiscal 2008.  In fiscal 2009, unit shipments decreased by 58% in
Europe and 55% in North America and Asia from fiscal 2008 levels.




Net
Sales and Service Fees by Product Category





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





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





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





Orders and
Backlog.  New order bookings in fiscal 2009, were $80.6
million, a decrease of $131.9 million, or 62.1%, from the prior
year.  This decrease was primarily driven by a decline in European
orders, which were down $100.8 million, or 65%. Fiscal 2009 orders in North
America decreased $23.9 million, or 51%, and orders in the Asia Pacific sales
region decreased $7.2 million, or 65%.  Orders for fiscal 2009
compared to fiscal 2008 were unfavorably affected by approximately $6.9 million,
or 5.2%, due to changes in currency exchange rates.  Unit orders
decreased 60.3% in Europe, 58.0% in North America and 60.6% in the Asia Pacific
region.   Backlog was $6.3 million at October 31, 2009, compared
to $15.7 million at October 31, 2008.  We do not believe backlog is a
useful measure of past performance or indicative of future
performance.  Backlog orders as of October 31, 2009 are expected to be
fulfilled in fiscal 2010.





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




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


18




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





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





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





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





Fiscal 2008 Compared to
Fiscal 2007





Sales and Service Fees.Annual sales and service fees in fiscal 2008 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.





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%.


19


Net
Sales and Service Fees by Product Category





The
following table sets forth net sales and service fees by product category for
the years ended October 31, 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 were fulfilled in
fiscal 2009.





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 fiscal 2007.  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.


20





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





Liquidity and Capital
Resources





At
October 31, 2009, we had cash and cash equivalents of $28.8 million compared to
$26.4 million at October 31, 2008.  Approximately 56.3% of the $28.8
million of cash and cash equivalents is denominated in U.S.
Dollars.  The remaining balances are denominated in the local
currencies of our various foreign entities and are subject to fluctuations in
currency exchange rates.





Working
capital, excluding cash, was $68.7 million at October 31, 2009, compared to
$73.8 million at October 31, 2008.  The reduction in working capital
was primarily due to reduced sales and production as a result of the lower
market demand.





Capital
expenditures were $3.7 million in fiscal 2009, $5.5 million in fiscal 2008, and
$4.5 million in fiscal 2007.  Capital expenditures were primarily for
software development projects and an integrated computer system.  We
funded these expenditures with cash flow from operations.




At
October 31, 2009, 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. At
present, we have no plans to offer or sell securities.




Although
we have not made any significant acquisitions in the recent past and we have no
present plans for acquisitions, we continue to receive and review information on
businesses and assets, including intellectual property assets, which are
available for purchase.




Contractual Obligations and
Commitments





The
following is a table of contractual obligations and commitments as of October
31, 2009 (all amounts in thousands):





Payments
Due by Period





Total
                
                
                Less than
                  1 Year
                
                
                1-3
                  Years
                
                
                3-5
                  Years
                
                
                More
                  than 5
                  YearsOperating
      Leases
                
                $
                4,780
                
                
                $
                1,915
                
                
                $
                2,002
                
                
                $
                863
                
                
                $
                —Deferred
      Credits and Other
                
                
                990
                
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                990Total
                
                $
                5,770
                
                
                $
                1,915
                
                
                $
                2,002
                
                
                $
                863
                
                
                $
                990





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 $671,000 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 2010 to be approximately $2.4 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 cash generated from
operations.


21





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, 2009, 53
such guarantees were outstanding totaling approximately $2.4 million in
guaranteed financing.  Upon shipment, the customer has the risk of
ownership.  The customer does not obtain title until they have paid
for the machine.  We believe that the proceeds obtained from the sale
of a repossessed 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.  Our accounting policies, including those described below,
are frequently evaluated as our judgment and estimates are based upon historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances.





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





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





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





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


22





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





The
determination of our provision for income taxes requires judgment, the use of
estimates and the interpretation and application of complex tax
laws.  Our provision for income taxes reflects a combination of income
earned and taxed at the federal and state level in the U.S., as well as in
various foreign jurisdictions.  We have not provided for any U.S.
income taxes on the undistributed earnings of our foreign subsidiaries or equity
method investments based upon our determination that such earnings will be
indefinitely reinvested abroad.  On November 1, 2008, we adopted FASB
guidance related to accounting for uncertainty in income taxes and we currently
account for uncertain tax positions in accordance with the provisions of this
guidance. Refer to Note 7, Income Taxes, for information related to the
effect of adoption ofthis
guidance, and the accounting for our 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, tax planning
strategies, and taxable income in future years.  Our judgment
regarding future profitability may change due to future market conditions,
changes in U.S. or foreign tax laws and other factors.  These changes,
if any, may require material adjustments to these deferred tax assets and an
accompanying reduction or increase in net income in the period when such
determinations are made.





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





Capitalized Software Development
Costs – Costs incurred to develop new computer software products and
significant enhancements to software features of existing products are
capitalized as required by FASB guidance relating to accounting for the costs of
computer software to be sold, leased, or otherwise marketed, and amortized over
the estimated product life of the related software.  The determination
as to when in the product development cycle technological feasibility has been
established, and the expected product life, require judgments and estimates by
management and can be affected by technological developments, innovations by
competitors and changes in market conditions affecting demand.  We
periodically review the carrying values of these assets and make judgments as to
ultimate realization considering the above-mentioned risk factors.





Derivative Financial Instruments– Critical aspects of our accounting policy for derivative financial
instruments include conditions that require that critical terms of a hedging
instrument are essentially the same as a hedged forecasted
transaction.  Another important element of our policy demands that
formal documentation be maintained as required by FASB guidance relating to
accounting for derivative instruments and hedging activities.  Failure
to comply with these conditions would result in a requirement to recognize
changes in market value of hedge instruments in earnings.  We
routinely monitor significant estimates, assumptions, and judgments associated
with derivative instruments, and compliance with formal documentation
requirements.


23





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


24


Item
7a.QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS





Interest Rate
Risk





We had no
borrowings outstanding under our bank credit facilities at October 31, 2009 and
have not borrowed from our bank credit facilities since February
2005.  Note 5 of Notes to Consolidated Financial Statements sets forth
the terms of our current credit facilities.





Foreign Currency Exchange
Risk





In fiscal
2009, we derived more than 70% of our revenues from foreign
markets.  All of our computerized machine tools and computer control
systems, as well as certain proprietary service parts, are sourced by our
U.S.-based engineering and manufacturing division and re-invoiced to our foreign
sales and service subsidiaries, primarily in their functional
currencies.





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





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





Forward
contracts for the sale or purchase of foreign currencies as of October 31, 2009,
which are designated as cash flow hedges under Financial Accounting Standards
Board’s (FASB) guidance related to accounting for derivative instruments and
hedging activities were as follows:




Notional
                          Amount
                        
                        
                        Weighted
                          Avg.
                        
                        
                        Contract Amount at
                          ForwardRates in
                          U.S. DollarsForward
                          Contracts
                        
                        in Foreign
                          Currency
                        
                        
                        Forward
                          Rate
                        
                        
                        Contract
                          Date
                        
                        
                        October 31,
                          2009
                        
                        Maturity
                          DatesSale
    Contracts:Euro
                        
                        
                        6,900,000
                        
                        
                        
                        1.3876
                        
                        
                        $
                        9,574,440
                        
                        
                        $
                        10,149,857
                        
                        Nov 2009-Oct 2010Sterling
                        
                        
                        2,015,000
                        
                        
                        
                        1.5819
                        
                        
                        $
                        3,187,529
                        
                        
                        $
                        3,309,601
                        
                        Nov 2009-Oct
      2010Purchase
      Contracts:New Taiwan
      Dollar
                        
                        
                        275,000,000
                        
                        
                        
                        32.29
                        *
                        
                        $
                        8,517,360
                        
                        
                        $
                        8,578,063
                        
                        Nov 2009-Oct
      2010


*NT
Dollars per U.S. Dollar


25


Forward
contracts for the sale or purchase of foreign currencies as of October 31, 2009,
which were entered into to protect against the effects of foreign currency
fluctuations on receivables and payables and are not designated as hedges under
this guidance denominated in foreign currencies, were as follows:




Contract Amount at Forward
                      Rates in
                      U.S.DollarsForwardContracts
                    
                    Notional
                      Amountin
                      Foreign
                      Currency
                    
                    
                    Weighted
                      Avg.
                      Forward
                      Rate
                    
                    
                    Contract
                      Date
                    
                    
                    October31,
                      2009
                    
                    MaturityDatesSale
    Contracts:Euro
                    
                    
                    14,881,291
                    
                    
                    
                    1.4494
                    
                    
                    $
                    21,568,943
                    
                    
                    $
                    21,909,736
                    
                    Nov 2009 – Feb2010Pound
    Sterling
                    
                    
                    108,276
                    
                    
                    
                    1.6468
                    
                    
                    $
                    178,309
                    
                    
                    $
                    177,987
                    
                    Nov 2009Canadian
    Dollar
                    
                    
                    278,873
                    
                    
                    
                    0.9222
                    
                    
                    $
                    257,177
                    
                    
                    $
                    258,138
                    
                    Dec2009Singapore
      Dollar
                    
                    
                    5,090,247
                    
                    
                    
                    1.5501
                    
                    
                    $
                    3,283,718
                    
                    
                    $
                    3,630,782
                    
                    Mar2010Purchase
      Contracts:New Taiwan
      Dollar
                    
                    
                    11,780,000
                    
                    
                    
                    32.34
                    *
                    
                    $
                    364,255
                    
                    
                    $
                    361,350
                    
                    Nov2009


*  NT
Dollars per U.S. Dollar





We are
exposed to foreign currency exchange risk related to our investment in net
assets in foreign countries.   To manage this risk, we entered
into a forward contract on November 26, 2007 with a notional amount of €3.0
million.  We designated this forward contract as a hedge of our net
investment in Euro denominated assets.  We selected the forward method
under the FASB guidance related to the accounting for derivatives instruments
and hedging activities.  The forward method requires all changes in
the fair value of the forward to be reported as a cumulative translation
adjustment in Accumulated Other Comprehensive Loss, net of tax, in the same
manner as the underlying hedged net assets. This forward contract matured on
November 25, 2008 and we entered into a new forward contract for the same
notional amount.  As of October 31, 2009, we had a realized gain of
$355,000 and an unrealized loss of $332,000, net of tax, recorded as cumulative
translation adjustments in Accumulated Other Comprehensive Loss, related to
these forward contracts.





