UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 Washington,D.C.20549
 
 FORM
        10-K
 (Mark
        One)
  T
              Annual
                  report pursuant to Section
                  13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal
                  year
                  endedOctober 31,
                  2007or
 £
              Transition
                  report pursuant to
                  Section 13 or 15(d) of the Securities Exchange Act of 1934 for
                  the
                  transition period from _________ to
                  _________.
 
 Commission
        File No.
        0-9143
 HURCO
        COMPANIES,
        INC.
 (Exact
        name of registrant as specified
        in its charter)
 Indiana
              
              35-1150732(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification Number)One
                  Technology 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£NoT
 
 Indicate
        by check mark if the registrant
        is not required to file reports pursuant to Section 13 or Section
        15(d).Yes£NoT
 
 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.YesTNo£
 
 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.T
 
 Indicate
        by check mark whether the
        registrant is a large accelerated filer, an accelerated filer or a
        non-
 accelerated
        filer. See definition of
“accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange
        Act.
 Large
                  accelerated filer£
              Accelerated
                  filerT
              Non-accelerated
                  filer£
 
 Indicate
        by check mark whether the
        registrant is a shell company (as defined in Rule 12b-2 of the Exchange
        Act).Yes£NoT
 
 The
        aggregate market value of the
        registrant’s voting stock held by non-affiliates as of April 30, 2007 (the last
        day of our most recently completed second quarter) was
        $281,851,000.
 
 The
        number of shares of the registrant’s
        common stock outstanding as of January 8, 2008 was
        6,392,220.
 
 DOCUMENTS
        INCORPORATED BY REFERENCE:
        Portions of the registrant’s Proxy Statement for its 2008 Annual Meeting of
        Shareholders (Part III).
  
 1
  Disclosure
        Concerning Forward-looking Statements
 
 Certain
        statements made in this annual report on form 10-K may constitute
“forward-looking statements” within the meaning of the Private Securities
        Litigation Reform Act of 1995.  These forward-looking statements
        involve known and unknown risks, uncertainties and other factors that may
        cause
        our actual results, performance or achievements to be materially different
        from
        any future results, performance or achievements expressed or implied by such
        forward-looking statements.  These factors include the risks
        identified in Item 1A.
  PART
        I
 
 Item1.
              BUSINESS
 
 General
 
 Hurco
        Companies, Inc. is an industrial technology company.  We design,
        manufacture and sell computerized machine tools to companies in the metal
        working industry through a worldwide sales, service and distribution
        network.  Although our computer control systems and software products
        are proprietary, they predominantly use industry standard personal computer
        components.  Our computer control systems and software products are
        primarily sold as integral components of our computerized machine tool
        products.  As used in this report, the words “we”, “us” and “our”
refer to Hurco Companies, Inc. and its consolidated subsidiaries.
 
 Since
        our
        founding in 1968, we have been a leader in the introduction of interactive
        computer control systems that automate manufacturing processes and improve
        productivity in the metal parts manufacturing industry. Hurco pioneered the
        application of microprocessor technology and conversational programming software
        for use on machine tools.  We have concentrated on designing
“user-friendly” computer control systems that can be operated by both skilled
        and unskilled machine tool operators and yet are capable of instructing a
        machine to perform complex tasks.  The combination of microprocessor
        technology and patented interactive, conversational programming software
        in our
        computer control systems enables operators on the production floor to quickly
        and easily create a program for machining a particular part from a blueprint
        or
        computer-aided design file and immediately begin machining that
        part.
  Our
        executive offices and principal design and engineering operations are
        headquartered in Indianapolis, Indiana.  Sales, application
        engineering and service offices are located in Indianapolis, Indiana;
        Mississauga, Canada; High Wycombe, England; Munich, Germany; Paris, France;
        Milan, Italy; Singapore and Taichung, Taiwan.  We also have a
        representative sales office in Shanghai, China, and a technical center in
        Shenzhen, China.  Distribution facilities are located in Los Angeles,
        California, Venlo, the Netherlands, and Singapore, and our principal
        manufacturing facility is located in Taiwan.  In November 2006, we
        registered a distribution company in India and throughout 2007 we established
        distributor relationships that enable us to sell our products throughout
        India.  As part of our plan to increase capacity and reduce
        manufacturing costs, we also opened a new manufacturing facility in Ningbo,
        China.  This facility currently focuses on machining castings and
        components to support our manufacturing operation in Taiwan.  In the
        future, the Ningbo facility can be expanded to include sub-assembly
        operations.  Eventually, machines designed specifically for the
        Chinese market will be produced at the Ningbo facility.
  Our
        strategy is to design, manufacture and sell to the global metalworking market
        a
        comprehensive line of computerized machine tools that incorporate our
        proprietary, interactive computer control technology.  Our technology
        is designed to enhance the machine tool user's productivity through ease
        of
        operation and higher levels of machine performance (speed, accuracy and surface
        finish quality).  We use an open system software architecture that
        permits our computer control systems and software to be produced 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 utilize a disciplined approach to strategically
        enter new geographic markets, as appropriate.  Our introduction of
        new, technologically advanced products, combined with our expansion into
        new
        markets, has resulted in our significant growth over the last several
        years.  In addition to this strong organic growth, our recent
        performance and current financial strength also provide us with the capability
        to pursue opportunistic acquisitions that are consistent with our strategic
        focus on expanding our product line and entering new markets.
  2
  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 11% of worldwide consumption.  Reports available
        for the U.S. machine tool market include:
  ·
              United
                  States Machine Tool Consumption – generated by the Association for
                  Manufacturing Technology and American Machine Tool Distributor
                  Association, this report includes metal cutting machines of all
                  types and
                  sizes, including segments in which we do not compete
  ·
              Purchasing
                  Manager’s Index - developed by the Institute for Supply
                  Management and reports activity levels in U.S. manufacturing
                  plants that purchase machine tools
  ·
              Capacity
                  Utilization of Manufacturing Companies – issued by the Federal
                  Reserve Board
  A
        limited
        amount of information for foreign markets is available, and different
        reporting methodologies are used by various countries.  Machine tool
        consumption data published by Gardner Publications, Inc., calculates machine
        tool consumption annually by country.  It is important to note that data
        for foreign countries is based on government reports that may lag six to
        twelve
        months and therefore is unreliable for forecasting purposes.
  Demand
        for capital equipment can fluctuate during periods of changing economic
        conditions.  Manufacturers and suppliers of capital goods, such as Hurco,
        are often the first to experience these changes in demand. Additionally,
        since our order backlog is approximately 60 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.
  3
  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 control systems.   Additionally, we produce and
        distribute software options, control upgrades, hardware accessories and
        replacement parts for our machine tool product lines and provide operator
        training and support services to our customers.
 
 The
        following table sets forth the contribution of each of our product groups
        to our
        total sales and service fees during each of the past three fiscal
        years:
 
 Net
                  Sales and Service Fees by Product Category(Dollars
                  in thousands)
              
              Year
                  ended October 31,2007
              
              
              2006
              
              
              2005Continuing
                  Products and ServicesComputerized
                  Machine Tools
              
              $
              165,832
              
              
              
              88.2
              %
              
              $
              128,946
              
              
              
              86.8
              %
              
              $
              107,313
              
              
              
              85.5
              %Computer
                  Control Systems and Software *
              
              
              5,291
              
              
              
              2.8
              %
              
              
              4,694
              
              
              
              3.2
              %
              
              
              4,129
              
              
              
              3.3
              %Service
                  Parts
              
              
              12,096
              
              
              
              6.4
              %
              
              
              10,494
              
              
              
              7.0
              %
              
              
              9,991
              
              
              
              8.0
              %Service
                  Fees
              
              
              4,828
              
              
              
              2.6
              %
              
              
              4,383
              
              
              
              3.0
              %
              
              
              4,076
              
              
              
              3.2
              %Total
              
              $
              188,047
              
              
              
              100
              %
              
              $
              148,517
              
              
              
              100
              %
              
              $
              125,509
              
              
              
              100
              %
 *Amounts shown do
          not
          include computer control systems sold as integrated components of computerized
          machine tools.
 
 Computerized
        Machine Tools – Machining Centers
 
 We
        design, manufacture and sell computerized machine tools equipped with a fully
        integrated interactive computer control system. During fiscal 2007 our twin
        touch-screen control console and our single touch-screen control console
        were
        shipped with our new 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. File management, process control, networking, and combining
        programming formats are enhanced with the new WinMax®
        control
        software.
 
 In
        the
        intensely competitive global manufacturing marketplace, significant increases
        in
        productivity are being derived from control and software technologies. Companies
        using computer controlled machine tools are better able to:
 
 ·
              maximize
                  the efficiency of their human resources
 ·
              continue
                  to expand their capability of making more advanced and complex
                  parts from
                  a wide range of materials and multiple processes
 ·
              maintain
                  the ability to incorporate fast moving changes in technology into
                  their
                  operations to keep their competitive edge
 ·
              continue
                  to integrate themselves into the global supply chain of their customers
                  by
                  supporting small to medium lot sizes for “just in time” initiatives
 
 *Pentium®
        is a
        registered trademark of Intel Corporation.
 **Windows®
        is a
        registered trademark of Microsoft Corporation.
  4
 
 Our
        Windows®**
        based
        control facilitates our ability to meet these customer needs. Companies are
        finding that the familiar Windows®**
        operating system coupled with the Hurco conversational style of program creation
        means that their operators are capable of creating and editing part programs
        without the overhead of specialized 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 are capable of processing the large amounts of data required for
        these parts to be processed at world-class speeds and accuracies. We continue
        to
        add technology to our control design as it becomes available.
 
 Our
        offering of machining centers, currently equipped with either a twin
        touch-screen or single touch-screen control console, consists of the following
        four product lines:
 
 VM
        Product Line
 
 The
        VM
        product line consists of moderately priced vertical machining centers for
        the
        entry-level market. Their design premise of a machining center with a large
        work
        cube and a small footprint optimizes the use of available floor space. The
        VM
        line consists of four 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 signature product
        line. The VMX line consists of 14 models in seven sizes with X-axis travels
        of
        24, 30, 40, 50, 60, 64, and 84 inches. The base prices of VMX machines range
        from $50,000 to $200,000.
 
 Five-Axis
        and Horizontal Machining Centers
 
 The
        Five-Axis and Horizontal product line is targeted at manufacturers seeking
        to
        produce complex multi-sided parts in a single setup. Purchasing one of these
        machining centers can yield significant productivity gains for operations
        that
        previously processed each side of a part individually.  The Five-Axis
        and Horizontal product line in 2007 consisted of four models, three vertical
        cutting machines and one horizontal cutting machine.  The base prices
        of the five-axis and horizontal machines range from $160,000 to
        $180,000.
 
 TM/TMM
        Product Line
 
 Since
        its
        introduction in fiscal 2005, we have continued to expand the TM turning center
        (horizontal slant-bed lathe) product line. The TM series is designed for
        entry-level job shops and contract manufacturers seeking efficient processing
        of
        small to medium lot sizes. The TM is offered in three models with chucks
        of 6,
        8, and 10 inches respectively. In September 2006, we further enhanced the
        capability of the TM turning centers with the addition of “live” or powered
        tooling on the lathe turret. Designated as the TMM product line, these machines
        allow our customers to complete a number of secondary milling, drilling and
        tapping operations, while the part is still held in the chuck after the turning
        operations are complete. This ability to “mill/turn” or “multi-task” on the same
        machine in a single setup can provide significant productivity gains. Two
        TMM
        models with this capability are being offered.  The base prices of the
        TM/TMM machines range from $40,000 to $85,000.
 
 
 *Pentium®
        is a
        registered trademark of Intel Corporation.
 **Windows®
        is a
        registered trademark of Microsoft Corporation.
  5
  Computer
        Control Systems and Software
 
 The
        following machine tool computer control systems and software products are
        sold
        directly to end-users and/or to original equipment manufacturers.
 Autobend®
 
 Autobend®
          computer
          control systems are applied to metal bending press brake machines that
          form
          parts from sheet metal and steel plate.  They consist of a
          microprocessor-based computer control and back gauge (an automated gauging
          system that determines where the bend will be made).  We have
          manufactured and sold the Autobend®
          product
          line since 1968.  We currently market two models of our Autobend®
          computer
          control systems for press brake machines, in combination with six different
          back
          gauges, through distributors to end-users as retrofit units for installation
          on
          existing or new press brake machines, as well as to original equipment
          manufacturers and importers.
 