Forward
contracts for the sale or purchase of foreign currencies as of October 31, 2009,
which are designated as net investment hedges under this guidance were as
follows:





Notional
                    Amount
                  
                  
                  Weighted
                    Avg.
                  
                  
                  Contract Amount at Forward
                    Rates in
                    U.S. DollarsForward Contracts
                  
                  in Foreign
                    Currency
                  
                  
                  Forward
                    Rate
                  
                  
                  Contract
                    Date
                  
                  
                  October 31,
                    2009
                  
                  Maturity DateSale
    Contracts:Euro
                  
                  
                  3,000,000
                  
                  
                  
                  1.2936
                  
                  
                  $
                  3,880,800
                  
                  
                  $
                  4,417,110
                  
                  Nov
  2009


26


Management’s
Annual Report on Internal Control Over Financial Reporting





Tothe Shareholders and


Board of Directors


of Hurco
Companies, Inc.:





Management of Hurco Companies, Inc. (the
“Company”), has assessed the effectiveness of internal controls over financial
reporting as of October 31, 2009, based oncriteria 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, 2009, are effective
based on thecriteria
specified above.





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





/s/Michael
  DoarMichael
      Doar,Chairman
      of the Board, Chief Executive Officer and President/s/ John G. OblazneyJohn
      G. Oblazney,Vice
      President & Chief Financial Officer/s/ Sonja K. McClellandSonja
      K. McClellandCorporate
      Controller, Assistant Secretary(Principal
      Accounting Officer)Indianapolis,
      IndianaJanuary 12,
      2010




27


Item
8.                FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA





Report
of Independent Registered Public Accounting Firm





Tothe Shareholders and


Board of Directors


of Hurco
Companies, Inc.





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





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





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





We have also audited, in accordance with
the standards of the Public Company Accounting Oversight Board (United States),
Hurco Companies, Inc.’s internal control over financial reporting as of October
31, 2009, based on the criteria established in Internal Control – Integrated
Framework issued by the Commission of Sponsoring Organizations of the Treadway
Commission and our report dated January 12, 2010 expressed an unqualified
opinion therein.





/s/Ernst
& Young LLP





Indianapolis,
Indiana


January 12, 2010


28


Report
of Independent Registered Public Accounting Firm





Tothe Shareholders and


Board of Directors


of Hurco
Companies, Inc.





We have
audited Hurco Companies, Inc.’s internal control over financial reporting as of
October 31, 2009, based on criteria established in Internal Cotnrol-Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria).  Hurco Companies, Inc.’s management is
responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management’s Annual Report on Internal
Control Over Financial Reporting.   Our responsibility is to
express an opinion on the company’s internal control over financial reporting
based on our audit.





We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects.  Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness
of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances.  We
believe that our audit provides a reasonable basis for our opinion.





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





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





In our
opinion, Hurco Companies, Inc. maintained, in all material respects effective
internal control over financial reporting as of October 31, 2009, based on the
COSO criteria.





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





/s/Ernst
& Young LLP





Indianapolis,
Indiana


January 12, 2010


29


Report
of Independent Registered Public Accounting Firm





Tothe Shareholders and


Board of Directors


of Hurco
Companies, Inc.





We have
audited the consolidated accompanying balance sheet of Hurco Companies,
Inc.  as of October 31, 2008, and the related consolidated statements
of operations, changes in shareholders' equity, and cash flows for each of the
two years in the period ended October 31, 2008.  In connection with
our audits of the consolidated financial statements, we have also audited the
consolidated financial statement schedule listed in the index under Item 15 as
it relates to the information for the years ended October 31, 2008 and October
31, 2007.  Hurco Companies, Inc. management is responsible for these
financial statements and the financial statement schedule.  Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our 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.  Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the
circumstances.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements.  An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation.  We believe
that our audits provide a reasonable basis for our opinion.





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





/s/Crowe
Horwath LLP





Indianapolis,
Indiana


January 12, 2009


30


HURCO COMPANIES,
INC.


CONSOLIDATED STATEMENTS OF
OPERATIONS





Year Ended October
      312009
                  
                  
                  2008
                  
                  
                  2007(Dollars in thousands, except per
      share amounts)Sales and service
      fees
                  
                  $
                  91,016
                  
                  
                  $
                  223,994
                  
                  
                  $
                  188,047Cost of sales and
      service
                  
                  
                  65,188
                  
                  
                  
                  141,377
                  
                  
                  
                  116,965Gross
profit
                  
                  
                  25,828
                  
                  
                  
                  82,617
                  
                  
                  
                  71,082Selling, general and
      administrative expenses
                  
                  
                  30,874
                  
                  
                  
                  46,811
                  
                  
                  
                  40,124Operating income
      (loss)
                  
                  
                  (5,046
                  )
                  
                  
                  35,806
                  
                  
                  
                  30,958Interest
      expense
                  
                  
                  35
                  
                  
                  
                  63
                  
                  
                  
                  201Interest
    income
                  
                  
                  190
                  
                  
                  
                  542
                  
                  
                  
                  699Investment
      income
                  
                  
                  16
                  
                  
                  
                  465
                  
                  
                  
                  339Earnings (losses) from equity
      investments
                  
                  
                  (326
                  )
                  
                  
                  12
                  
                  
                  
                  1,048Other income (expense),
      net
                  
                  
                  1,389
                  
                  
                  
                  (2,596
                  )
                  
                  
                  (78
                  )Income (loss) before income
      taxes
                  
                  
                  (3,812
                  )
                  
                  
                  34,166
                  
                  
                  
                  32,765Provision (benefit) for income
      taxes
                  
                  
                  (1,491
                  )
                  
                  
                  11,646
                  
                  
                  
                  11,876Net income
      (loss)
                  
                  $
                  (2,321
                  )
                  
                  $
                  22,520
                  
                  
                  $
                  20,889Earnings (loss) per common share –
      basic
                  
                  $
                  (0.36
                  )
                  
                  $
                  3.51
                  
                  
                  $
                  3.27Weighted average common shares
      outstanding – basic
                  
                  
                  6,429
                  
                  
                  
                  6,415
                  
                  
                  
                  6,382Earnings (loss) per common share –
      diluted
                  
                  $
                  (0.36
                  )
                  
                  $
                  3.49
                  
                  
                  $
                  3.24Weighted average common shares
      outstanding – diluted
                  
                  
                  6,429
                  
                  
                  
                  6,444
                  
                  
                  
                  6,440





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


31


HURCO COMPANIES,
INC.


CONSOLIDATED BALANCE
SHEETS







As
      of October 312009
                                        
                                        
                                        2008(Dollars
      in thousands, except per share amounts)ASSETSCurrent
      assets:Cash
      and cash equivalents
                                        
                                        $
                                        28,782
                                        
                                        
                                        $
                                        26,394Short-term
      investments
                                        
                                        
                                        —
                                        
                                        
                                        
                                        6,674Accounts
      receivable, less allowance for doubtful accounts of  $809 in
      2009 and $678 in 2008
                                        
                                        
                                        13,988
                                        
                                        
                                        
                                        31,952Refundable
      taxes
                                        
                                        
                                        7,121
                                        
                                        
                                        
                                        —Inventories,
      net
                                        
                                        
                                        60,281
                                        
                                        
                                        
                                        66,368Deferred
      income taxes and other
                                        
                                        
                                        5,890
                                        
                                        
                                        
                                        5,444Derivative
      assets
                                        
                                        
                                        376
                                        
                                        
                                        
                                        12,463Other
                                        
                                        
                                        1,826
                                        
                                        
                                        
                                        2,017Total
      current assets
                                        
                                        
                                        118,264
                                        
                                        
                                        
                                        151,312Property
      and equipment:Land
                                        
                                        
                                        782
                                        
                                        
                                        
                                        782Building
                                        
                                        
                                        7,116
                                        
                                        
                                        
                                        7,127Machinery
      and equipment
                                        
                                        
                                        14,995
                                        
                                        
                                        
                                        14,885Leasehold
      improvements
                                        
                                        
                                        2,021
                                        
                                        
                                        
                                        1,76524,914
                                        
                                        
                                        
                                        24,559Less
      accumulated depreciation and amortization
                                        
                                        
                                        (11,802
                                        )
                                        