 Software
            Products
 In
        addition to our standard computer control features, we offer software option
        products for two-dimensional and three-dimensional programming.  These
        products are sold to users of our computerized machine tools equipped with
        our
        twin touch-screen or single touch-screenconsoles
        featuring WinMax®
        control
        software.  The options include: Swept Surface, SelectSurface Finish
        Quality (SFQ), DXF Transfer, UltiNetTM,
        UltiPocketTM,
        Conversational Part and Tool Probing, and Advanced Verification
        Graphics.
 
 Our
        Swept
        Surface software option simplifies programming of 3D contours and significantly
        reduces programming time. SelectSurface Finish Quality (SFQ) lets the customer
        control surface finish quality and run time in one easy step.
 
 The
        DXF
        Transfer software option can substantially increase operator productivity
        because it eliminates manual data entry of part features by transferring
        AutoCADTM
        drawing
        files directly into the Hurco computer control or into our desktop programming
        software, WinMax Desktop.
 
 UltiNetÔ
        is a networking software
        option used by our customers to transfer part design and manufacturing
        information to computerized machine tools at high speeds and to network
        computerized machine tools within the customer's manufacturing
        facility.
 
 UltiPocketTM
        automatically calculates the tool path around islands, eliminating the arduous
        task of plotting these shapes.  Islands can also be rotated, scaled
        and repeated.
 
 Conversational
        Part and Tool Probing options permit the computerized dimensional measurement
        of
        machined parts and the associated cutting tools.  This “on-machine”
technique improves the throughput of the measurement process when compared
        to
        traditional “off-machine” approaches.
 
 The
        Advanced Verification Graphics
        feature significantly reduces both scrap and programming time because it
        provides customers with 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.
 
 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.
  6
  Manufacturing
 
 Our
        manufacturing strategy is based on sourcing of our modular designed components
        from a network of contract suppliers and sub-contractors who manufacture
        our
        components in accordance with our proprietary design, quality standards and
        cost
        specifications. This has enabled us to lower our production costs, reduce
        our
        working capital per sales dollar, and increase our worldwide manufacturing
        capacity without significant incremental investment in capital equipment
        or
        personnel.
 
 Our
        computerized metal cutting machine tools are manufactured to our specifications
        primarily by our wholly owned subsidiary in Taiwan, Hurco Manufacturing Limited
        (HML).  This subsidiary has increased our overall capacity and reduced
        our dependence on other manufacturers.  In addition, we have a
        relationship with a contract machine manufacturer in Taiwan that produces
        certain models included in our product line. Both of these companies conduct
        final assembly operations and are supported by a network of sub-contract
        suppliers of components and sub-assemblies.  In 2006, we opened a new
        manufacturing facility in Ningbo, China that focuses on the machining of
        castings and components to support production in Taiwan.  In the
        future, we can expand the Ningbo facility to include sub-assembly
        operations.  Eventually, we expect that machines designed specifically
        for the Chinese market will be produced at the Ningbo facility.
 
 We
        have a
        contract manufacturing agreement for computer control systems with Hurco
        Automation, Ltd., a Taiwanese company in which we have a 35% ownership
        interest.  This company produces all of our computer control systems
        to our specifications, sources industry standard computer components and
        our
        proprietary parts, performs final assembly, and conducts test
        operations.
 
 We
        work
        closely with our wholly owned subsidiaries, contract manufacturer, 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.  We continue to consider additional contract manufacturing
        resources to increase our long term capacity. 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 of our Taiwanese manufacturing facilities, or key
        component suppliers could have a material adverse effect on our
        operations.
 
 Marketing
        and Distribution
 
 We
        sell
        our products through more than 170 independent agents and distributors in
        countries throughout North America, Europe and Asia.  Although some of
        our distributors may carry competitive products, the Hurco line is the primary
        line for the majority of our distributors globally.  We also have
        direct sales personnel in Canada, England, France, Germany, Italy, Singapore
        and
        China, which are among the world's principal machine tool consuming
        countries.
 
 Approximately
        89% of the worldwide demand for computerized machine tools and computer control
        systems is outside the United States.  In fiscal 2007, more than
        two-thirds 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 computerized machine tools 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.
 
 Our
        computerized machine tool software options and accessories are sold primarily
        to
        end-users.  We sell our AutobendÒ
        computer control systems to original equipment manufacturers of new machine
        tools who integrate them with their own products prior to the sale of those
        products to their own customers, to retrofitters of used machine tools who
        integrate them with those machines as part of the retrofitting operation,
        and to
        end-users who have an installed base of machine tools, either with or without
        related computer control systems.
  7
 
 Demand
 
 We
        believe that advances in industrial technology and the related demand for
        automated process improvements drive demand for our products.
 
 Other
        factors affecting demand
        include:
 
 ·
              the
                  need to continuously improve
                  productivity and shorten cycle
                  time
 ·
              an
                  aging machine tool installed
                  base that will require replacement with more advanced and efficient
                  technology created by shorter product life
                  cycles
 ·
              the
                  industrial development of
                  emerging markets in Asia andEastern
                  Europe
 ·
              the
                  declining supply of skilled
                  machinists
 
 Demand
        for our products is also highly dependent upon economic conditions and the
        general level of business confidence, as well as such factors as production
        capacity utilization and changes in governmental policies regarding tariffs,
        corporate taxation, and other investment incentives.  By marketing and
        distributing our products on a worldwide basis, we seek to reduce the impact
        of
        adverse changes in economic conditions that might occur in a particular
        geographic region.
 
 Competition
 
 We
        compete with many other machine tool producers in the United States and foreign
        markets.  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., Masak 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
 
 Non-capitalized
        research and development expenditures for new products and significant product
        improvements were $3.1 million, $2.5 million and $2.4 million in fiscal 2007,
        2006, and 2005, respectively.  In addition, we recorded expenditures
        of $1.2 million in 2007, $2.1 million in 2006, and $1.2 million in 2005,
        related
        to software development projects that were capitalized.
 
 Employees
 
 We
        had
        approximately 380 full-time employees at the end 2007, none of whom are covered
        by a collective-bargaining agreement or represented by a union.  We
        have experienced no employee-generated work stoppages or disruptions and
        we
        consider our employee relations to be satisfactory.
  8
  Geographic
        Areas
 
 Financial
        information about geographic areas is set forth in Note 14 of Notes to
        Consolidated Financial Statements.
 
 The
        risks
        of doing business on a global basis are set forth in Item 1A.
 
 Backlog
 
 For
        information on orders and backlog,
        see Management’s Discussion and Analysis of Financial Condition and Results of
        Operation.
 
 Availability
        of Reports and
        Other Information
 
 Our
        website is www.hurco.com.  We
        make available on this website, free of charge, access to our annual, quarterly
        and current reports and other documents filed by us with the Securities and
        Exchange Commission (SEC) as soon as reasonably practical after the filing
        date.  These reports can also be obtained at the SEC’s Public
        Reference Room at 100 F Street, NE Washington, DC 20549.
 
 Item
                  1A.
              RISK
                  FACTORS
 
 In
        this
        section we describe a number of 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
          cyclical nature of our business causes fluctuations in our operating results.
 
 The
        machine tool industry is highly cyclical and changes in demand can occur
        abruptly in the geographic markets we serve. As a result of this cyclicality,
        we
        have experienced in the past, and expect to experience in the future,
        significant fluctuations in our sales, which will affect our results of
        operations and financial condition.
 
 Our
        international operations pose additional risks that may adversely impact
        sales
        and earnings.
 
 During
        the fiscal year ended October 31, 2007, more than two-thirds of our revenues
        were derived from sales to customers located outside the United
        States.  We also have manufacturing facilities and assets located
        outside of the United States.  These international operations are
        subject to a number of risks, including:
 
 ·
              trade
                  barriers
 ·
              regional
                  economic uncertainty
 ·
              differing
                  labor regulation
 ·
              risk
                  of governmental expropriation
 ·
              domestic
                  and foreign customs and tariffs
 ·
              current
                  and changing regulatory environments affecting the importation
                  and
                  exportation of products and raw materials
 ·
              difficulty
                  in obtaining distribution support
 ·
              difficulty
                  in staffing and managing widespread operations
 ·
              differences
                  in the availability and terms of financing
 ·
              political
                  instability and unrest
 ·
              risks
                  of changes in taxes
 ·
              tax
                  implications from repatriation of funds
  9
  Quotas,
        tariffs, taxes or other trade barriers could require us to change manufacturing
        sources, reduce prices, increase spending on marketing or product development,
        withdraw from or not enter certain markets or otherwise take actions that
        could
        be adverse to us.  Also, in some foreign jurisdictions, we may be
        subject to laws limiting the right and ability of entities organized or
        operating therein to pay dividends or remit earnings to affiliated companies
        unless specified conditions are met.  These factors may adversely
        affect our future operating results.  All of our products are shipped
        from our manufacturing facility in Taiwan from the Port of Taichung to three
        ports of destination: Los Angeles, California, Venlo, Netherlands, and
        Singapore.  Changes in customs requirements, as a result of national
        security or other constraints put upon these ports, may also have an adverse
        impact on our future operating results.
 
 We
        depend on limited sources for our products.
 
 Our
        wholly owned subsidiary in Taiwan, Hurco Manufacturing Ltd. (HML), produces
        over
        98% of our machine tools.  Any interruption in manufacturing at HML
        would have an adverse effect on our financial operating
        results.  Interruption in manufacturing at HML could result from a
        change in the political environment or a natural disaster, such as an
        earthquake, typhoon, or tsunami. Any interruption with our contract manufacturer
        or one of our key component suppliers may also have an adverse effect on
        our
        operating results and our financial condition.
 
 Fluctuations
        in the exchange rates between the U.S. Dollar and any of several foreign
        currencies could increase our costs or decrease our revenue.
 
 Our
        international sales divisions generate more than two-thirds of our revenues,
        which are received in several foreign currencies, primarily the Euro and
        Pound
        Sterling. Therefore, our results of operations and financial condition are
        affected by fluctuations in exchange rates between these currencies and the
        U.S.
        Dollar, both for purposes of actual conversion and financial reporting purposes.
        In addition, payments for components incorporated into our products are made
        in
        the New Taiwan Dollar.  We hedge our foreign currency exposure with
        the purchase of forward exchange contracts. Hedge contracts only mitigate
        the
        impact of changes in foreign currency rates that occur during the term of
        the
        related hedge contract period.  Refer to Note 1 of Notes to
        Consolidated Financial Statements for the impact of translation of foreign
        currencies and hedging on the consolidated financial statements.
 
 Our
        competitive position and prospects for growth may be diminished if we are
        unable
        to develop and introduce new and enhanced products on a timely basis that
        are
        accepted in the market.
 
 The
        machine tool industry is subject to technological change, evolving industry
        standards, changing customer requirements, and improvements in and expansion
        of
        product offerings. Our ability to anticipate changes in technology, industry
        standards, customer requirements and product offerings by competitors, and
        to
        develop and introduce new and enhanced products on a timely basis that are
        accepted in the market, will be significant factors in maintaining or improving
        our competitive position and growth prospects.  If the technologies or
        standards used in our products become obsolete or fail to gain widespread
        commercial acceptance, our business would be materially adversely affected.
        Although we believe that we have the technological capabilities to remain
        competitive, developments by others may render our products or technologies
        obsolete or noncompetitive.
 
 We
        compete with larger companies that have greater financial resources, and
        our
        business could be harmed by competitors’ actions.
 
 The
        markets in which our products are sold are extremely competitive and highly
        fragmented. In marketing our products, we compete with other manufacturers
        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.
  10
  Fluctuation
        of the price of raw materials, especially steel and iron, could adversely
        affect
        our sales, costs and profitability.
 
 We
        manufacture products with a high iron and steel content for which worldwide
        prices have increased significantly. The availability and price for these
        and
        other raw materials are subject to volatility due to worldwide supply and
        demand
        forces, speculative actions, inventory levels, exchange rates, production
        costs,
        and anticipated or perceived shortages. In some cases, those cost increases
        can
        be passed on to customers in the form of price increases; in other cases
        they
        cannot. If the prices of raw materials increase and we are not able to charge
        our customers higher prices to compensate, it would adversely affect our
        results
        of operations.
 
 Due
        to future changes in technology, changes in market demand, or changes in
        market
        expectations, portions of our inventory may become obsolete or
        excess.
 
 The
        technology within our products changes and generally new versions of machines
        are brought to market in three to five year cycles. The phasing out of an
        old
        product involves estimating the amount of inventory to hold to satisfy the
        final
        demand for those machines and to satisfy future repair part needs. Based
        on
        changing customer demand and expectations of delivery times for repair parts,
        we
        may find that we have either obsolete or excess inventory on hand. Because
        of
        unforeseen future changes in technology, market demand, or competition, we
        might
        have to write off unusable inventory, which may adversely affect our results
        of
        operations.
 