                                        
                                        (10,961
                                        )13,112
                                        
                                        
                                        
                                        13,598Software
      development costs, less accumulated
    amortization
                                        
                                        
                                        6,503
                                        
                                        
                                        
                                        5,711Investments
      and other assets, net
                                        
                                        
                                        6,864
                                        
                                        
                                        
                                        6,823$
                                        144,743
                                        
                                        
                                        $
                                        177,444LIABILITIES
      AND SHAREHOLDERS’ EQUITYCurrent
      liabilities:Accounts
      payable
                                        
                                        $
                                        7,920
                                        
                                        
                                        $
                                        26,691Accounts
      payable-related parties
                                        
                                        
                                        342
                                        
                                        
                                        
                                        1,612Accrued
      expenses and other
                                        
                                        
                                        9,025
                                        
                                        
                                        
                                        17,598Accrued
      warranty expenses
                                        
                                        
                                        1,286
                                        
                                        
                                        
                                        2,536Derivative
      liabilities
                                        
                                        
                                        2,234
                                        
                                        
                                        
                                        2,692Total
      current liabilities
                                        
                                        
                                        20,807
                                        
                                        
                                        
                                        51,129Non-current
      liabilities:Deferred
      income taxes
                                        
                                        
                                        2,570
                                        
                                        
                                        
                                        2,056Deferred
      credits and other
                                        
                                        
                                        990
                                        
                                        
                                        
                                        7823,560
                                        
                                        
                                        
                                        2,838Commitments
      and contingenciesShareholders’
      equity:Preferred
      stock: no par value per share, 1,000,000 shares authorized, no shares
      issued
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —Common
      stock: no par value, $.10 stated value per share, 13,250,000 shares
      authorized, 6,440,851 and 6,420,851 shares issued and outstanding in 2009
      and 2008, respectively
                                        
                                        
                                        644
                                        
                                        
                                        
                                        642Additional
      paid-in capital
                                        
                                        
                                        52,003
                                        
                                        
                                        
                                        51,690Retained
      earnings
                                        
                                        
                                        69,568
                                        
                                        
                                        
                                        71,889Accumulated
      other comprehensive loss
                                        
                                        
                                        (1,839
                                        )
                                        
                                        
                                        (744
                                        )Total
      shareholders’ equity
                                        
                                        
                                        120,376
                                        
                                        
                                        
                                        123,477$
                                        144,743
                                        
                                        
                                        $
                                        177,444





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


32


HURCO COMPANIES,
INC.


CONSOLIDATED STATEMENTS OF CASH
FLOWS





Year Ended October
      312009
                    
                    
                    2008
                    
                    
                    2007(Dollars in
      thousands)Cash flows from operating
      activities:Net income
      (loss)
                    
                    $
                    (2,321
                    )
                    
                    $
                    22,520
                    
                    
                    $
                    20,889Adjustments to reconcile net
      income (loss) to Net cash provided by (used for) operating
      activities:Provision for doubtful
      accounts
                    
                    
                    131
                    
                    
                    
                    (73
                    )
                    
                    
                    116Deferred income tax
      provision
                    
                    
                    (2,824
                    )
                    
                    
                    1,048
                    
                    
                    
                    1,216Equity in (income) loss of
      affiliates
                    
                    
                    326
                    
                    
                    
                    (12
                    )
                    
                    
                    (1,048
                    )Foreign currency (gain)
      loss
                    
                    
                    (6,422
                    )
                    
                    
                    8,184
                    
                    
                    
                    (7,602
                    )Unrealized (gain) loss on
      derivatives
                    
                    
                    4,058
                    
                    
                    
                    (3,886
                    )
                    
                    
                    429Depreciation and
      amortization
                    
                    
                    3,295
                    
                    
                    
                    3,023
                    
                    
                    
                    2,106Stock-based
      compensation
                    
                    
                    246
                    
                    
                    
                    535
                    
                    
                    
                    480Change in assets and
      liabilities:(Increase) decrease in accounts
      receivable
                    
                    
                    14,262
                    
                    
                    
                    (6,260
                    )
                    
                    
                    (1,742
                    )(Increase) decrease in
      inventories
                    
                    
                    11,409
                    
                    
                    
                    (11,832
                    )
                    
                    
                    (14,116
                    )Increase (decrease) in accounts
      payable
                    
                    
                    (20,524
                    )
                    
                    
                    (7,649
                    )
                    
                    
                    7,821Increase (decrease) in accrued
      expenses
                    
                    
                    (9,610
                    )
                    
                    
                    3,304
                    
                    
                    
                    6,474Net change in derivative assets
      and liabilities
                    
                    
                    3,261
                    
                    
                    
                    (2,158
                    )
                    
                    
                    491Other
                    
                    
                    3,230
                    
                    
                    
                    (6,583
                    )
                    
                    
                    (1,321
                    )Net cash provided by (used for)
      operating activities
                    
                    
                    (1,483
                    )
                    
                    
                    161
                    
                    
                    
                    14,193Cash flows from investing
      activities:Proceeds from sale of property and
      equipment
                    
                    
                    239
                    
                    
                    
                    17
                    
                    
                    
                    —Purchase of property and
      equipment
                    
                    
                    (1,679
                    )
                    
                    
                    (4,580
                    )
                    
                    
                    (3,325
                    )Purchase of
      investments
                    
                    
                    —
                    
                    
                    
                    (9,100
                    )
                    
                    
                    (24,000
                    )Sale of
      investments
                    
                    
                    6,674
                    
                    
                    
                    12,100
                    
                    
                    
                    14,000Software development
      costs
                    
                    
                    (2,020
                    )
                    
                    
                    (934
                    )
                    
                    
                    (1,185
                    )Other proceeds
      (investments)
                    
                    
                    (889
                    )
                    
                    
                    (80
                    )
                    
                    
                    1,898Net cash provided by (used for)
      investing activities
                    
                    
                    2,325
                    
                    
                    
                    (2,577
                    )
                    
                    
                    (12,612
                    )Cash flows from financing
      activities:Repayment of first
      mortgage
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    (4,010
                    )Tax benefit from exercise of stock
      options
                    
                    
                    26
                    
                    
                    
                    36
                    
                    
                    
                    298Proceeds from exercise of common
      stock options
                    
                    
                    43
                    
                    
                    
                    151
                    
                    
                    
                    186Net cash provided by (used for)
      financing activities
                    
                    
                    69
                    
                    
                    
                    187
                    
                    
                    
                    (3,526
                    )Effect of exchange rate changes on
      cash
                    
                    
                    1,477
                    
                    
                    
                    (1,137
                    )
                    
                    
                    1,859Net increase (decrease) in
      cash
                    
                    
                    2,388
                    
                    
                    
                    (3,366
                    )
                    
                    
                    (86
                    )Cash and cash equivalents at
      beginning of year
                    
                    
                    26,394
                    
                    
                    
                    29,760
                    
                    
                    
                    29,846Cash and cash equivalents at end
      of year
                    
                    $
                    28,782
                    
                    
                    $
                    26,394
                    
                    
                    $
                    29,760Supplemental
      disclosures:Cash paid
      for:Interest
                    
                    $
                    20
                    
                    
                    $
                    12
                    
                    
                    $
                    157Income
taxes
                    
                    $
                    4,877
                    
                    
                    $
                    15,799
                    
                    
                    $
                    9,971





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


33


HURCO COMPANIES,
INC.


CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY





Common
      Stock(Dollars
      in thousands, except
                Shares
      Issued and Outstanding)
              
              Shares
      Issued
                &
                Outstanding
              
              
              Amount
              
              
              Additional
                Paid-In
                Capital
              
              
              Retained
                Earnings
              
              
              Accumulated
                Other
                Comprehensive
                Income
                (Loss)
              
              
              TotalBalances,
      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
              )
              
              
              123,477Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (2,321
              )
              
              
              —
              
              
              
              (2,321
              )Translation
      of foreign currency financial statements
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3,080
              
              
              
              3,080Unrealized
      loss of derivative instruments, net of tax
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (4,377
              )
              
              
              (4,377
              )Reversal
      of unrealized loss on investments, net of
tax
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              202
              
              
              
              202Comprehensive
      loss
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (3,416
              )Exercise
      of common stock options
              
              
              20,000
              
              
              
              2
              
              
              
              41
              
              
              
              —
              
              
              
              —
              
              
              
              43Tax
      benefit from exercise of stock options
              
              
              —
              
              
              
              —
              
              
              
              26
              
              
              
              —
              
              
              
              —
              
              
              
              26Stock-based
      compensation expense
              
              
              —
              
              
              
              —
              
              
              
              246
              
              
              
              —
              
              
              
              —
              
              
              
              246Balances,
      October 31, 2009
              
              
              6,440,851
              
              
              $
              644
              
              
              $
              52,003
              
              
              $
              69,568
              
              
              $
              (1,839
              )
              
              $
              120,376





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


34


HURCO COMPANIES,
INC.


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS





1.           SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





FASB Accounting Standards
Codification –Effective for interim and annual periods ending after
September 15, 2009, the FASB has defined a new hierarchy for U.S. GAAP and
established the FASB Accounting Standards Codification (ASC) as the sole source
for authoritative guidance to be applied by nongovernmental
entities.  The adoption of the ASC changes the manner in which U.S.
GAAP guidance is referenced, but it does not have any impact on our financial
position or results of operations.





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 $2.3 million and $2.6 million as of October 31, 2009
and 2008 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
translation adjustments of foreign currency balance sheets are recorded as a
component of Accumulated Other Comprehensive Loss in shareholders'
equity.  Income and expenses are translated at the average exchange
rates during the year.  Cumulative foreign currency translation
adjustments as of October 31, 2009 were a net loss of $1,399,000 and are
included in Accumulated Other Comprehensive Loss. Foreign currency transaction
gains and losses are recorded as income or expense as incurred.





Hedging.On
February 1, 2009, we adopted FASB guidance related to disclosures about
derivative instruments and hedging activities. The adoption of this guidance did
not have a material impact on our consolidated financial position or results of
operations, but does require increased disclosure of our derivative and hedging
activities, including how derivative and hedging activities affect our
consolidated financial statements.  These disclosures are provided
below.





We are
exposed to certain market risks relating to our ongoing business operations,
including foreign currency risk, interest rate risk and credit
risk.  We manage our exposure to these and other market risks through
regular operating and financing activities.  Currently, the only risk
that we manage through the use of derivative instruments is foreign currency
risk.





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





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


35


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





Derivatives Designated as
Hedging Instruments





We enter
into foreign currency forward exchange contracts periodically to hedge certain
forecasted inter-company sales and purchases denominated in foreign currencies
(the Pound Sterling, Euro and New Taiwan Dollar).  The purpose of
these instruments is to mitigate the risk that the U.S. Dollar net cash inflows
and outflows resulting from sales and purchases denominated in foreign
currencies will be adversely affected by changes in exchange
rates.  These forward contracts have been designated as cash flow
hedge instruments, and are recorded in the Consolidated Balance Sheets at fair
value in Derivative Assets and Derivative Liabilities.  The effective
portion of the gains and losses resulting from the changes in the fair value of
these hedge contracts are deferred in Accumulated Other Comprehensive Loss and
recognized as an adjustment to Cost of Sales and Service in the period that the
corresponding inventory sold that is the subject of the related hedge contract
is recognized, thereby providing an offsetting economic impact against the
corresponding change in the U.S. Dollar value of the inter-company sale or
purchase being hedged.  The ineffective portion of gains and losses
resulting from the changes in the fair value of these hedge contracts is
reported in Other Income (Expense) immediately.  We perform quarterly
assessments of hedge effectiveness by verifying and documenting the critical
terms of the hedge instrument and determining that forecasted transactions have
not changed significantly.   We also assess on a quarterly basis
whether there have been adverse developments regarding the risk of a
counterparty default.





We have
forward contracts outstanding as of October 31, 2009, in Euros and Pounds
Sterling and New Taiwan Dollars with set maturity dates ranging from November
2009 through October 2010.  The contract amount at forward rates in
U.S. Dollars at October 31, 2009 for Euros and Pounds Sterling was $10.1 million
and $3.3 million, respectively.  The contract amount at forward rates
in U.S. Dollars for New Taiwan Dollars was $8.6 million at October 31,
2009.  At October 31, 2009, we had approximately $457,000 of losses,
net of tax, related to cash flow hedges deferred in Accumulated Other
Comprehensive Loss.  Of this amount, $402,000 represents unrealized
losses, net of tax, related to cash flow hedge instruments that remain subject
to currency fluctuation risk.  These deferred losses will be recorded
as an adjustment to Cost of Sales in periods through October 2010, in which the
corresponding inventory that is the subject of the related hedge contract is
sold, as described above.





We are
also exposed to foreign currency exchange risk related to our investment in net
assets in foreign countries.   To manage this risk, we entered
into a forward contract on November 26, 2007 with a notional amount of €3.0
million.  We designated this forward contract as a hedge of our net
investment in Euro denominated assets.  We selected the forward method
under the FASB guidance related to the accounting for derivatives instruments
and hedging activities.  The forward method requires all changes in
the fair value of the forward to be reported as a cumulative translation
adjustment in Accumulated Other Comprehensive Loss, net of tax, in the same
manner as the underlying hedged net assets. This forward contract matured on
November 25, 2008 and we entered into a new forward contract for the same
notional amount that is set to mature in November 2009.  At October
31, 2009, we had $355,000 of realized losses and $332,000 of unrealized losses,
net of tax, recorded as cumulative translation adjustments in Accumulated Other
Comprehensive Loss related to these forward contracts.





Derivatives Not Designated
as Hedging Instruments





We enter
into foreign currency forward exchange contracts to protect against the effects
of foreign currency fluctuations on receivables and payables denominated in
foreign currencies. These derivative instruments are not designated as hedges
under FASB guidance and, as a result, changes in their fair value are reported
currently as Other Expense (Income), Net in the Consolidated Statements of
Operations consistent with the transaction gain or loss on the related
receivables and payables denominated in foreign currencies.


36





HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





We have
forward contracts outstanding as of October 31, 2009, in Euros, Pounds Sterling,
Canadian Dollars, Singapore Dollars and New Taiwan Dollars with set maturity
dates ranging from November 2009 through March 2010.  The contract
amounts at forward rates in U.S. Dollars at October 31, 2009 for Euros, Pounds
Sterling, Canadian Dollars and Singapore Dollars totaled $26.0
million.  The contract amount at forward rates in U.S. Dollars for New
Taiwan Dollars was $361,000 at October 31, 2009.





Fair Value of Derivative
Instruments





We
recognize the fair value of derivative instruments as assets and liabilities on
a gross basis on our Consolidated Balance Sheets.  As of October 31,
2009 and October 31, 2008, all derivative instruments were recorded at fair
value on the balance sheets as follows (in thousands):





2009
                            
                            2008Balance
      Sheet
                            
                            Fair
                            
                            Balance
      Sheet
                            
                            FairDerivatives
                            
                            Location
                            
                            Value
                            
                            Location
                            
                            ValueDesignated
      as Hedging Instruments:Foreign
      exchange forward contracts
                            
                            Derivative
      assets
                            
                            $
                            74
                            
                            Derivative
      assets
                            
                            $
                            9,733Foreign
      exchange forward contracts
                            
                            Derivative
      liabilities
                            
                            $
                            1,246
                            
                            Derivative
      liabilities
                            
                            $
                            2,568Not Designated as Hedging
      Instruments:Foreign
      exchange forward contracts
                            
                            Derivative
      assets
                            
                            $
                            302
                            
                            Derivative
      assets
                            
                            $
                            2,730Foreign
      exchange forward contracts
                            
                            Derivative
      liabilities
                            
                            $
                            988
                            
                            Derivative
      liabilities
                            
                            $
                            124





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





Derivative
instruments had the following effects on our Consolidated Balance Sheets,
Statements of Changes in Shareholders’ Equity and Statements of Operations, net
of tax during the year ended October 31, 2009 and 2008 (in
thousands):





Derivatives
                    
                    Amount of Gain (Loss)
                      Recognized in Other
                      Comprehensive Income
                    
                    Location of Gain (Loss)
                      Reclassified from Other
                      Comprehensive Income
                    
                    Amount of Gain (Loss)
                      Reclassified from Other
                      Comprehensive Income2009
                    
                    
                    2008
                    
                    
                    
                    2009
                    
                    
                    2008Designated as
      Hedging Instruments:(Effective
      Portion)Foreign
      exchange forward contracts
                    
                    $
                    (435
                    )
                    
                    $
                    3,938
                    
                    Cost
      of sales and service
                    
                    $
                    989
                    
                    
                    $
                    (4,682
                    )(Ineffective
      Portion)Foreign
      exchange forward contracts
                    
                    
                    N/A
                    
                    
                    
                    N/A
                    
                    Other
      income (expense)
                    
                    $
                    2,028
                    
                    
                    $
                    (220
                    )





Location
      of Gain (Loss)
                          
                          Amount
      of Gain (Loss)Derivatives
                          
                          Recognized in Operations
                          
                          Recognized in Operations2009
                          
                          
                          2008Not
      Designated as Hedging Instruments:Foreign
      exchange forward contracts
                          
                          Other
      income (expense)
                          
                          $
                          (643
                          )
                          
                          $
                          2,979




37





HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





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





Property and
Equipment.  Property and equipment are carried at cost.
Depreciation and amortization of assets are provided primarily under the
straight-line method over the shorter of the estimated useful lives or the lease
terms as follows:


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


Total
depreciation expense for the years ended October 31, 2009, 2008 and 2007 was
$2.1 million, $1.5 million, and $1.4 million, respectively.





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





Depending
upon geographic location, after shipment a machine may be installed at the
customer’s facilities by a distributor, independent contractor or Hurco service
technician.  In most instances where a machine is sold through a
distributor, we have no installation involvement.  If sales are direct
or through sales agents, we will typically complete the machine installation,
which consists of the reassembly of certain parts that were removed for shipping
and the re-testing of the machine to ensure that it is performing within the
standard specifications.  We consider the machine installation process
inconsequential and perfunctory.  Service fees from maintenance
contracts are deferred and recognized in earnings on a pro rata basis over the
term of the contract.





Allowance for Doubtful
Accounts.  The allowance for doubtful accounts is based on our
best estimate of probable credit issues and historical experience.





Software Revenue
Recognition.  Sales related to software products are recognized
when shipped in conformity with American Institute of Certified Public
Accountants’ Statement of Position 97-2.  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, eneral and Administrative
Expenses.  Research and development expenses totaled $2.5 million,
$3.0 million, and $3.1 million, in fiscal 2009, 2008, and 2007,
respectively.