 We
        may make acquisitions that could disrupt our operations and harm our operating
        results.
 
 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.
  11
 
 Risks
        related to new product development also apply to acquisitions. For additional
        information, please see the risk factor above entitled, “Due to future changes
        in technology, changes in market demand, or changes in market expectations,
        portions of our inventory may become obsolete or excess.”
 
 Intangible
        or other assets may become impaired requiring us to record a significant
        charge
        to earnings.
 
 Under
        U.S. Generally Accepted Accounting Principles, we review our assets for
        impairment when events or changes in circumstances indicate the carrying
        value
        may not be recoverable.  Intangible assets and our investment
        accounted for under the equity method are required to be tested for impairment
        at least annually.  We may be required to record a significant charge
        to earnings in our financial statements for the period in which any impairment
        of these assets is determined.  This may adversely affect our results
        of operations.  To date we have not taken a significant charge for an
        impairment of assets.
 
 Our
        continued success depends on our ability to protect our intellectual
        property.
 
 Our
        future success depends in part upon our ability to protect our intellectual
        property.  We rely principally on nondisclosure agreements, other
        contractual arrangements, trade secret law, trademark and patent law, to
        protect
        our intellectual property.  However these measures may be inadequate
        to protect our intellectual property from infringement by others or prevent
        misappropriation of our proprietary rights.  In addition, the laws of
        some foreign countries do not protect proprietary rights to the same extent
        as
        do U.S. laws.  Our inability to protect our proprietary information
        and enforce our intellectual property rights through infringement proceedings
        could have a material adverse effect on our business, financial condition
        and
        results of operations.
 
 The
        unplanned loss of current members of our senior management team and other
        key
        personnel may adversely affect our operating results.
 
 The
        unexpected loss of senior management or other key personnel could impair
        our
        ability to carry out our business plan. We believe that our future success
        will
        depend in part on our ability to attract and retain highly skilled and qualified
        personnel. The loss of senior management or other key personnel may adversely
        affect our operating results as we incur costs to replace the departed personnel
        and potentially lose opportunities in the transition of important job
        functions.
 
 Item
                  1B.
              UNRESOLVED
                  STAFF
                  COMMENTS
  None.
  12
  Item
                  2
              PROPERTIES
  The
        following table sets forth the
        location, size and principal use of each of our facilities:
 
 Location
                
                Square
                    Footage
                
                
                Principal
                    UsesIndianapolis,Indiana
                
                165,000
                (1)
                
                Corporate
                    headquarters, design and
                    engineering, product testing, sales and marketing, application
                    engineering
                    and customer serviceLos
                    Angeles,California
                
                13,000
                
                
                Warehouse,
                    distribution, sales,
                    application engineering and customer serviceMississauga,Canada
                
                3,600
                
                
                Sales,
                    application engineering and
                    customer serviceHigh
                    Wycombe,England
                
                12,000
                
                
                Sales,
                    application engineering and
                    customer serviceParis,France
                
                4,700
                
                
                Sales,
                    application engineering and
                    customer serviceMunichandRodermark,Germany
                
                25,000
                
                
                Sales,
                    application engineering and
                    customer serviceMilanandVenice,Italy
                
                7,400
                
                
                Sales,
                    application engineering and
                    customer serviceSingapore
                
                3,000
                
                
                Sales,
                    application engineering and
                    customer serviceShanghai,China
                
                1,200
                
                
                Sales,
                    application engineering and
                    customer serviceTaichung,Taiwan
                
                193,000
                
                
                ManufacturingNingbo,China
                
                31,000
                
                
                Manufacturing
 (1)
              Approximately
                  50,000 square feet
                  is leased to a third-party under a lease, which expires April 30,
                  2010.
 
 We
        own
        the Indianapolis facility and lease all other facilities.  The leases
        have terms expiring at various dates ranging from April 2008 to April
        2014.  We believe that all of our facilities are well maintained and
        are adequate for our needs now and in the foreseeable future.  We do
        not believe that we would experience any difficulty in replacing any of the
        present facilities if any of our leases were not renewed at
        expiration.
 
 Item
                  3.
              LEGAL
                  PROCEEDINGS
 
 We
        are
        involved in various claims and lawsuits arising in the normal course of
        business.  We do not expect any of these claims, individually or in
        the aggregate, to have a material adverse effect on our financial position
        or
        results of operations.
  13
 
 Item
                  4.
              SUBMISSION
                  OF MATTERS TO A VOTE OF SECURITY
                  HOLDERS
 
 None.
 
 Executive
        Officers of the Registrant
 
 Executive
        officers are elected each year
        by the Board of Directors at the first board meeting following the Annual
        Meeting of Shareholders to serve during the ensuing year and until their
        respective successors are elected and qualified.  There are no family
        relationships between any of our executive officers or between any of them
        and
        any of the members of the Board of Directors.
 
 The
        following information sets forth as
        of October 31, 2007, 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
              
              52
              
              Chairman
                          of the Board and Chief Executive
                          OfficerJames
                  D.
                  Fabris
              
              56
              
              President
                  and Chief Operating
                  OfficerJohn
                  G.
                  Oblazney
              
              39
              
              Vice
                  President, Secretary,
                  Treasurer and Chief Financial OfficerSonja
                  K.
                  McClelland
              
              36
              
              Corporate
                  Controller, Assistant
                  Secretary
 
  Michael
        Doar was elected
        Chairman of the Board and Chief Executive Officer on November 14,
        2001.  Mr. Doar had held various management positions with Ingersoll
        Milling Machine Company from 1989 until 2001.  Mr. Doar has been a
        director of Hurco since 2000.
 
 James
        D.
        Fabris was elected President and Chief Operating Officer on November 14,
        2001.  Mr. Fabris served as Executive Vice President - Operations from
        November 1997 until his current appointment and previously served as a Vice
        President of Hurco since February 1995.
 
 John
        G.
        Oblazney was elected Vice President, Secretary, Treasurer and Chief Financial
        Officer in September 2006.  Prior to joining us, Mr. Oblazney served
        as the Chief Financial Officer of Carrier Corporation’s Light Commercial
        Business, a division of United Technologies Corporation, since December 2005.
        Prior to that, Mr. Oblazney served in various other financial positions with
        Carrier Corporation from 2000 to 2005.  Prior to joining Carrier
        Corporation, Mr. Oblazney was employed for six years with Cooper Industries
        and
        employed three years by an international public accounting firm.
 
 Sonja
        K. McClelland has been employed by
        Hurco since September 1996 and was elected Corporate Controller, Assistant
        Secretary in November 2004.  Ms. McClelland served as Corporate
        Accounting Manager from September 1996 to 1999, then as Division Controller
        for
        HurcoUSAfrom
        September 1999 to November
        2004.  Prior to joining Hurco, Ms. McClelland was employed for three
        years by an international public accounting firm.
  14
  PART
        II
 
 Item
                  5.
              MARKET
                  FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERSANDISSUER
                  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.
 
 2007
              
              
              2006Fiscal
                  Quarter Ended:
              
              High
              
              
              Low
              
              
              High
              
              
              LowJanuary
                  31
              
              $
              33.18
              
              
              $
              24.61
              
              
              $
              35.30
              
              
              $
              17.74April
                  30
              
              
              47.86
              
              
              
              33.07
              
              
              
              37.47
              
              
              
              23.75July
                  31
              
              
              56.28
              
              
              
              39.12
              
              
              
              32.98
              
              
              
              20.42October
                  31
              
              
              60.44
              
              
              
              39.77
              
              
              
              29.26
              
              
              
              19.80
  At
          January 8, 2008, the closing price of
          our common stock on the Nasdaq Global Select Market was
          $39.02.
 
 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 192 holders of record of our common stock as of January 8,
          2008.
 
 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.
 
 15
 
 Item
                  6.
              SELECTED
                  FINANCIALDATA
  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 312007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Statement
                  of Operations Data:
              
              (Dollars
                  in thousands, except per share amounts)Sales
                  and service fees
              
              $
              188,047
              
              
              $
              148,517
              
              
              $
              125,509
              
              
              $
              99,572
              
              
              $
              75,532Gross
                  profit
              
              
              71,082
              
              
              
              53,325
              
              
              
              42,558
              
              
              
              30,298
              
              
              
              20,822Selling,
                  general and administrative expenses
              
              
              40,124
              
              
              
              30,697
              
              
              
              26,057
              
              
              
              21,401
              
              
              
              18,749Restructuring
                  expense (credit) and other expense, net
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              465
              
              
              
              (124
              )Operating
                  income
              
              
              30,958
              
              
              
              22,628
              
              
              
              16,501
              
              
              
              8,432
              
              
              
              2,197Interest
                  expense (income)
              
              
              (65
              )
              
              
              259
              
              
              
              355
              
              
              
              468
              
              
              
              658Net
                  income
              
              
              20,889
              
              
              
              15,479
              
              
              
              16,443
              
              
              
              6,269
              
              
              
              462Earnings
                  per common share- diluted
              
              
              3.24
              
              
              
              2.42
              
              
              
              2.60
              
              
              
              1.04
              
              
              
              0.08Weighted
                  average common shares outstanding-diluted
              
              
              6,440
              
              
              
              6,397
              
              
              
              6,336
              
              
              
              6,026
              
              
              
              5,582
 
 
 As
                  of October 312007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Balance
                  Sheet Data:
              
              (Dollars
                  in thousands)Current
                  assets*
              
              $
              139,265
              
              
              $
              103,434
              
              
              $
              73,818
              
              
              $
              56,472
              
              
              $
              42,390Current
                  liabilities
              
              
              63,215
              
              
              
              44,340
              
              
              
              30,761
              
              
              
              30,125
              
              
              
              20,154Working
                  capital*
              
              
              76,050
              
              
              
              59,094
              
              
              
              43,057
              
              
              
              26,347
              
              
              
              22,236Current
                  ratio
              
              
              2.2
              
              
              
              2.3
              
              
              
              2.4
              
              
              
              1.9
              
              
              
              2.1Total
                  assets*
              
              
              163,781
              
              
              
              125,545
              
              
              
              94,114
              
              
              
              73,446
              
              
              
              57,958Non-current
                  liabilities*
              
              
              2,963
              
              
              
              5,830
              
              
              
              4,409
              
              
              
              4,866
              
              
              
              9,063Total
                  debt
              
              
              --
              
              
              
              4,010
              
              
              
              4,136
              
              
              
              4,600
              
              
              
              9,222Shareholders’
                  equity
              
              
              97,603
              
              
              
              75,375
              
              
              
              58,944
              
              
              
              38,455
              
              
              
              28,741
 *Certain
        information for prior year has
        been reclassified to reflect current year presentation.
  16
  Item
                  7.
              MANAGEMENT'S
                  DISCUSSIONANDANALYSIS OF FINANCIAL
                  CONDITIONANDRESULTS OF
                  OPERATIONS
  EXECUTIVE
        OVERVIEW
 
 Hurco
        Companies, Inc., is an industrial technology company operating in a single
        segment.  We design and produce computerized machine tools, featuring
        our proprietary computer control systems and software, for sale through our
        own
        distribution network to the worldwide metal cutting market.  We also
        provide software options, control upgrades, accessories and replacement parts
        for our products, as well as customer service and training support.
 
 Our
        computerized metal cutting machine tools are manufactured in Taiwan to our
        specifications by our wholly owned subsidiary, Hurco Manufacturing Limited
        (HML), and an affiliate.  We sell our products through more than 170
        independent agents and distributors in countries throughout North America,
        Europe and Asia.  We also have our own direct sales and service
        organizations in Canada, England, France, Germany, Italy, Singapore and
        China.
 
 The
        machine tool industry is highly cyclical and changes in demand can occur
        abruptly.  There was a significant decline in global demand that
        continued through the fourth quarter of fiscal 2003.  During the
        downturn, we took actions to discontinue the production and sale of
        underperforming products, refocused on our core product lines and significantly
        reduced our operating costs.  We also began introducing new product
        models in late fiscal 2002 and have continued this process.  The
        primary drivers of our operational performance in the past three years have
        been
        improved worldwide demand for our products and increasing acceptance of our
        expanded product line.
 
 Approximately
        89% of worldwide demand for machine tools comes from outside the United
        States.  During fiscal 2006 and 2007, more than two-thirds of our
        revenues were attributable to customers located abroad.  Our sales to
        foreign customers are denominated, and payments by those customers are made
        in
        the prevailing currencies—primarily the Euro and Pound Sterling—in the countries
        in which those customers are located, and our product costs are incurred
        and
        paid primarily in the New Taiwan Dollar and the U.S. Dollar.  Changes
        in currency exchange rates may have a material effect on our operating results
        and consolidated balance sheets as reported under U.S. Generally Accepted
        Accounting Principles.  For example, when a foreign currency increases
        in value relative to the U.S. Dollar, sales made (and expenses incurred)
        in that
        currency, when translated to U.S. Dollars for reporting in our financial
        statements, are higher than would be the case when that currency has a lower
        value relative to the U.S. Dollar.  In our comparison of
        period-to-period results, we discuss not only the increases or decreases
        in
        those results as reported in our financial statements (which reflect translation
        to U.S. Dollars at prevailing exchange rates), but also the effect that changes
        in exchange rates had on those results. For additional information on the
        impact
        of translation of foreign currencies and our hedging practices, see Note
        1 of
        Notes to Consolidated Financial Statements.
 
 Our
        high
        levels of foreign manufacturing and sales also subject us to cash flow risks
        due
        to fluctuating currency exchange rates.  We seek to mitigate those
        risks through the use of various derivative instruments – principally foreign
        currency forward exchange contracts.
 
 The
        volatility of demand for machine tools can significantly impact our working
        capital requirements and, therefore, our cash flow from operations and our
        operating profits.  Because our products are produced in Taiwan,
        manufacturing and ocean transportation lead times require that we schedule
        machine tool production based on forecasts of customer orders for a future
        period of four or five months.  We continually monitor order activity
        levels and adjust future production schedules to reflect changes in demand,
        but
        a significant unexpecteddecline in customer
        orders
        from forecasted levels can temporarily increase our finished goods inventories
        and our use of working capital.
 
 17
 
 Results
        of
        Operations
 
 The
        following table presents, for the fiscal years indicated, selected items
        from
        the Consolidated Statements of Income expressed as a percentage of worldwide
        sales and service fees and the year-to-year percentage changes in the dollar
        amounts of those items.
 
 Percentage
                  of Revenues
              
              
              Year-to-Year
                  % Change2007
              
              
              2006
              
              
              2005
              
              
              Increase
                  (Decrease)07
                  vs. 06
              
              
              06
                  vs. 05Sales
                  and service fees
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              26.6
              %
              
              
              18.3
              %Gross
                  profit
              
              
              37.8
              %
              
              
              35.9
              %
              
              
              33.9
              %
              
              
              33.3
              %
              
              
              25.3
              %Selling,
                  general and Administrative expenses
              
              
              21.3
              %
              
              
              20.7
              %
              
              
              20.7
              %
              
              
              30.7
              %
              
              
              17.8
              %Operating
                  income
              
              
              16.5
              %
              
              
              15.2
              %
              
              
              13.1
              %
              
              
              36.8
              %
              
              
              37.1
              %Interest
                  expense (income)
              
              
              (0.03
              %)
              
              
              0.2
              %
              
              
              0.3
              %
              
              
              (125.1
              %)
              
              
              (27.0
              %)Net
                  income
              
              
              11.1
              %
              
              
              10.4
              %
              
              
              13.1
              %
              
              
              35.0
              %
              
              
              (5.9
              %)
 
 Fiscal
        2007 Compared to
        Fiscal 2006
 
 Sales
        and Service Fees.Sales
        and service fees for fiscal 2007 were the highest in our 39-year history,
        totaling $188.0 million, an increase of $39.5 million, or 26.6%, over fiscal
        2006.  Of this increase, $28.5 million was attributable to operational
        growth and approximately $11.0 million was due to the favorable effects of
        a
        weakening U.S. dollar on currency translation.  Computerized machine
        tool sales, which also were the highest in our history, totaled $165.8 million,
        an increase of 28.6% from the $128.9 million recorded in 2006, primarily
        driven
        by strong worldwide demand for our products and an increase in the percentage
        of
        sales attributable to higher price machines as a result of our expanded product
        line.
 
 Net
        Sales and Service Fees by
        Geographic Region
 
 The
        following table sets forth net sales and service fees by geographic region
        for
        the years ended October 31, 2007 and 2006 (in thousands):
 
 October
                  31,
              
              
              Increase2007
              
              
              2006
              
              
              Amount
              
              
              %Americas
              
              $
              52,133
              
              
              
              27.7
              %
              
              $
              50,563
              
              
              
              34.0
              %
              
              $
              1,570
              
              
              
              3.1
              %Europe
              
              
              125,446
              
              
              
              66.7
              %
              
              
              87,735
              
              
              
              59.1
              %
              
              
              37,711
              
              
              
              43.0
              %Asia
                  Pacific
              
              
              10,468
              
              
              
              5.6
              %
              
              
              10,219
              
              
              
              6.9
              %
              
              
              249
              
              
              
              2.4
              %Total
              
              $
              188,047
              
              
              
              100.0
              %
              
              $
              148,517
              
              
              
              100.0
              %
              
              $
              39,530
              
              
              
              26.6
              %
 
 In
        the
        Americas, sales and service fees increased 3.1% primarily due to improved
        mix as
        unit sales volumes decreased by 4.7% a result of general weakening in demand
        for
        the domestic machine tool market.
 
 European
        sales and service fees increased by 43.0%, which includes a favorable impact
        due
        to changing currency rates of $10.5 million, or 11.9%.  Unit sales
        increased by 28.0% in fiscal 2007 compared to fiscal 2006 as a result of
        a
        strong European market and continued expansion into eastern European
        markets.  The remaining 15.0% of growth in European sales and service
        fees was primarily derived by continued demand for our higher end VMX product
        line.
 
 Sales
        and
        service fees in the Asia Pacific region increased by 2.4%, due to increased
        volume of larger higher priced machines, partially offset by a 10.1% decline
        in
        overall unit volume.  The effect of a weaker U.S. Dollar when
        translating foreign sales for financial reporting purposes had a favorable
        impact of approximately $539,000, or 5.3%, on this region’s sales comparison for
        the full year.
  18
  Net
        Sales and Service Fees by Product
        Category
 
 The
        following table sets forth net sales and service fees by product category
        for
        the years ended October 31, 2007 and 2006 (in thousands):
 
 October
                  31,
              
              
              Increase2007
              
              
              2006
              
              
              Amount
              
              
              %Computerized
                  Machine Tools
              
              $
              165,832
              
              
              
              88.2
              %
              
              $
              128,946
              
              
              
              86.8
              %
              
              $
              36,886
              
              
              
              28.6
              %Service
                  Fees, Parts and Other
              
              
              22,215
              
              
              
              11.8
              %
              
              
              19,571
              
              
              
              13.2
              %
              
              
              2,644
              
              
              
              13.5
              %Total
              
              $
              188,047
              
              
              
              100.0
              %
              
              $
              148,517
              
              
              
              100.0
              %
              
              $
              39,530
              
              
              
              26.6
              %
 
 Sales
        of computerized machine tools
        totaled $165.8 million in fiscal 2007, an increase of $36.9 million, or 28.6%,
        primarily driven by a strong European market and continued demand for our
        higher
        end VMX product line.
 
 Orders
        and
        Backlog.New order bookings in fiscal 2007, were $199.0
        million, an increase of $44.2 million, or 28.6%, over the prior
        year.  New order bookings increased by 6.1%, 43.6% and 5.2% in the
        Americas, Europe and Asia Pacific, respectively.  Europe was the
        primary contributor to the increased orders, driven by a strong market,
        expansion into new markets and favorable product mix.  Unit orders
        increased 26.1% in Europe and decreased by 6.7% and 10.7% in North America
        and
        Asia Pacific, respectively.  The reduction in North America was
        primarily due to a general weakening in demand for the domestic machine tool
        market, while Asia Pacific orders were down slightly due to continued
        development of the selling channels in China and India.  Orders for
        fiscal 2007 compared to fiscal 2006 were favorably affected by approximately
        $11.7 million, or 7.5%, due to changes in currency exchange
        rates.  Backlog was $29.4 million at October 31, 2007, compared to
        $16.1 million at October 31, 2006.  We do not believe backlog is a
        useful measure of past performance or indicative of future
        performance.  Backlog orders as of October 31, 2007 are expected to be
        fulfilled in fiscal 2008.
 
 Gross
        Margin.  Gross margin for fiscal 2007 was 37.8%, an increase
        over the 35.9% margin realized in the corresponding 2006 period, reflecting
        the
        impact of higher sales and improved mix.
 
 Operating
        Expenses.  Selling, general and administrative expenses for
        fiscal 2007 of $40.1 million increased $9.4 million, or 30.7%, from those
        of
        fiscal 2006 and includes the unfavorable effect of currency translation of
        $1.5
        million, or 5.0%.  The increase was attributable to a $571,000
        increase in product development expenses, a $4.5 million increase in global
        sales and marketing expenditures and a $4.4 million increase in general and
        administrative expenses.  The increased global sales and marketing
        expenditures include increased expenses for local trade shows, increased
        European agent sales commissions and marketing expenses for expansion of
        sales
        into emerging markets.  General and administrative expenses increased
        primarily as a result of incentive compensation, incremental healthcare related
        benefits, and increases in other miscellaneous administrative
        expenses.
 
 Operating
        Income.  Operating income for fiscal 2007 totaled $31.0
        million, or 16.5% of sales, compared to $22.6 million or 15.2% of sales,
        in
        fiscal 2006.
 
 Other
        Income
        (Expense).  Other income (expense), net in fiscal 2007 relates
        primarily to increased income from investments in minority-owned contract
        manufacturers in Taiwan accounted for under the equity method, tax deferred
        income earned on investments of cash, and currency exchange gains on
        inter-company receivables and payables denominated in foreign currencies,
        net of
        gains or losses on related forward contracts.
 
 19
 
 Provision
        for Income
        Taxes.The effective tax rate for fiscal 2007 was 36.2%,
        compared to 33.0% for the same period in the prior year.  The 2006
        lower effective tax rate was primarily due to a deduction generated from
        a
        change in tax code.
 
 Net
        Income.  Net
        income for fiscal 2007 was $20.9 million, or $3.24 per share, which is an
        increase of 35.0% over fiscal 2006 net income of $15.5 million, or $2.42
        per
        share.
 
 Fiscal
        2006 Compared to
        Fiscal 2005
 
 Sales
        and Service Fees.Sales
        and service fees for fiscal 2006 were $148.5 million, an increase of $23.0
        million, or 18.3%, over fiscal 2005, of which $24.6 million was attributable
        to
        operational growth offset by approximately $1.6 million of unfavorable effects
        of currency translation.  Computerized machine tool sales totaled
        $128.9 million, an increase of 20.2% from the $107.3 million recorded in
        2005,
        primarily driven by strong worldwide demand for our
        products.  Approximately $4.0 million, or 17.6%, of the increase in
        sales of computerized machine tools was the result of sales of our lathe
        machine
        line, which we introduced in the first quarter of fiscal 2005.
 
 Net
        Sales and Service Fees by
        Geographic Region
 
 The
        following table sets forth net sales and service fees by geographic region
        for
        the years ended October 31, 2006 and 2005 (in thousands):
 
 October
                  31,
              
              
              Increase2006
              
              
              2005
              
              
              Amount
              
              
              %Americas
              
              $
              50,563
              
              
              
              34.0
              %
              
              $
              43,194
              
              
              
              34.4
              %
              
              $
              7,369
              
              
              
              17.1
              %Europe
              
              
              87,735
              
              
              
              59.1
              %
              
              
              75,225
              
              
              
              59.9
              %
              
              
              12,510
              
              
              
              16.6
              %Asia
                  Pacific
              
              
              10,219
              
              
              
              6.9
              %
              
              
              7,090
              
              
              
              5.7
              %
              
              
              3,129
              
              
              
              44.1
              %Total
              
              $
              148,517
              
              
              
              100.0
              %
              
              $
              125,509
              
              
              
              100.0
              %
              
              $
              23,008
              
              
              
              18.3
              %
 
 In
        the
        Americas, sales and service fees increased $7.4 million, or 17.1%, due to
        the
        growth of our VM product line combined with continued demand for our higher
        end
        VMX product line and incremental sales of the lathe product
        line.  Lathe unit shipments increased 15.0% in fiscal 2006 compared to
        fiscal 2005.  Unit shipments of vertical machining centers (which
        exclude lathes) increased approximately 28.1% in fiscal 2006 compared to
        16.8%
        for similar products in the United States as reported by the Association
        for
        Manufacturing Technology.
 