38





HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





Costs
incurred to develop computer software products and significant enhancements to
software features of existing products to be sold or otherwise marketed are
capitalized, after technological feasibility is established.  Software
development costs are amortized to Cost of Sales on a straight-line basis over
the estimated product life of the related software, which ranges from three to
five years.  We capitalized costs of $2.0 million in 2009, $934,000 in
2008, and $1.2 million in 2007 related to software development
projects.  Amortization expense was $1.2 million, $1.2 million, and
$702,000, for the years ended October 31, 2009, 2008, and 2007,
respectively.  Accumulated amortization at October 31, 2009 and 2008
was $6.1 million and $4.9 million, respectively.  Estimated
amortization expense for the existing amortizable intangible assets for the
years ending October 31, is as follows (in thousands):





Fiscal Year
                  
                  Amortization
                    Expense2010
                  
                  $
                  1,1702011
                  
                  
                  1,1702012
                  
                  
                  7112013
                  
                  
                  682014
                  
                  
                  29





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




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 shares
underlying outstanding stock options using the treasury method.  The
dilutive number of shares for the year ended October 31, 2009, 2008 and 2007 was
0, 29,000 and 58,000, respectively.




Three
      Months Ended
                        
                        
                        Twelve
      Months EndedOctober
      31,
                        
                        
                        October
      31,(in
      thousands, except per share amount)
                        
                        2009
                        
                        
                        2008
                        
                        
                        2009
                        
                        
                        2008Basic
                        
                        
                        Diluted
                        
                        
                        Basic
                        
                        
                        Diluted
                        
                        
                        Basic
                        
                        
                        Diluted
                        
                        
                        Basic
                        
                        
                        DilutedNet
      income (loss)
                        
                        $
                        (1,163
                        )
                        
                        $
                        (1,163
                        )
                        
                        $
                        3,422
                        
                        
                        $
                        3,422
                        
                        
                        $
                        (2,321
                        )
                        
                        $
                        (2,321
                        )
                        
                        $
                        20,520
                        
                        
                        $
                        20,520Weighted
      average shares outstanding
                        
                        
                        6,441
                        
                        
                        
                        6,441
                        
                        
                        
                        6,415
                        
                        
                        
                        6,415
                        
                        
                        
                        6,429
                        
                        
                        
                        6,429
                        
                        
                        
                        6,415
                        
                        
                        
                        6,415Assumed
      issuances under stock options plans
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        21
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        —
                        
                        
                        
                        296,441
                        
                        
                        
                        6,441
                        
                        
                        
                        6,415
                        
                        
                        
                        6,436
                        
                        
                        
                        6,429
                        
                        
                        
                        6,429
                        
                        
                        
                        6,415
                        
                        
                        
                        6,444Income
      (loss) per common share
                        
                        $
                        (0.18
                        )
                        
                        $
                        (0.18
                        )
                        
                        $
                        0.51
                        
                        
                        $
                        0.50
                        
                        
                        $
                        (0.36
                        )
                        
                        $
                        (0.36
                        )
                        
                        $
                        3.51
                        
                        
                        $
                        3.49




39





HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





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





The
determination of our provision for income taxes requires judgment, the use of
estimates and the interpretation and application of complex tax
laws.  Our provision for income taxes reflects a combination of income
earned and taxed at the federal and state level in the U.S., as well as in
various foreign jurisdictions.  We have not provided for any U.S.
income taxes on the undistributed earnings of our foreign subsidiaries or equity
method investments based upon our determination that such earnings will be
indefinitely reinvested abroad.  On November 1, 2008, we adopted FASB
guidance related to accounting for uncertainty in income taxes and we currently
account for uncertain tax positions in accordance with the provisions of this
guidance. Refer to Note 7, Income Taxes, for information related to the
effect of adoption of this guidance, and the accounting for our 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, tax planning
strategies, and taxable income in future years.  Our judgment
regarding future profitability may change due to future market conditions,
changes in U.S. or foreign tax laws and other factors.  These changes,
if any, may require material adjustments to these deferred tax assets and an
accompanying reduction or increase in net income in the period when such
determinations are made.





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





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





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


40


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued




2.           BUSINESS
OPERATIONS





Nature of
Business.  We design and manufacture computer control systems,
software and computerized machine tools for sale through our own distribution
system to the worldwide machine tool industry.  The 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 fiscal 2009
that significantly adversely affected our results of operations.





The end
market for our products consists primarily of precision tool, die and mold
manufacturers, independent job shops, and specialized short-run production
applications within large manufacturing operations. Industries served include:
aerospace, defense, medical equipment, energy, automotive/transportation,
electronics and computer industries.  Our products are sold through
independent agents and distributors throughout North America, Europe and
Asia.  We also have our own direct sales and service organizations in
Canada, China, France, Germany, Italy, Poland, Singapore, South Africa, Spain,
the United Kingdom, and certain areas of the United States.





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





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




3.           SHORT-TERM
INVESTMENTS





As of
October 31, 2008 we held $6.7 million face amount of auction rate securities,
which represented indirect interest in student loan obligations and municipal
bonds.  These securities were intended to provide liquidity via an
auction process that would reset the applicable interest rate at predetermined
intervals, allowing a holder to either roll over the investment or to sell the
securities at par value.  We classified our auction rate securities as
“available for sale” in accordance with the provisions of FASB guidance related
to accounting for certain investments in debt and equity
securities.





During
fiscal 2008, we recorded an unrealized loss of $202,000 on our investment in
these securities, net of tax, in Accumulated Other Comprehensive Loss, as we had
concluded there was a temporary decline in the estimated fair value of the
securities.  In the first quarter of fiscal 2009, we sold all of our
holdings of auction rate securities at par value and, accordingly, we reversed
our previously–recorded unrealized loss on the securities.  As a
result, no gain or loss was recognized in our statement of operations for the
year ended October 31, 2009, on the sale of the securities.


41


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





4.           INVENTORIES





Inventories
as of October 31, 2009 and 2008 are summarized below (in
thousands):





2009
                  
                  
                  2008Purchased
      parts and sub assemblies
                  
                  $
                  14,961
                  
                  
                  $
                  13,098Work-in-process
                  
                  
                  3,559
                  
                  
                  
                  11,243Finished
      goods
                  
                  
                  41,761
                  
                  
                  
                  42,027$
                  60,281
                  
                  
                  $
                  66,368




5.  DEBT
AGREEMENTS





As of
October 30, 2009, we amended (the "Amendment") our U.S. Credit Agreement, dated
as of December 7, 2007.  As amended, we have an unsecured revolving
credit and letter of credit facility (the “U.S. Facility”) of $15.0 million,
with maximum outstanding letters of credit under the U.S. Facility of $3.0
million.  The U.S. Facility matures on December 7, 2012.  The
U.S. Credit Agreement also provides for a separate uncommitted demand
credit facility in the amount of New Taiwan Dollars 100.0 million (the “Taiwan
Facility”).




Borrowings
under the U.S. Facility will bear interest at a LIBOR-based rate or a floating
rate based on the prime rate, in each case, plus an applicable
margin.  The floating rate will not be less than a one month
LIBOR-based rate plus 2.50% per annum.   When our consolidated net
income for the four most recently reported consecutive fiscal quarters
is:




(i) equal
to or greater than $0.00 (a "No Loss Four Quarter Period"), the applicable
margins are determined by reference to the ratio of the total consolidated
interest-bearing debt and obligations and the undrawn face amount of all letters
of credit outstanding ("consolidated total indebtedness"), to consolidated
EBITDA (as defined in the U.S. Credit Agreement); and




(ii) less
than $0.00 (a "Net Loss Four Quarter Period"), the applicable margins are
determined based on the ratio of the positive remainder, if any, of the
aggregate cash and cash equivalent investments, on a


consolidated
basis, minus the consolidated total indebtedness, to an amount equal to two (2)
times the consolidated net loss (stated as an absolute value) for the two
consecutive fiscal quarters ending at the close of such four quarter period (the
"Excess Cash to Annualized Net Loss Ratio").




As
amended, the U.S. Credit Agreement limits our ability to declare and pay
dividends, incur additional indebtedness and make acquisitions following the
occurrence of a Net Loss Four Quarter Period, which limitations remain in effect
until there occurs a No Loss Four Quarter Period.  The U.S. Credit
Agreement also contains financial covenants including a maximum ratio of
consolidated total indebtedness to total indebtedness and net worth remains
applicable as of the close of the last fiscal quarter of each No Loss Four
Quarter Period.  For the last fiscal quarter of a Net Loss Four
Quarter Period, we must achieve an Excess Cash to Annualized Net Loss Ratio of
not less than 1.00 to 1.00.




We are
also party to a £1.0 million revolving credit facility in the United Kingdom and
a €1.5 million revolving credit facility in Germany. As of October 31, 2009, we
had no debt or borrowings outstanding under our domestic or foreign credit
facilities.  As of October 31, 2008, we had $615,000 of outstanding
letters of credit issued to non-U.S. suppliers for inventory purchase
commitments.  As of October 31, 2009, we had unutilized credit
facilities of $21.9 million available for either direct borrowings or commercial
letters of credit.


42


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued




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 $50.8 million and $128.2 million at
October 31, 2009 and 2008, respectively.  The fair value of Derivative
Assets recorded on our Consolidated Balance Sheets at October 31, 2009 and 2008
was $376,000 and $12.5 million, respectively.  The fair value of
Derivative Liabilities recorded on our Consolidated Balance Sheets at October
31, 2009 and 2008 was $2.2 million and $2.7 million, respectively.