 In
        Europe, our sales and service fees increased by $12.5 million, or 16.6%,
        which
        includes an unfavorable impact due to changes in currency rates of $1.8 million
        or 2.4%.  Unit sales increased 19.2% when comparing fiscal 2006 to
        2005.
 
 Sales
        and
        service fees in the Asia Pacific region were not significantly affected by
        changes in currency exchange rates, but did reflect improved activity in
        Asian
        markets.  Shipments of our lathe product line increased 9.0% and
        shipments of vertical machining centers increased 48.7% in fiscal 2006 compared
        to fiscal 2005.
  20
 
 Net
        Sales and Service Fees by Product
        Category
 
 The
        following table sets forth net sales and service fees by product category
        for
        the years ended October 31, 2006 and 2005 (in thousands):
 
 October
                  31,
              
              
              Increase2006
              
              
              2005
              
              
              Amount
              
              
              %Computerized  Machine
                  Tools
              
              $
              128,946
              
              
              
              86.8
              %
              
              $
              107,313
              
              
              
              85.5
              %
              
              $
              21,633
              
              
              
              20.2
              %Service
                  Fees, Parts  and Other
              
              
              19,571
              
              
              
              13.2
              %
              
              
              18,196
              
              
              
              14.5
              %
              
              
              1,375
              
              
              
              7.6
              %Total
              
              $
              148,517
              
              
              
              100.0
              %
              
              $
              125,509
              
              
              
              100.0
              %
              
              $
              23,008
              
              
              
              18.3
              %
 
 Sales
        of
        computerized machine tools totaled $128.9 million in fiscal 2006, an increase
        of
        $21.6 million, or 20.2%, primarily driven by strong worldwide demand for
        our
        existing products.  Approximately $4.0 million of the increase in
        sales of computerized machine tools was a result of sales of our lathe machine
        line, which was introduced in the first quarter of fiscal 2005.
 
 Orders
        and
        Backlog.  New order bookings for fiscal 2006 totaled $154.8
        million, an increase of $31.9 million, or 26.0%, as compared to $122.9 million
        recorded in fiscal 2005.  New order bookings increased by 17.6%, 27.4%
        and 63.3% in the Americas, Europe and Asia Pacific,
        respectively.  Unit orders were also strong in all geographic regions
        in fiscal 2006. Unit orders increased 33.4%, 29.4% and 66.7% in North America,
        Europe and Asia Pacific, respectively.  Orders for fiscal 2006
        compared to fiscal 2005 were unfavorably affected by approximately $1.7 million
        due to changes in currency exchange rates. Backlog was $16.1 million at October
        31, 2006, compared to $10.0 million at October 31, 2005.  We do not
        believe backlog is a useful measure of past performance or indicative of
        future
        performance.  Backlog orders as of October 31, 2006 are expected to be
        fulfilled in fiscal 2007.
 
 Gross
        Margin.  Gross margin for fiscal 2006 was 35.9%, an increase
        over the 33.9% margin realized in the corresponding 2005 period, due principally
        to the increased sales volume.
 
 Operating
        Expenses.  Selling, general and administrative expenses for
        fiscal 2006 of $30.7 million increased $4.6 million, or 17.6%, from those
        of
        fiscal 2005.  The increase was primarily due to a $2.6 million
        increase in global sales and marketing expenditures and a $2.0 million increase
        in general and administrative expenses.  The increased global sales
        and marketing expenditures include increased expenses for local and
        international trade shows, increased European agent sales commissions and
        marketing expenses for expansion of sales into emerging markets. The principal
        factor contributing to the increase in general and administrative expenses
        was
        consulting and audit fees for compliance with the internal control-reporting
        requirement of Section 404 of the Sarbanes Oxley Act of 2002, which became
        applicable to us in fiscal 2006.
 
 Operating
        Income.  Operating income for fiscal 2006 totaled $22.6
        million, or 15.2% of sales, compared to $16.5 million or 13.1% of sales,
        in the
        prior year.
 
 Other
        Income
        (Expense).  Other income (expense), net decrease in fiscal 2006
        relates primarily to currency exchange losses on inter-company receivables
        and
        payables denominated in foreign currencies, net of gains or losses on related
        forward contracts.
 
 Provision
        for Income
        Taxes.We incurred income tax expense of $7.6 million in
        fiscal 2006.  In contrast we had no income tax expense in 2005
        primarily due to the utilization of net operating loss carryforwards of
        approximately $9.8 million.
 
 Net
        Income.  Net
        income for fiscal 2006 was $15.5 million, or $2.42 per share, compared to
        $16.4
        million, or $2.60 per share, in the prior year.  The improvement in
        net income was primarily due to increased sales of our computerized machine
        tools and improved gross margins, partially offset by increased operating
        expenses and tax provision.
 
 21
  Liquidity
        and Capital
        Resources
 
 At
        October 31, 2007, we had cash and cash equivalents of $39.8 million compared
        to
        $29.8 million at October 31, 2006.  Approximately 58.0% of the $39.8
        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 and short-term debt, was $36.3 million at October
        31,
        2007, compared to $29.4 million at October 31, 2006.  The increase in
        working capital relates to higher inventory levels to support increased order
        volume, particularly for our larger machines. We expect our operating working
        capital requirements will increase in fiscal 2008 as our sales and service
        fees
        increase.  We will fund these increased requirements with cash flow
        from operations and borrowings under our bank credit
        facilities.  Capital expenditures were $4.5 million in fiscal 2007,
        $3.3 million in fiscal 2006, and $3.0 million in fiscal 2005.  Capital
        expenditures were primarily for an integrated computer system, software
        development projects and purchases of equipment related to expansion of our
        manufacturing facilities.  We funded these expenditures with cash flow
        from operations.
  As
        of
        October 31, 2007 we had no debt or borrowings outstanding under our domestic
        and
        European bank credit facilities.  The $4.0 million mortgage balance
        outstanding as of October 31, 2006 was paid in full on April 30,
        2007.
  On
        December 7, 2007, we entered into a new domestic credit agreement that provides
        us with a $30.0 million unsecured revolving credit facility and a separate
        letter of credit facility in the amount of 100.0 million New Taiwan
        Dollars.  On the same day, we entered into a Taiwan revolving credit
        agreement of 100.0 million New Taiwan Dollars which is an uncommitted demand
        credit facility. In the event the Taiwan facility is not available, the Taiwan
        letter of credit facility from the domestic agreement would enable us to
        provide
        credit enhancement to a replacement lender in Taiwan. We also entered into
        a
£1.0 million revolving facility agreement in the United Kingdom.  The new
        domestic facility and U.K. facility will mature on December 7, 2012. The
        new
        domestic agreement and new U.K. agreement replace our prior agreements, which
        would have matured on January 31, 2008.  We incurred no early termination
        or prepayment penalties in connection with replacement of these prior
        facilities. See Note 4 of Notes to Consolidated Financial Statements for
        further
        discussions on debt.
  On
        July
        12, 2007, we filed a registration statement on Form S-3 with the SEC utilizing
        the “shelf” registration process.  The registration statement was
        declared effective on July 26, 2007.  This registration statement
        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.
 
 Although
        we have not made any significant acquisitions in the recent past, we continue
        to
        receive information on businesses and assets, including intellectual property
        assets that are being sold.  Should attractive opportunities arise, we
        believe that our earnings, cash flow from operations, borrowings under our
        bank
        credit facilities, and the sale of securities from our shelf registration
        would
        provide sufficient resources to finance a possible acquisition.
  22
 
 Contractual
        Obligations and
        Commitments
 
 The
        following is a table of contractual obligations and commitments as of October
        31, 2007 (all amounts in thousands):
 
 Payments
                  Due by
                  PeriodTotal
              
              
              Less
                  than 1 Year
              
              
              1-3
                  Years
              
              
              3-5
                  Years
              
              
              More
                  than 5 YearsOperating
                  Leases
              
              $
              4,162
              
              
              $
              1,710
              
              
              $
              1,683
              
              
              $
              761
              
              
              $
              8Deferred
                  Credits and Other
              
              
              1,007
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,007Total
              
              $
              5,169
              
              
              $
              1,710
              
              
              $
              1,683
              
              
              $
              761
              
              
              $
              1,015
 
 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.
 
 We
        expect
        capital spending in fiscal 2008 to be approximately $5.6 million, which includes
        investments for further expansion of our manufacturing operations, capitalized
        software and costs to continue implementation of our integrated computer
        system.
 
 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, 2007, 54 such guarantees were outstanding
        totaling approximately $1.6 million.  Upon shipment, the customer has
        the risk of ownership.  The customer does not obtain title until the
        machine is paid in full.  We believe that the proceeds obtained from
        liquidation of the machine would cover any payments required by the
        guarantee.
 
 Critical
        Accounting
        Estimates
 
 Our
        discussion and analysis of financial condition and results of operations
        is
        based upon our consolidated financial statements, which have been prepared
        in
        accordance with U.S. Generally Accepted Accounting Principles.  The
        preparation of financial statements in conformity with those accounting
        principles require us to make judgments and estimates that affect the amounts
        reported in the consolidated financial statements and accompanying
        notes.  Those judgments and estimates have a significant effect on the
        financial statements because they result primarily from the need to make
        estimates about the effects of matters that are inherently
        uncertain.  Actual results could differ from those
        estimates.  We frequently re-evaluate our judgments and estimates that
        are based upon historical experience and on various other assumptions that
        are
        believed to be reasonable under the circumstances.  We have evaluated
        our significant accounting estimates and disclosed them in Note 1 of the
        Notes
        to Consolidated Financial Statements.
  23
 
 Item
                  7a.
              QUANTITATIVE
                  AND
                  QUALITATIVE DISCLOSURES ABOUT MARKET
                  RISKS
 
 Interest
        Rate
        Risk
 
 We
        had no
        borrowings outstanding under our bank credit facilities at October 31, 2007
        and
        have not borrowed from our bank credit facilities since February
        2005.  Note 4 of Notes to Consolidated Financial Statements set forth
        the interest rates related to our current credit facilities.
 
 Foreign
        Currency Exchange
        Risk
 
 In
        fiscal
        2007, more than two-thirds of our revenues, including export sales, were
        derived
        from foreign markets.  All of our computerized machine tools and
        computer control systems, as well as certain proprietary service parts, are
        sourced by our U.S.-based engineering and manufacturing division and re-invoiced
        to our foreign sales and service subsidiaries, primarily in their functional
        currencies.
 
 Our
        products are sourced from foreign suppliers or built to our specifications
        by
        our wholly owned subsidiary in Taiwan or overseas contract
        manufacturer.  These purchases are predominantly in foreign currencies
        and in some cases our arrangements with these suppliers include foreign currency
        risk sharing agreements, which reduce (but do not eliminate) the effects
        of
        currency fluctuations on product costs.  The predominant portion of
        our exchange rate risk associated with product purchases relates to the New
        Taiwan Dollar.
 
 We
        enter
        into foreign currency forward exchange contracts from time to time to hedge
        the
        cash flow risk related to forecasted inter-company sales and forecasted
        inter-company and third party purchases denominated in, or based on, foreign
        currencies (primarily the Euro, Pound Sterling and New Taiwan
        Dollar).  We also enter into foreign currency forward exchange
        contracts to protect against the effects of foreign currency fluctuations
        on
        receivables and payables denominated in foreign currencies.  We do not
        speculate in the financial markets and, therefore, do not enter into these
        contracts for trading purposes.
 