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





On
November 1, 2008, we adopted FASB guidance related to fair value measurements it
relates to financial assets and liabilities recorded on a recurring
basis.  The FASB has delayed the effective date of guidance for
nonfinancial assets and liabilities, except for items that are recognized or
disclosed at fair value in the financial statements on a recurring
basis.  We do not expect that the full adoption of this guidance will
have a material impact on our consolidated financial statements.





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





In
accordance with this guidance, the following table represents the fair value
hierarchy for our financial assets and liabilities measured at fair value as of
October 31, 2009 (in thousands):




Level I
                  
                  
                  Level II
                  
                  
                  Level III
                  
                  
                  TotalAssets:Derivative
      Assets
                  
                  $
                  —
                  
                  
                  $
                  376
                  
                  
                  $
                  —
                  
                  
                  $
                  376





Level I
                  
                  
                  Level II
                  
                  
                  Level III
                  
                  
                  TotalLiabilities:Derivative
      Liabilities
                  
                  $
                  —
                  
                  
                  $
                  2,234
                  
                  
                  $
                  —
                  
                  
                  $
                  2,234





Included
as Level II fair value measurements are derivative assets and liabilities
related to hedged and unhedged gains and losses on foreign currency forward
exchange contracts entered into with a third party.  We estimate the
fair value of these derivatives on a recurring basis using foreign currency
exchange rates obtained from active markets.


43


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





7.           INCOME
TAXES





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





(in
      thousands)
                
                Year Ended October 312009
                
                
                2008
                
                
                2007Current:U.S.
      taxes
                
                $
                (5,512
                )
                
                $
                8,768
                
                
                $
                9,290Foreign
      taxes
                
                
                1,197
                
                
                
                3,926
                
                
                
                3,802(4,315
                )
                
                
                12,694
                
                
                
                13,092Deferred:U.S.
      taxes
                
                
                2,954
                
                
                
                (1,163
                )
                
                
                (1,657
                )Foreign
      taxes
                
                
                (130
                )
                
                
                115
                
                
                
                4412,824
                
                
                
                (1,048
                )
                
                
                (1,216
                )$
                (1,491
                )
                
                $
                11,646
                
                
                $
                11,876





A
comparison of income tax expense at the U.S. statutory rate of 35% in 2009, 2008
and 2007, to the Company’s effective tax rate is as follows:





Income
      (Loss) before income taxes (in thousands):
                
                Year Ended October 312009
                
                
                2008
                
                
                2007Domestic
                
                $
                (7,097
                )
                
                $
                20,856
                
                
                $
                20,463Foreign
                
                
                3,286
                
                
                
                13,310
                
                
                
                12,302Earnings
      (Loss) before taxes on income
                
                $
                (3,812
                )
                
                $
                34,166
                
                
                $
                32,765Tax
      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
                
                
                4.4
                %
                
                
                (1.9
                )%
                
                
                0.1
                %Valuation
      allowance
                
                
                (2.2
                )%
                
                
                —
                
                
                
                —State
      income taxes
                
                
                4.7
                %
                
                
                1.9
                %
                
                
                2.4
                %Permanent
      items
                
                
                (12.5
                )%
                
                
                0.1
                %
                
                
                0.8
                %FIN48
      Statute expiration
                
                
                3.4
                %
                
                
                —
                
                
                
                —All
      other
                
                
                6.3
                %
                
                
                (1.0
                )%
                
                
                (2.1
                )%Effective
      tax rate
                
                
                39.1
                %
                
                
                34.1
                %
                
                
                36.2
                %





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, 2009 are
approximately $34.6 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.


44


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





Deferred
income taxes are determined based on the difference between the amounts used for
financial reporting purposes and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse.  Significant components of our deferred tax assets and
liabilities at October 31, 2009 and 2008 were as follows (in
thousands):





October 312009
                      
                      
                      2008Deferred
      Tax Assets and Other:Current:Inter-company
      profit in inventory
                      
                      $
                      3,220
                      
                      
                      $
                      5,575Derivative
      liabilities (assets)
                      
                      
                      268
                      
                      
                      
                      (2,477
                      )Accrued
      inventory reserves
                      
                      
                      1,068
                      
                      
                      
                      1,070Accrued
      warranty expenses
                      
                      
                      59
                      
                      
                      
                      148Deferred
      compensation
                      
                      
                      283
                      
                      
                      
                      264Other
      accrued expenses
                      
                      
                      286
                      
                      
                      
                      864Foreign
      net operating loss carry forward
                      
                      
                      86
                      
                      
                      
                      -Other
                      
                      
                      706
                      
                      
                      
                      -5,976
                      
                      
                      
                      5,444Less:
      Valuation allowance on foreign net operating loss carry
      forward
                      
                      
                      (86
                      )
                      
                      
                      -Current
      deferred tax assets and other, net
                      
                      
                      5,890
                      
                      
                      
                      5,444Deferred
      Tax Liabilities:Non-current:Property
      and equipment and capitalized software development costs
                      
                      
                      (3,036
                      )
                      
                      
                      (2,717
                      )Other
                      
                      
                      466
                      
                      
                      
                      661Non-current
      deferred tax liabilities, net
                      
                      
                      (2,570
                      )
                      
                      
                      (2,056
                      )Net
      deferred tax asset
                      
                      $
                      3,320
                      
                      
                      $
                      3,388





On
November 1, 2007, we adopted FASB guidance clarifying 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):


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





We had
$574,000 of unrecognized tax benefits at October 31, 2009, 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.





We
recognize accrued interest and penalties related to unrecognized tax benefits as
components of our income tax provision.  We believe there is
substantial support for taking these tax benefits and therefore have estimated
no tax penalties.  As of October 31, 2009, the gross amount of
interest accrued, reported in other liabilities, was approximately $97,000,
which did not include the federal tax benefit of interest
deductions.


45





HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





The
statute of limitation with respect to unrecognized tax benefits will expire
between July 2010 and July 2013.  We anticipate a reduction of
$482,000 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 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
      2006 through the current periodIndiana
              Fiscal
      2006 through the current periodCalifornia
              Fiscal
      2005 through the current periodGermany1
              Fiscal
      2005 through the current periodTaiwan
              Fiscal
      2004 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.  As of April 1, 2009, we suspended our
discretionary contributions to the plans for an indefinite period. Our
contributions totaled $443,800, $877,600, and $460,200, for the fiscal years
ended October 31, 2009, 2008 and 2007, respectively.





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 total number of
shares of our common stock that may be issued as awards under the 2008 Plan is
750,000.  The market value of a share of our common stock, for
purposes of the 2008 Plan, is the closing sale price as reported by the Nasdaq
Global Select Market on the date in question or, if not a trading day, on the
last preceding trading date.





During
fiscal 2009, 2008 and 2007, we recorded approximately $246,000, $535,000 and
$480,000, respectively, of stock-based compensation expense related to grants
under the plans.  As of October 31, 2009, there was approximately
$163,000 of total unrecognized stock-based compensation cost that we expect to
recognize by the end of fiscal 2014.


46


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – Continued





During
fiscal 2009, options to purchase 20,000 shares were exercised, resulting in cash
proceeds of approximately $43,000 and an additional tax benefit of approximately
$26,000, compared to 28,631 shares and 45,700 shares exercised in 2008 and 2007
resulting in cash proceeds of approximately $151,000 and $186,700 for those
fiscal years and additional tax benefits of approximately $36,000 and $298,000,
respectively.





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





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





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 our common stock,
expected term of the options and a risk-free interest rate based upon a
three-year U.S. Treasury yield as of the date of grant.  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.





A summary
of the status of the options as of October 31, 2009, 2008 and 2007 and the
related activity for the year is as follows:


Shares Under
                            Option
                          
                          
                          Weighted Average
                            Exercise Price Per ShareBalance
      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
                          
                          
                          $
                          20.29Granted
                          
                          
                          21,000
                          
                          
                          
                          14.88Cancelled
                          
                          
                          —
                          
                          
                          
                          —Expired
                          
                          
                          —
                          
                          
                          
                          —Exercised
                          
                          
                          (20,000
                          )
                          
                          $
                          2.15Balance October 31, 2009
                          
                          
                          65,369
                          
                          
                          $
                          24.11


47


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





The total
intrinsic value of stock options exercised during the twelve months ended
October 31, 2009, 2008 and 2007 was approximately $0.3 million, $0.5 million and
$2.4 million respectively.





As of
October 31, 2009, 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, 2009 was $28,000.  Stock
options outstanding and exercisable on October 31, 2009, are as
follows:





Range of Exercise
                            Prices Per Share
                          
                          Shares Under
                            Option
                          
                          
                          Weighted Average
                            Exercise Price Per
                            Share
                          
                          
                          Weighted Average
                            Remaining Contractual
                            Life in YearsOutstanding$                         2.15
                          
                          
                          500
                          
                          
                          $
                          2.15
                          
                          
                          
                          2.114.88
                          
                          
                          21,000
                          
                          
                          
                          14.88
                          
                          
                          
                          9.526.69
                          
                          
                          33,869
                          
                          
                          
                          26.69
                          
                          
                          
                          7.035.83
                          
                          
                          10,000
                          
                          
                          
                          35.83
                          
                          
                          
                          8.6$            2.15
      – 35.83
                          
                          
                          65,369
                          
                          
                          $
                          24.11
                          
                          
                          
                          7.5Exercisable$                         2.15
                          
                          
                          500
                          
                          
                          $
                          2.15
                          
                          
                          
                          2.114.88
                          
                          
                          —
                          
                          
                          
                          14.88
                          
                          
                          
                          —26.69
                          
                          
                          23,869
                          
                          
                          
                          26.69
                          
                          
                          
                          4.735.83
                          
                          
                          10,000
                          
                          
                          
                          35.83
                          
                          
                          
                          8.6$            2.15
      – 35.83
                          
                          
                          34,369
                          
                          
                          $
                          28.99
                          
                          
                          
                          6.2





10.           RELATED
PARTY TRANSACTIONS





During
fiscal 2007, we sold our 24% ownership interest in Quaser Machine Tools, Inc., a
Taiwan contract for $2.1 million, which was approximately our carrying
value.  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 for the year
ended October 31, 2007.  Our sales of product to this manufacturer
were $176,000 in fiscal 2007.





As of
October 31, 2009, 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 $2.3 million
and $2.6 million at October 31, 2009 and 2008 is included in Investments and
Other Assets, Net on the Consolidated Balance Sheets.  Purchases of
product from HAL amounted to $2.9 million, $10.3 million and $11.7 million in
2009, 2008 and 2007, respectively.  Sales of product to HAL were $0.3
million, $2.0 million and $1.9 million for the years ended October 31, 2009,
2008 and 2007, respectively.  Trade payables to HAL were $342,000 and
$1.6 million at October 31, 2009 and 2008, respectively.  Trade
receivables from HAL were $50,000 and $296,000 at October 31, 2009 and 2008,
respectively.


48


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





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





(in
      thousands)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007(1)Net
      Sales
                  
                  $
                  3,710
                  
                  
                  $
                  11,935
                  
                  
                  $
                  58,053Gross
      Profit
                  
                  
                  488
                  
                  
                  
                  1,883
                  
                  
                  
                  10,061Operating
      Income (Loss)
                  
                  
                  (689
                  )
                  
                  
                  159
                  
                  
                  
                  3,757Net
      Income (Loss)
                  
                  
                  (1,203
                  )
                  
                  
                  147
                  
                  
                  
                  3,467Current
      Assets
                  
                  $
                  6,110
                  
                  
                  $
                  8,658
                  
                  
                  $
                  36,945Non-current
      Assets
                  
                  
                  1,742
                  
                  
                  
                  2,195
                  
                  
                  
                  10,636Current
      Liabilities
                  
                  
                  1,211
                  
                  
                  
                  3,176
                  
                  
                  
                  18,785
 (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.





12.           GUARANTEES
AND PRODUCT WARRANTIES





We follow
FASB guidance for accounting for contingencies, relating to the guarantor’s
accounting for, and disclosures of, the issuance of certain types of
guarantees.





From time
to time, our subsidiaries guarantee third party payment obligations in
connection with the sale of certain machines to customers that use
financing.  At October 31, 2009, we had 53 outstanding third party
guarantees totaling approximately $2.4 million in guaranteed financing. 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 they have paid for the
machine.  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 the sale of a repossessed machine would cover any payments
required by the guarantee.  We accrue for potential liabilities when
we believe a loss is probable and can be estimated.





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):





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




49





HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued




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, 2009, are summarized as follows (in
thousands):





2010
                    
                    $
                    1,9152011
                    
                    
                    1,2242012
                    
                    
                    7782013
                    
                    
                    5812014
                    
                    
                    282Total
                    
                    $
                    4,780





Lease
expense for the years ended October 31, 2009, 2008, and 2007 was $3.0 million,
$2.6 million, and $2.3 million, respectively.





We
recorded approximately $175,000 of lease income during fiscal 2009 from leasing
50,000 square feet of our Indianapolis facility.  The lease expires on
October 31, 2011.


50


HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





14.           QUARTERLY
HIGHLIGHTS (Unaudited)





First
                                Quarter
                              
                              
                              Second
                                Quarter
                              
                              
                              Third
                                Quarter
                              
                              
                              Fourth
                                Quarter2009 (In thousands, except per share
      data)Sales
      and service fees
                              
                              $
                              28,307
                              
                              
                              $
                              20,489
                              
                              
                              $
                              19,039
                              
                              
                              $
                              23,181Gross
      profit
                              
                              
                              8,542
                              
                              
                              
                              5,220
                              
                              
                              
                              5,251
                              
                              
                              
                              6,815Gross
      profit margin
                              
                              
                              30.2
                              %
                              
                              
                              25.5
                              %
                              
                              
                              27.6
                              %
                              
                              
                              29.4
                              %Selling,
      general and administrative expenses
                              
                              
                              8,029
                              
                              
                              
                              7,518
                              
                              
                              
                              7,200
                              
                              
                              
                              8,127Operating
      income (loss)
                              
                              
                              513
                              
                              
                              
                              (2,298
                              )
                              
                              
                              (1,949
                              )
                              
                              
                              (1,312
                              )Provision
      (benefit) for income taxes
                              
                              
                              195
                              
                              
                              
                              (207
                              )
                              
                              
                              (552
                              )
                              
                              
                              (927
                              )Net
      income (loss)
                              
                              
                              354
                              
                              
                              
                              (281
                              )
                              
                              
                              (1,231
                              )
                              
                              
                              (1,163
                              )Income
      (loss) per common share – basic
                              
                              $
                              0.06
                              
                              
                              $
                              (0.04
                              )
                              
                              $
                              (0.19
                              )
                              
                              $
                              (0.18
                              )Income
      (loss) per common share – diluted
                              
                              $
                              0.05
                              
                              
                              $
                              (0.04
                              )
                              
                              $
                              (0.19
                              )
                              
                              $
                              (0.18
                              )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
                              
                              
                              $
                              0.50





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.


51





HURCO
COMPANIES, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued





We sell
our products through more than 100 independent agents and distributors
throughout North America, Europe and Asia.  Our line is the primary
line for the majority of our distributors globally even though some may carry
competitive products.  We also have our own direct sales and service
organizations in Canada, China, France, Germany, Italy, Poland, Singapore, South
Africa, Spain, the United Kingdom, and certain areas of the United States, which
are among the world's principal machine tool consuming
countries.  During fiscal 2009, no distributor accounted for more than
5% of our sales and service fees.  In fiscal 2009, more than 70% of
our revenues were from overseas customers and no single end-user of our products
accounted for more than 5% of our total sales and service fees.





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





Net
      Sales and Service Fees by Product Category
                  Year ended October 31,2009
                  
                  
                  2008
                  
                  
                  2007Computerized
      Machine Tools
                  
                  $
                  75,213
                  
                  
                  $
                  199,238
                  
                  
                  $
                  165,832Computer
      Control Systems and Software *
                  
                  
                  2,546
                  
                  
                  
                  5,678
                  
                  
                  
                  5,291Service
      Parts
                  
                  
                  8,851
                  
                  
                  
                  13,240
                  
                  
                  
                  12,096Service
      Fees
                  
                  
                  4,406
                  
                  
                  
                  5,838
                  
                  
                  
                  4,828Total
                  
                  $
                  91,016
                  
                  
                  $
                  223,994
                  
                  
                  $
                  188,047


*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 312009
                  
                  
                  2008
                  
                  
                  2007North
      America
                  
                  $
                  25,203
                  
                  
                  $
                  48,087
                  
                  
                  $
                  50,010Germany
                  
                  
                  26,273
                  
                  
                  
                  81,945
                  
                  
                  
                  58,860United
      Kingdom
                  
                  
                  11,242
                  
                  
                  
                  20,877
                  
                  
                  
                  19,326Italy
                  
                  
                  4,969
                  
                  
                  
                  10,329
                  
                  
                  
                  9,389France
                  
                  
                  4,486
                  
                  
                  
                  13,412
                  
                  
                  
                  11,019Other
      Europe
                  
                  
                  11,372
                  
                  
                  
                  36,202
                  
                  
                  
                  25,856Total
      Europe
                  
                  
                  58,342
                  
                  
                  
                  162,765
                  
                  
                  
                  124,450Asia
                  
                  
                  5,557
                  
                  
                  
                  11,816
                  
                  
                  
                  12,493Other
      Foreign
                  
                  
                  1,914
                  
                  
                  
                  1,326
                  
                  
                  
                  1,094Total
      Foreign
                  
                  
                  65,813
                  
                  
                  
                  175,907
                  
                  
                  
                  138,037$
                  91,016
                  
                  
                  $
                  223,994
                  
                  
                  $
                  188,047





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





As
      of October 312009
                        
                        
                        2008United
      States
                        
                        $
                        7,942
                        
                        
                        $
                        8,421Foreign
      countries
                        
                        
                        7,048
                        
                        
                        
                        6,996$
                        14,990
                        
                        
                        $
                        15,417


52


HURCO
COMPANIES, INC.
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
 
 Net
assets by geographic area were (in thousands):
 As of October 312009
                      
                      
                      2008North
      America
                      
                      $
                      63,659
                      
                      
                      $
                      73,793Europe
                      
                      
                      41,824
                      
                      
                      
                      36,008Asia
                      
                      
                      14,893
                      
                      
                      
                      13,676$
                      120,376
                      
                      
                      $
                      123,477
 
 16.        NEW
ACCOUNTING PRONOUNCEMENTS
 
 In
December 2007, the FASB issued guidance that changed the way in which we account
for business combinations as it introduces new purchase accounting concepts,
expands the use of fair value accounting related to business combinations and
changes the subsequent period accounting for certain acquired assets and
liabilities, and among other things, includes a substantial number of new
disclosure requirements. This guidance will be applied prospectively on business
combinations with acquisition dates in fiscal years beginning on or after
December 15, 2008.  This guidance may have a material impact on
our financial statements if we make future acquisitions.
 