 Forward
        contracts for the sale or purchase of foreign currencies as of October 31,
        2007
        which are designated as cash flow hedges under SFAS No. 133 were as
        follows:
 
 Contract
                  Amount at Forward Rates in U.S. DollarsForward
                  Contracts
              
              Notional
                  Amount in Foreign Currency
              
              Weighted
                  Avg. Forward Rate
              
              Contract
                  Date
              
              October
                  31, 2007
              
              Maturity
                  DatesSale
                  Contracts:Euro
              
              34,000,000
              
              $1.3728
              
              $46,675,200
              
              $49,308,127
              
              Nov
                  2007-Oct 2008Sterling
              
              3,985,000
              
              $1.9926
              
              $  7,940,511
              
              $  8,236,052
              
              Nov
                  2007-Oct 2008Purchase
                  Contracts:New
                  Taiwan Dollar
              
              895,000,000
              
              32.33*
              
              $27,683,266
              
              $28,060,651
              
              Nov
                  2007-Oct 2008
 *NT
        Dollars per U.S. Dollar
 
 24
  We
        also
        enter into foreign currency forward exchange contracts to protect against
        the
        effects of foreign currency fluctuations on receivables and payables denominated
        in foreign currencies.  These derivative instruments are not
        designated as hedges under SFAS 133, “Accounting Standards for Derivative
        Instruments and Hedging Activities.”  The forward contracts for the
        sale or purchase of those currencies related to receivables and payables
        as of
        October 31, 2007 are as follows:
 
 Contract
                  Amount at Forward Rates in U.S. DollarsForward
                  Contracts
              
              Notional
                  Amount in Foreign Currency
              
              Weighted
                  Avg. Forward Rate
              
              Contract
                  Date
              
              October
                  31, 2007
              
              Maturity
                  DatesSale
                  Contracts:Euro
              
              16,677,079
              
              $1.4187
              
              $23,659,772
              
              $24,168,767
              
              Nov
                  2007-Dec 2007Singapore
                  Dollar
              
              10,247,257
              
              $1.4887
              
              $  6,883,359
              
              $  7,105,725
              
              Nov
                  2007-Jan 2008Sterling
              
              1,535,391
              
              $2.0417
              
              $  3,134,808
              
              $  3,190,363
              
              Nov
                  2007-Dec 2007Purchase
                  Contracts:New
                  Taiwan Dollar
              
              555,390,000
              
              32.37*
              
              $17,157,553
              
              $17,259,035
              
              Nov
                  2007-Jan 2008
 *  NT
        Dollars per U.S. Dollar
 
 25
 
 Management’s
        Annual Report on
        Internal Control Over Financial Reporting
 
 Tothe
        Shareholders
        and
 Board
        of
        Directors
 of
        Hurco
        Companies, Inc.:
 
 Management
        of Hurco Companies, Inc. (the “Company”), has assessed the effectiveness of
        internal controls over financial reporting as of October 31, 2007, based
        on
        criteria established in Internal Control—Integrated Framework issued by the
        Committee of Sponsoring Organizations of the Treadway Commission
        (COSO).  Management is responsible for thesefinancial statements,
        for maintaining effective internal control over financial reporting, and
        for its
        assessment of the effectiveness of internal control over financial
        reporting.
 
 Because
        of its inherent limitations, the Company’s internal control over financial
        reporting may not prevent or detect misstatements.  Also, projections
        of any evaluation of effectiveness to future periods are subject to the risk
        that controls may become inadequate because of changes in conditions, or
        that
        the degree of compliance with the policies or procedures may
        deteriorate.
 
 In
        management’s opinion, the Company’s internal controls over financial reporting
        as of October 31, 2007, are effective based on the criteria specified
        above.
 
 Our
        independent registered accounting firm, Crowe Chizek and Company LLC, who
        also
        audited our consolidated financial statements, audited the effectiveness
        of our
        internal control over financial reporting.  Crowe Chizek and Company
        LLC has issued their attestation report, which is included in Part II, Item
        8 of
        this Annual Report on Form 10-K.
 
 
 /s/
        Michael Doar
 Michael
        Doar,
 Chairman
        of the Board & Chief Executive Officer
 
 /s/
        John
        G. Oblazney
 John
        G.
        Oblazney,
 Vice
        President & Chief Financial Officer
 
 /s/
        Sonja
        K. McClelland
 Sonja
        K.
        McClelland
 Corporate
        Controller, Assistant Secretary
 (Principal
        Accounting Officer)
 
 Indianapolis,
        Indiana
 January
        10, 2008
 
 26
 
 Item
                  8.
              FINANCIAL
                  STATEMENTS
                  AND SUPPLEMENTARY
                  DATA
 
 Report
        of Independent Registered
        Public Accounting Firm
 
 Tothe
        Shareholders
        and
 Board
        of
        Directors
 of
        Hurco
        Companies, Inc.
 
 We
        have
        audited the accompanying consolidated balance sheets of Hurco Companies,
        Inc.
        and Subsidiaries as of October 31, 2007 and 2006, and the related
        consolidated statements of income, changes in shareholders’ equity and cash
        flows for the years ended October 31, 2007 and 2006.  In
        connection with our audits of the consolidated financial statements, we also
        have audited the consolidated financial statement schedule as it relates
        to the
        fiscal year 2007 and 2006 information which is listed in the index under
        Item
        15.  We also have audited the Company’s internal control over
        financial reporting as of October 31, 2007, based on criteria established
        in
        Internal Control – Integrated Framework issued by the Committee of Sponsoring
        Organizations of the Treadway Commission (COSO).  Hurco Companies,
        Inc. management is responsible for these financial statements and the financial
        statement schedule, for maintaining effective internal control over financial
        reporting, and for its assessment of the effectiveness of internal control
        over
        financial reporting included in the accompanying management’s annual report on
        internal control over financial reporting.  Our responsibility is to
        express an opinion on these financial statements and the financial statement
        schedule and an opinion on the company’s internal control over financial
        reporting based on our audits.
 
 We
        conducted our audits in accordance with the standards of the Public Company
        Accounting Oversight Board (United States).  Those standards require
        that we plan and perform the audits to obtain reasonable assurance about
        whether
        the financial statements are free of material misstatement and whether effective
        internal control over financial reporting was maintained in all material
        respects.  Our audits of the financial statements included examining,
        on a test basis, evidence supporting the amounts and disclosures in the
        financial statements, assessing the accounting principles used and significant
        estimates made by management, and evaluating the overall financial statement
        presentation.  Our audit of internal control over financial reporting
        included obtaining an understanding of internal control over financial
        reporting, assessing the risk that a material weakness exists, and testing
        and
        evaluating the design and operating effectiveness of internal control based
        on
        the assessed risk.  Our audits also included performing such other
        procedures as we considered necessary in the circumstances.  We
        believe that our audits provide a reasonable basis for our
        opinions.
 
 A
        company's internal control over financial reporting is a process designed
        to
        provide reasonable assurance regarding the reliability of financial reporting
        and the preparation of financial statements for external purposes in accordance
        with U.S. generally accepted accounting principles.  A company's
        internal control over financial reporting includes those policies and procedures
        that (1) pertain to the maintenance of records that, in reasonable detail,
        accurately and fairly reflect the transactions and dispositions of the assets
        of
        the company; (2) provide reasonable assurance that transactions are recorded
        as
        necessary to permit preparation of financial statements in accordance with
        U.S.
        generally accepted accounting principles, and that receipts and expenditures
        of
        the company are being made only in accordance with authorizations of management
        and directors of the company; and (3) provide reasonable assurance regarding
        prevention or timely detection of unauthorized acquisition, use, or disposition
        of the company's assets that could have a material effect on the financial
        statements.
 
 Because
        of its inherent limitations, internal control over financial reporting may
        not
        prevent or detect misstatements.  Also, projections of any evaluation
        of effectiveness to future periods are subject to the risk that controls
        may
        become inadequate because of changes in conditions, or that the degree of
        compliance with the policies or procedures may deteriorate.
  27
 
 In
        our
        opinion, the consolidated financial statements referred to above present
        fairly,
        in all material respects, the financial position of Hurco Companies, Inc
        and
        Subsidiaries as of October 31, 2007 and 2006, and the results of their
        operations and their cash flows for the years ended October 31, 2007 and
        2006 in conformity with accounting principles generally accepted in the United
        States of America.  Also, in our opinion, the related consolidated
        financial statement schedule as it relates to the fiscal year 2007 and 2006
        information, when considered in relation to the basic 2007 and 2006 consolidated
        financial statements taken as a whole, presents fairly, in all material
        respects, the information set forth therein.  Also, in our opinion,
        Hurco Companies, Inc. and Subsidiaries maintained, in all material respects,
        effective internal control over financial reporting as of October 31, 2007,
        based on criteria established in Internal Control-Integrated Framework issued
        by
        the Committee of Sponsoring Organizations of the Treadway Commission
        (COSO).
 
 
 /s/Crowe
        Chizek and Company LLC
 
 Indianapolis,
        Indiana
 January
        10, 2008
 
 28
 
 Report
        of Independent Registered
        Public Accounting Firm
 
 Tothe
        Shareholders
        and
 Board
        of
        Directors
 of
        Hurco
        Companies, Inc.:
 
 In
        our
        opinion, the consolidated financial statements listed in the accompanying
        index appearing under Item 15(a)(1) present fairly, in all material
        respects, the results of operations and cash flows of Hurco Companies, Inc.
        and
        its subsidiaries for the year ended October 31, 2005 in conformity with
        accounting principles generally accepted in the United States of
        America.  In addition, in our opinion, the financial statement
        schedule listed in the accompanying index appearing under Item 15(a) (2)
        presents fairly, in all material respects, the information set forth therein
        when read in conjunction with the related consolidatedfinancial
        statements.  These financial statements and financial statement
        schedule are the responsibility of the Company's management.  Our
        responsibility is to express an opinion on these financial statements and
        financial statement schedule based on our audits.  We conducted our
        audit of these statements in accordance with the standards of the Public
        Company
        Accounting Oversight Board (United States).  Those standards require
        that we plan and perform the audit to obtain reasonable assurance about whether
        the financial statements are free of material misstatement.  An audit
        includes examining, on a test basis, evidence supporting the amounts and
        disclosures in the financial statements, assessing the accounting principles
        used and significant estimates made by management, and evaluating the overall
        financial statement presentation.  We believe that our audit provides
        a reasonable basis for our opinion.
 
 /s/PricewaterhouseCoopers
        LLP
 
 Indianapolis,
        Indiana
 January
        18, 2006
  29
 
 HURCO
        COMPANIES,
        INC.
 CONSOLIDATED
        STATEMENTS OF
        INCOME
 
 Year
                  Ended October 312007
              
              
              2006
              
              
              2005(Dollars
                  in thousands, except per share amounts)Sales
                  and service
                  fees
              
              $
              188,047
              
              
              $
              148,517
              
              
              $
              125,509Cost
                  of sales and service
              
              
              116,965
              
              
              
              95,192
              
              
              
              82,951Gross
                  profit
              
              
              71,082
              
              
              
              53,325
              
              
              
              42,558Selling,
                  general and administrative expenses
              
              
              40,124
              
              
              
              30,697
              
              
              
              26,057Operating
                  income
              
              
              30,958
              
              
              
              22,628
              
              
              
              16,501Interest
                  expense (income)
              
              
              (65
              )
              
              
              259
              
              
              
              355Earnings
                  from equity investments
              
              
              1,048
              
              
              
              865
              
              
              
              418Other
                  income (expense), net
              
              
              694
              
              
              
              (120
              )
              
              
              (482
              )Income
                  before income taxes
              
              
              32,765
              
              
              
              23,114
              
              
              
              16,082Provision
                  for (benefit from) income taxes (Note 6)
              
              
              11,876
              
              
              
              7,635
              
              
              
              (361
              )Net
                  income
              
              $
              20,889
              
              
              $
              15,479
              
              
              $
              16,443Earnings
                  per common share – basic
              
              $
              3.27
              
              
              $
              2.45
              
              
              $
              2.66Weighted
                  average common shares outstanding – basic
              
              
              6,382
              
              
              
              6,317
              
              
              
              6,171Earnings
                  per common share – diluted
              
              $
              3.24
              
              
              $
              2.42
              
              
              $
              2.60Weighted
                  average common shares outstanding – diluted
              
              
              6,440
              
              
              
              6,397
              
              
              
              6,336
 
 
 The
        accompanying notes are an
        integral part of the consolidated financial statements.
 
 30
 
 HURCO
        COMPANIES,
        INC.
 CONSOLIDATED
        BALANCE
        SHEETS
 
 ASSETS
 As
                  of October
                  312007
              
              
              2006Current
                  assets:
              (Dollars
                  in thousands, except per share amounts)Cash
                  and cash equivalents
              
              $
              39,760
              
              
              $
              29,846Accounts
                  receivable, less allowance for doubtful accounts of  $751 in
                  2007 and $635 in 2006
              
              
              25,645
              
              
              
              22,248Inventories
              
              
              61,121
              
              
              
              43,343Deferred
                  tax assets, net
              
              
              8,258
              
              
              
              5,320Other
              
              
              4,481
              
              
              
              2,677Total
                  current assets
              
              
              139,265
              
              
              
              103,434Property
                  and equipment:Land
              
              
              776
              
              
              
              761Building
              
              
              7,135
              
              
              
              7,234Machinery
                  and equipment
              
              
              13,629
              
              
              
              12,952Leasehold
                  improvements
              
              
              1,473
              
              
              
              1,14723,013
              
              
              
              22,094Less
                  accumulated depreciation and amortization
              
              
              (11,617
              )
              
              
              (12,944
              )11,396
              
              
              
              9,150Software
                  development costs, less accumulated amortization
              
              
              5,960
              
              
              
              5,580Investments
                  and other assets
              
              
              7,160
              
              
              
              7,381$
              163,781
              
              
              $
              125,545LIABILITIES
                  AND SHAREHOLDERS’
                  EQUITYCurrent
                  liabilities:Accounts
                  payable
              
              $
              33,056
              
              
              $
              24,482Accounts
                  payable-related parties
              
              
              2,430
              
              
              
              2,123Accrued
                  expenses and other
              
              
              25,280
              
              
              
              15,673Accrued
                  warranty expenses
              
              
              2,449
              
              
              
              1,926Current
                  portion of long-term debt
              
              
              --
              
              
              
              136Total
                  current liabilities
              
              
              63,215
              
              
              
              44,340Non-current
                  liabilities:Long-term
                  debt
              
              
              --
              
              
              
              3,874Deferred
                  tax liability, net
              
              
              1,956
              
              
              
              1,431Deferred
                  credits and other
              
              
              1,007
              
              
              
              5252,963
              
              
              
              5,830Commitments
                  and contingencies
                  (Notes 10 and 11)Shareholders’
                  equity:Preferred
                  stock: no par value per share, 1,000,000 shares authorized, no
                  shares
                  issued
              
              
              --
              
              
              
              --Common
                  stock: no par value, $.10 stated value per share, 12,500,000 shares
                  authorized, 6,392,220 and 6,346,520 shares issued and outstanding
                  in 2007
                  and 2006, respectively
              
              
              639
              
              
              
              635Additional
                  paid-in capital
              
              
              50,971
              
              
              
              50,011Retained
                  earnings
              
              
              49,369
              
              
              
              28,480Accumulated
                  other comprehensive income (loss)
              
              
              (3,376
              )
              
              
              (3,751
              )Total
                  shareholders’ equity
              
              
              97,603
              
              
              
              75,375$
              163,781
              
              
              $
              125,545
 
 
 The
        accompanying notes are an
        integral part of the consolidated financial statements.
 
 31
 
 HURCO
        COMPANIES,
        INC.
 CONSOLIDATED
        STATEMENTS OF CASH
        FLOWS
  Year
                    Ended October 312007
                
                
                2006
                
                
                2005Cash
                    flows from operating
                    activities:
                
                (Dollars
                    in thousands)Net
                    income
                
                $
                20,889
                
                
                $
                15,479
                
                
                $
                16,443Adjustments
                    to reconcile net income to Net cash provided by operating
                    activities:Provision
                    for doubtful accounts
                
                
                116
                
                
                
                (207
                )
                
                
                119Deferred
                    Tax Provision
                
                
                1,216
                
                
                
                491
                
                
                
                (4,389
                )Equity
                    in income of affiliates
                
                
                (1,048
                )
                
                
                (865
                )
                
                
                (418
                )Depreciation
                    and amortization
                
                
                2,106
                
                
                
                1,504
                
                
                
                1,331Tax
                    benefit from exercise of stock options (prior to Adoption of
                    SFAS
                    123(R)
                
                
                --
                
                
                
                --
                
                
                
                1,146Change
                    in assets/liabilities(Increase)
                    decrease in accounts receivable
                
                
                (1,742
                )
                
                
                (1,312
                )
                
                
                (3,606
                )(Increase)
                    decrease in inventories
                
                
                (14,116
                )
                
                
                (12,726
                )
                
                
                (660
                )Increase
                    (decrease) in accounts payable
                
                
                7,821
                
                
                
                9,318
                
                
                
                (1,191
                )Increase
                    (decrease) in accrued expenses
                
                
                6,474
                
                
                
                3,423
                
                
                
                2,653Other
                
                
                (7,523
                )
                
                
                (1,059
                )
                
                
                549Net
                    cash provided by operating
                    activities
                
                
                14,193
                
                
                
                14,046
                
                
                
                11,977Cash
                    flows from investing
                    activities:Proceeds
                    from sale of property and equipment
                
                
                --
                
                
                
                16
                
                
                
                --Purchase
                    of property and equipment
                
                
                (3,325
                )
                
                
                (1,212
                )
                
                
                (1,879
                )Software
                    development costs
                
                
                (1,185
                )
                
                
                (2,089
                )
                
                
                (1,161
                )Change
                    in restricted cash
                
                
                --
                
                
                
                --
                
                
                
                277Other
                    proceeds (investments)
                
                
                1,898
                
                
                
                (335
                )
                
                
                224Net
                    cash used for investing
                    activities
                
                
                (2,612
                )
                
                
                (3,620
                )
                
                
                (2,539
                )Cash
                    flows from financing
                    activities:Advances
                    on bank credit facilities
                
                
                --
                
                
                
                --
                
                
                
                4,977Repayments
                    on bank credit facilities
                
                
                --
                
                
                
                --
                
                
                
                (5,124
                )Repayments
                    of term debt
                
                
                --
                
                
                
                --
                
                
                
                (200
                )Repayment
                    of first mortgage
                
                
                (4,010
                )
                
                
                (126
                )
                
                
                (117
                )Tax
                    benefit from exercise of stock options
                
                
                298
                
                
                
                744
                
                
                
                --Proceeds
                    from exercise of common stock options
                
                
                186
                
                
                
                562
                
                
                
                797Net
                    cash provided by (used for)
                    financing activities
                
                
                (3,526
                )
                
                
                1,180
                
                
                
                333Effect
                    of exchange rate changes
                    on cash
                
                
                1,859
                
                
                
                681
                
                
                
                (461
                )Net
                    increase in
                    cash
                
                
                9,914
                
                
                
                12,287
                
                
                
                9,310Cash
                    and cash equivalents at
                    beginning of year
                
                
                29,846
                
                
                
                17,559
                
                
                
                8,249Cash
                    and cash equivalents at
                    end of year
                
                $
                39,760
                
                
                $
                29,846
                
                
                $
                17,559Supplemental
                    disclosures:Cash
                    paid for:Interest
                
                $
                157
                
                
                $
                314
                
                
                $
                331Income
                    taxes
                
                $
                9,971
                
                
                $
                3,920
                
                
                $
                1,509
 The
        accompanying notes are an
        integral part of the consolidated financial statements.
 
 32
  HURCO
        COMPANIES,
        INC.
 CONSOLIDATED
        STATEMENTS OF CHANGES IN
        SHAREHOLDERS' EQUITY
 
 
 Common
                  Stock
              
              
              Additional
              
              
              
              
              
              Accumulated
                Other(Dollars
                  in thousands, except
                  Shares Issued and Outstanding)
              
              Shares
                  Issued
                &
                Outstanding
              
              
              Amount
              
              
              Paid-In
                Capital
              
              
              Retained
                Earnings
                (Deficit)
              
              
              Comprehensive
                Income
                (Loss)
              
              
              TotalBalances,
                  October 31,
                  2004
              
              
              6,019,594
              
              
              $
              602
              
              
              $
              46,778
              
              
              $
              (3,442
              )
              
              $
              (5,483
              )
              
              $
              38,455Net
                  income
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              16,443
              
              
              
              --
              
              
              
              16,443Translation
                  of foreign currency financial statements
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (838
              )
              
              
              (838
              )Unrealized
                  gain of derivative instruments, net of tax
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              2,941
              
              
              
              2,941Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              18,546Exercise
                  of common stock options
              
              
              200,626
              
              
              
              20
              
              
              
              777
              
              
              
              --
              
              
              
              --
              
              
              
              797Tax
                  benefit from exercise of stock options
              
              
              --
              
              
              
              --
              
              
              
              1,146
              
              
              
              --
              
              
              
              --
              
              
              
              1,146Balances,
                  October 31,
                  2005
              
              
              6,220,220
              
              
              
              622
              
              
              
              48,701
              
              
              
              13,001
              
              
              
              (3,380
              )
              
              
              58,944Net
                  income
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              15,479
              
              
              
              --
              
              
              
              15,479Translation
                  of foreign currency financial statements
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              1,288
              
              
              
              1,288Unrealized
                  loss of derivative instruments, net of tax
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (1,659
              )
              
              
              (1,659
              )Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              15,108Exercise
                  of common stock options
              
              
              126,300
              
              
              
              13
              
              
              
              549
              
              
              
              --
              
              
              
              --
              
              
              
              562Tax
                  benefit from exercise of stock options
              
              
              --
              
              
              
              --
              
              
              
              744
              
              
              
              --
              
              
              
              --
              
              
              
              744Stock-based
                  compensation expense
              
              
              --
              
              
              
              --
              
              
              
              17
              
              
              
              --
              
              
              
              --
              
              
              
              17Balances,
                  October 31,
                  2006
              
              
              6,346,520
              
              
              
              635
              
              
              
              50,011
              
              
              
              28,480
              
              
              
              (3,751
              )
              
              
              75,375Net
                  income
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              20,889
              
              
              
              --
              
              
              
              20,889Translation
                  of foreign currency financial statements
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              2,568
              
              
              
              2,568Unrealized
                  loss of derivative instruments, net of tax
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (2,193
              )
              
              
              (2,193
              )Comprehensive
                  income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              21,264Exercise
                  of common stock options
              
              
              45,700
              
              
              
              4
              
              
              
              182
              
              
              
              --
              
              
              
              --
              
              
              
              186Tax
                  benefit from exercise of stock options
              
              
              --
              
              
              
              --
              
              
              
              298
              
              
              
              --
              
              
              
              --
              
              
              
              298Stock-based
                  compensation expense
              
              
              --
              
              
              
              --
              
              
              
              480
              
              
              
              --
              
              
              
              --
              
              
              
              480Balances,
                  October 31,
                  2007
              
              
              6,392,220
              
              
              $
              639
              
              
              $
              50,971
              
              
              $
              49,369
              
              
              $
              (3,376
              )
              
              $
              97,603
 
  The
        accompanying notes are an
        integral part of the consolidated financial statements.
 
 33
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS
 
 1.           SUMMARY
        OF SIGNIFICANT ACCOUNTING POLICIES
 
 Consolidation.  The
        consolidated financial statements include the accounts of Hurco Companies,
        Inc.
        (an Indiana corporation) and its wholly owned and controlled
        subsidiaries.  We have a 35% ownership interest in one affiliate
        accounted for using the equity method.  Our investment in that
        affiliate was approximately $2.4 million and $2.0 million as of October 31,
        2007
        and 2006, respectively. Our 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 purchased
        with maturity of three months or less to be cash equivalents.  Cash
        flows from hedges are classified consistent with the items being
        hedged.
 
 Translation
        of Foreign
        Currencies.  All balance sheet accounts of non-U.S.
        subsidiaries are translated at the exchange rate as of the end of the year
        and
        recorded as a component of Accumulated Other Comprehensive Income (Loss)
        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, 2007, were a net loss of $732,000
        and
        are included in Accumulated Other Comprehensive Income (Loss). These foreign
        currency translation adjustments are recorded net of tax as they relate to
        permanent investments in international subsidiaries. Foreign currency
        transaction gains and losses are recorded as income or expense as
        incurred.
 
 Hedging.We
        periodically enter into foreign currency forward exchange contracts to hedge
        certain forecasted inter-company sales and forecasted inter-company and third
        party purchases of product denominated in foreign currencies (primarily Pound
        Sterling, Euro and New Taiwan Dollar).  The purpose of these
        instruments is to mitigate the risk that the U.S. Dollar net cash inflows
        and
        outflows resulting from the sales and purchases denominated in foreign
        currencies will be adversely affected by changes in exchange
        rates.  These forward contracts have been designated as cash flow
        hedge instruments, and are recorded in the Consolidated Balance Sheets at
        fair
        value in Other Current Assets and Accrued Expenses.  Gains and losses
        resulting from changes in the fair value of these hedge contracts are deferred
        in Accumulated Other Comprehensive Income (Loss) and recognized as an adjustment
        to cost of sales in the period that the sale of the related hedged item is
        recognized, thereby providing an offsetting economic impact against the
        corresponding change in the U.S. Dollar value of the inter-company sale or
        purchase item being hedged.
 
 At
        October 31, 2007, we had approximately $2.6 million of losses, net of tax,
        related to cash flow hedges deferred in Accumulated Other Comprehensive Income
        (Loss). Of this amount, $1.6 million represents unrealized losses, net of
        tax,
        related to future cash flow hedge instruments that remain subject to currency
        fluctuation risk.  These deferred losses will be recorded as an
        adjustment to Cost of Sales in the periods through October 31, 2008, in which
        the sale of the related hedged item is recognized, as described
        above.  At October 31, 2006, we had $448,000 of losses, net of tax,
        related to cash flow hedges deferred in Accumulated Other Comprehensive Income
        (Loss).  Net losses on cash flow hedge contracts, which we
        reclassified from Accumulated Other Comprehensive Income (Loss) to Cost of
        Sales, were $1.9 million for the period ended October 31, 2007, compared
        to net
        gains of $698,000 and net losses of $747,000 reclassified in the periods
        ending
        October 31, 2006 and 2005, respectively.
 