 In
December 2007, the FASB issued guidance that changed the accounting and
reporting for minority interests, which have been recharacterized as
noncontrolling interests and classified as a component of
equity.  This guidance required retroactive adoption of the
presentation and disclosure requirements for existing minority interests. This
guidance became effective for our 2009 fiscal year and interim periods
within 2009. The adoption did not have a material impact on our consolidated
financial statements or results of operations.
 
 In May
2009, we adopted FASB guidance that established general standards of accounting
for and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued.  This
guidance introduced new terminology but is based on the same principles that
previously existed in the auditing standards.  This guidance requires
disclosure of the date through which we have evaluated subsequent events and
whether that date represents the date the financial statements were issued or
the date the financial statements were available to be issued.  We
issued our financial statements by filing with the Securities Exchange
Commission on January 12, 2010, for the year ended October 31, 2009 and we have
evaluated subsequent events through the time of the filing.
 
 Effective
for interim and annual periods ending after September 15, 2009, the FASB has
defined a new hierarchy for U.S. GAAP and established the FASB Accounting
Standards Codification (ASC) as the sole source for authoritative guidance to be
applied by nongovernmental entities.  The adoption of the ASC changes
the manner in which U.S. GAAP guidance is referenced, but it did not have any
impact on our financial position or results of operations.
  53
  Item
9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON
 ACCOUNTING AND FINANCIAL
DISCLOSURE
 
 None.
 
 Item 9A.CONTROLS AND
PROCEDURES
 
 Under the
supervision and with the participation of management, including our Chief
Executive Officer and Chief Financial Officer, we carried out an evaluation of
the effectiveness of the design and operation of our disclosure controls and
procedures as of October 31, 2009, 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, 2009
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting.
 
 Item 9B.OTHER
INFORMATION
 
 During
the fourth quarter of fiscal 2009, 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 our
common stock for the five-year period ended October 31, 2009, as compared to the
Russell 2000 and a peer group consisting of traded securities for U.S. companies
in the same three digit Standard Industrial Classification group as Hurco (SIC
3540-3549 – Metal Working Machinery and Equipment).  The comparisons
in this table are required by the SEC and are not intended to forecast or be
indicative of possible future performance of our common stock.
 
 
 
 10/04
                                                
                                                
                                                10/05
                                                
                                                
                                                10/06
                                                
                                                
                                                10/07
                                                
                                                
                                                10/08
                                                
                                                
                                                10/09Hurco
      Companies, Inc.
                                                
                                                
                                                100.00
                                                
                                                
                                                124.42
                                                
                                                
                                                181.86
                                                
                                                
                                                398.46
                                                
                                                
                                                157.01
                                                
                                                
                                                110.96Russell
      2000
                                                
                                                
                                                100.00
                                                
                                                
                                                112.08
                                                
                                                
                                                134.47
                                                
                                                
                                                146.94
                                                
                                                
                                                96.74
                                                
                                                
                                                102.99Peer
      Group - SIC Codes 3540-3549
                                                
                                                
                                                100.00
                                                
                                                
                                                106.59
                                                
                                                
                                                111.11
                                                
                                                
                                                137.94
                                                
                                                
                                                73.10
                                                
                                                
                                                73.45
 
 *The stock price performance
included in this graph is not necessarily indicative of future stock price
performance
  54
  PART
III
 
 Item
10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
 
 The
information required by this item is incorporated herein by reference to the
definitive proxy statement for our 2010 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 2010 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 2010 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, 2009:
 
 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
                  
                  
                  65,369
                  
                  
                  $
                  24.11
                  
                  
                  
                  719,000Equity
      compensation plans not approved by security holders
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  
                  65,369
                  
                  
                  $
                  24.11
                  
                  
                  
                  719,000
 
 As of
October 31, 2009, 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 2010 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 2010 annual meeting of
shareholders.




55




PART
IV





Item
15. EXHIBITS AND FINANCIAL
STATEMENT SCHEDULES





(a)
              1.
              Financial
      Statements.  The following consolidated financial
      statements of Registrant are included herein under Item 8 of Part
      II:




PageReport
      of Independent Registered Public Accounting Firm – Ernst & Young
      LLP
                                      
                                      28Report
      of Independent Registered Public Accounting Firm – Crowe Horwath
      LLP
                                      
                                      30Consolidated
      Statements of Operations – years endedOctober 31, 2009, 2008 and 2007
                                      
                                      31Consolidated
      Balance Sheets – as of October 31, 2009 and 2008
                                      
                                      32Consolidated
      Statements of Cash Flows – yearsended October 31, 2009, 2008 and 2007
                                      
                                      33Consolidated
      Statements of Changes in Shareholders’ Equity –years ended October 31, 2009, 2008 and 2007
                                      
                                      34Notes
      to Consolidated Financial Statements
                                      
                                      35





2.
            Financial Statement
      Schedule.  The following financial statement schedule is
      included in this Item.




PageSchedule
      II - Valuation and Qualifying Accounts and Reserves
              57





All
      other financial statement schedules are omitted because they are not
      applicable or the required information is included in the consolidated
      financial statements or notes
thereto.





(b)
            Exhibits





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


56


Schedule
II - Valuation and Qualifying Accounts and Reserves


for
the years ended October 31, 2009, 2008, and 2007


(Dollars
in thousands)





Description
              
              Balance at
                Beginning
                of Period
              
              
              Charged to
                Costs and
                Expenses
              
              
              Charged
                To Other
                Accounts
              
              
              Deductions
              
              
              Balance
                At End
                Of PeriodAllowance
      for doubtful Accounts for the year ended:October
      31,
      2009
              
              $
              678
              
              
              $
              736
              
              
              
              —
              
              
              $
              605
              (1)
              
              $
              809October
      31,
      2008
              
              $
              751
              
              
              $
              (42
              )
              
              
              —
              
              
              $
              31
              (2)
              
              $
              678October
      31,
      2007
              
              $
              635
              
              
              $
              128
              
              
              
              —
              
              
              $
              12
              (3)
              
              $
              751Accrued
      warranty expenses For the year ended:October
      31,
      2009
              
              $
              2,536
              
              
              $
              846
              
              
              
              —
              
              
              $
              2,096
              
              
              $
              1,286October
      31,
      2008
              
              $
              2,449
              
              
              $
              2,755
              
              
              
              —
              
              
              $
              2,666
              
              
              $
              2,536October
      31,
      2007
              
              $
              1,926
              
              
              $
              2,610
              
              
              
              —
              
              
              $
              2,087
              
              
              $
              2,449





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





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





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


57


EXHIBITS
INDEX





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


10.1*
                            
                            Summary
      compensation sheet.21
                            
                            Subsidiaries
      of the Registrant.23.1
                            
                            Consent
      of Independent Registered Public Accounting Firm, Ernst & Young
      LLP23.2
                            
                            Consent
      of Independent Registered Public Accounting Firm, Crowe Horwath
      LLP31.1
                            
                            Certification
      by the Chief Executive Officer, pursuant to Rule 13a-15(b) under the
      Securities and Exchange Act of 1934, as amended.31.2
                            
                            Certification
      by the Chief Financial Officer, pursuant to Rule 13a-15(b) under the
      Securities and Exchange Act of 1934, as amended.32.1
                            
                            Certification
      by the Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.2
                            
                            Certification
      by the Chief Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.


Exhibits Incorporated by
Reference.  The following exhibits are incorporated into this
report:





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


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


58


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized, this 12th day of January
2010.





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


59


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





Signature and Title(s)
                          
                          Date/s/ Michael Doar
                          
                          January
      12, 2010Michael
      Doar, Chairman of the Board,Chief
      Executive Officer and Presidentof
      Hurco Companies, Inc.(Principal
      Executive Officer)/s/ John G. Oblazney
                          
                          January
      12, 2010John
      G. OblazneyVice-President,Secretary,
      Treasurer andChief
      Financial Officerof
      Hurco Companies, Inc.(Principal
      Financial Officer)/s/ Sonja K. McClelland
                          
                          January
      12, 2010Sonja
      K. McClellandCorporate
      Controller, Assistant Secretaryof
      Hurco Companies, Inc.(Principal
      Accounting Officer)





/s/ Stephen H. Cooper
                              
                              January
      12, 2010Stephen
      H. Cooper, Director/s/ Robert W. Cruickshank
                              
                              January
      12, 2010Robert
      W. Cruickshank, Director/s/ Philip James
                              
                              January
      12, 2010Philip
      James, Director/s/ Michael P. Mazza
                              
                              January
      12, 2010Michael
      P. Mazza, Director/s/ Richard T. Niner
                              
                              January
      12, 2010Richard
      T. Niner, Director/s/ Charlie Rentschler
                              
                              January
      12, 2010Charlie
      Rentschler, Director/s/ Janaki Sivanesan
                              
                              January
      12, 2010Janaki
      Sivanesan, Director


60