 34
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS – Continued
 
 We
        also
        enter into foreign currency forward exchange contracts to protect against
        the
        effects of foreign currency fluctuations on receivables and payables denominated
        in foreign currencies.  These derivative instruments are not
        designated as hedges under SFAS 133, “Accounting Standards for Derivative
        Instruments and Hedging Activities” (SFAS 133) and, as a result, changes in fair
        value are reported currently as Other Expense, Net in the Consolidated
        Statements of Income consistent with the transaction gain or loss on the
        related
        foreign denominated receivable or payable and non-hedged foreign currency
        gains
        and losses.  Such net transaction gain was $19,000 for the year ended
        October 31, 2007, compared to net transaction losses of $423,000 and $476,000
        for the years ended October 31, 2006 and 2005, respectively.
 
 Inventories.  Inventories
        are stated at the lower of cost or market, with cost determined using the
        first-in, first-out method.
 
 Property
        and
        Equipment.  Property and equipment are carried at cost. Any
        impairment would be recognized based on an assessment of future operations
        (including cash flows) to ensure that assets are appropriately valued.
        Depreciation and amortization of assets are provided primarily under the
        straight-line method over the shorter of the estimated useful lives or the
        lease
        terms as follows:
 
 Number
                  of YearsBuilding
              40Machines
              7-10Shop
                  and office equipment
              3-7Leasehold
                  improvements
              3-40
 
 Total
        depreciation expense for the years ended October 31, 2007, 2006 and 2005
        was
        $1.4 million, $1.1 million, and $1.0 million, respectively.
 
 Revenue
        Recognition.  We recognize revenue from sales of our machine
        tool systems upon delivery of the product to the customer, which is normally
        at
        the time of shipment, because persuasive evidence of an arrangement exists,
        delivery has occurred, the selling price is fixed and determinable and
        collectibility is reasonably assured.  In certain foreign locations,
        we retain title after shipment under a “retention of title” clause solely to
        protect collectibility. The retention of title is similar to UCC filings
        in the
        United States and provides the creditor with additional rights to the machine
        if
        the customer fails to pay.  Revenue recognition at the time of
        shipment is appropriate in this instance as long as all risks of ownership
        have
        passed to the buyer. Our computerized machine tools are general-purpose computer
        controlled machine tools that are typically used in stand-alone operations.
        Transfer of ownership and risk of loss are not contingent upon contractual
        customer acceptance. Prior to shipment, we test each machine to ensure the
        machine’s compliance with standard operating specifications as listed in our
        sales literature.
 
 Depending
        upon geographic location, after shipment a machine may be installed at the
        customer’s facilities by a distributor, independent contractor or Hurco service
        technician.  In most instances where a machine is sold through a
        distributor, Hurco has no installation involvement.  If sales are
        direct or through sales agents, Hurco will typically complete the machine
        installation, which consists of the reassembly of certain parts that were
        removed for shipping and the re-testing of the machine to ensure that it
        is
        performing within the standard specifications.  We consider the
        machine installation process inconsequential and perfunctory.
 
 Service
        fees from maintenance contracts are deferred and recognized in earnings on
        a pro
        rata basis over the term of the contract.  Sales related to software
        products are recognized when shipped in conformity with American Institute
        of
        Certified Public Accountants’ Statement of Position 97-2.
 
 35
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS – Continued
 
 Software
        Revenue
        Recognition.  The software does not require production,
        modification or customization. At the time of shipment, persuasive evidence
        of
        an arrangement exists, delivery has occurred, the selling price is fixed
        and
        determinable and collectibility is reasonably assured.
 
 Product
        Warranty.  Expected future product warranty expense is recorded
        when the product is sold. See Note 11 of Notes to Consolidated Financial
        Statements on further discussion of warranties.
 
 Research
        and Development
        Costs.  The costs associated with research and development
        programs for new products and significant product improvements are expensed
        as
        incurred and are included in Selling, General and Administrative
        Expenses.  Research and development expenses totaled $3.1 million,
        $2.5 million, and $2.4 million, in fiscal 2007, 2006, and 2005,
        respectively.
 
 Costs
        incurred to develop computer software products and significant enhancements
        to
        software features of existing products to be sold or otherwise marketed are
        capitalized, after technological feasibility is established.  Software
        development costs are amortized to Cost of Sales on a straight-line basis
        over
        the estimated product life of the related software, which ranges from three
        to
        five years.  We capitalized costs of $1.2 million in 2007, $2.1
        million in 2006, and $1.2 million in 2005 related to software development
        projects.  Amortization expense was $702,000, $363,000, and $329,000,
        for the years ended October 31, 2007, 2006, and 2005,
        respectively.  Accumulated amortization at October 31, 2007 and 2006
        was $3.7 million and $3.0 million, respectively.  Any impairment of
        the carrying value of the capitalized software development costs would be
        recognized based on an assessment of future operations (including cash flows)
        to
        ensure that assets are appropriately valued.
 
 Estimated
        amortization expense for the existing amortizable intangible assets for the
        years ending October 31, is as follows:
  Fiscal
                  Year
              
              Amortization
                  Expense2008
              
              $
              1,1752009
              
              
              1,3752010
              
              
              1,2752011
              
              
              1,2752012
              
              
              825
 
 Earnings
        Per
        Share.Basic and diluted earnings per common share are based
        on the weighted average number of our shares of common stock
        outstanding.  Diluted earnings per common share give effect to
        outstanding stock options using the treasury method.  The impact of
        stock options on weighted average shares for the years ended October 31,
        2007,
        2006 and 2005 was 58,000, 80,000, and 165,000 respectively.
 
 Income
        Taxes.  We
        record income taxes under SFAS 109 “Accounting for Income
        Taxes.”  SFAS 109 utilizes the liability method for computing deferred
        income taxes.
  36
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS – Continued
 
 In
        the
        ordinary course of global business, there are transactions and calculations
        where the ultimate tax outcome is uncertain.  The calculation of tax
        liabilities involves dealing with uncertainties in the application of complex
        tax laws.  We recognize potential liabilities for anticipated tax
        audit issues in the U.S. and other tax jurisdictions based on an estimate
        of the
        ultimate resolution of whether, and the extent to which, additional taxes
        will
        be due.  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.  Although we believe the estimates are reasonable, no
        assurance can be given that the final outcome of these matters will not be
        different than what is reflected in the historical income tax provisions
        and
        accruals.  Such differences could have a material impact on the income
        tax provision and operating results in the period in which such determination
        is
        made.
 
 As
        part
        of our financial process, we must assess the likelihood that our deferred
        tax
        assets can be recovered.  If recovery is not likely, the provision for
        taxes must be increased by recording a reserve in the form of a valuation
        allowance for the deferred tax assets that are estimated not to be ultimately
        recoverable.  In the process, certain relevant criteria are evaluated
        including the existence of deferred tax liabilities that can be used to absorb
        deferred tax assets, the taxable income in prior carryback years that can
        be
        used to absorb net operating losses and credit carrybacks, and taxable income
        in
        future years.  Our judgment regarding future profitability may change
        due to future market conditions, changes in U.S. or international tax laws
        and
        other factors.  These changes, if any, may require material
        adjustments to these deferred tax assets and an accompanying reduction or
        increase in net income in the period when such determinations are
        made.
 
 In
        addition to the risks to the effective tax rate described above, the effective
        tax rate reflected in forward-looking statements is based on current enacted
        tax
        law.  Significant changes during the year of enacted tax law could
        materially affect these estimates.
 
 Estimates.The
        preparation of financial statements in conformity with U.S. Generally Accepted
        Accounting Principles requires us to make estimates and assumptions that
        affect
        the reported amounts presented and disclosed in our consolidated financial
        statements. Significant estimates and assumptions in these consolidated
        financial statements require the exercise of judgment and are used for, but
        not
        limited to, allowance for doubtful accounts, estimates of future cash flows
        and
        other assumptions associated with intangible and long-lived asset impairment
        tests, useful lives for depreciation and amortization, warranty programs,
        income
        taxes and deferred tax valuation allowances, lease classification, and
        contingencies.  Due to the inherent uncertainty involved in making
        estimates, actual results reported in future periods may be different from
        these
        estimates.
 
 Stock
        Based Compensation -
        Prior to fiscal 2006, we applied the provisions of Accounting Principles
        Board
        (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” in accounting
        for stock-based compensation.  As a result, no compensation expense
        was recognized for stock options granted with exercise prices equivalent
        to the
        fair market value of the stock on the date of grant.  In fiscal 2006
        we adopted SFAS No. 123(R), “Share Based Payment,” using the modified
        prospective method.  We began applying the provisions of SFAS No.
        123(R) to option grants, as well as to the nonvested portion of outstanding
        options granted before that date.  Compensation expense is determined
        at the date of grant using the Black-Scholes valuation model.  We
        recorded $480,000 and $17,000 of compensation expense during the fiscal years
        ending October 31, 2007 and 2006, respectively for vested options.  We
        expect to record additional compensation expense of approximately $57,000
        per
        quarter, ratably, through the fourth quarter of fiscal 2009 for the options
        granted in November 2006.
  37
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS – Continued
 
 The
        adoption of this pronouncement had no effect on compensation cost recorded
        in
        fiscal 2005 related to stock options, which will continue to be disclosed
        on a
        pro forma basis only.
 
 (in
                  thousands, except per share data)
              
              2005Net
                  income, as
                  reported
              
              $
              16,443Deduct:
                  Total stock-based employee compensation expense determined under
                  fair
                  value based method for all awards, net of related tax
                  effects
              
              
              (23
              )Pro
                  forma net income
              
              $
              16,420Earnings
                  (loss) per
                  share:Basic
                  as reported
              
              $
              2.66Basic
                  pro forma
              
              $
              2.66Diluted
                  as reported
              
              $
              2.60Diluted
                  pro forma
              
              $
              2.59
  As
        of
        October 31, 2007, there were no outstanding non-qualified options that had
        been
        granted outside of the 1997 plan to current members of the Board of
        Directors.
 
 Reclassifications
 Certain
        prior year amounts have been reclassified to conform to the current year
        presentation. These changes had no impact on previously reported net income
        or
        shareholders' equity.
  2.
              BUSINESS
                  OPERATIONS
 
 Nature
        of
        Business.  We design and manufacture computer control systems,
        software and computerized machine tools for sale through our own distribution
        system to the worldwide machine tool industry.
 
 The
        end
        market for our products consists primarily of precision tool, die and mold
        manufacturers, independent job shops, and specialized short-run production
        applications within large manufacturing operations.  Industries served
        include: aerospace, defense, medical equipment, energy,
        automotive/transportation, electronics and computer industries.  Our
        products are sold through independent agents and distributors in countries
        throughout North America, Europe and Asia.  We also maintain direct
        sales operations in Canada, England, France, Germany, Italy, Singapore and
        China.
 
 Credit
        Risk.  We
        sell products to customers located throughout the world.  We perform
        ongoing credit evaluations of customers and generally do not require
        collateral.  Allowances are maintained for potential credit
        losses.  Concentration of credit risk with respect to trade accounts
        receivable is limited due to the large number of customers and their dispersion
        across many geographic areas.  Although a significant amount of trade
        receivables are with distributors primarily located in the United States,
        no
        single distributor or region represents a significant concentration of credit
        risk.
 
 Manufacturing
        Risk.Our
        wholly owned subsidiary in Taiwan, Hurco Manufacturing Ltd. (HML), produces
        over
        98% of our machine tools.  Any interruption in manufacturing at HML
        would have an adverse effect on our financial operating
        results.  Interruption in manufacturing at HML could result from a
        change in the political environment or a natural disaster, such as an
        earthquake, typhoon, or tsunami. Any interruption with our contract manufacturer
        or one of our key component suppliers may also have an adverse effect on
        our
        operating results and our financial condition.
  38
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS – Continued
 
 3.
              INVENTORIES
 
 Inventories
        as of October 31, 2007 and 2006 are summarized below (in
        thousands):
 
 2007
              
              
              2006Purchased
                  parts and sub assemblies
              
              $
              10,956
              
              
              $
              7,645Work-in-process
              
              
              11,692
              
              
              
              7,608Finished
                  goods
              
              
              38,473
              
              
              
              28,090$
              61,121
              
              
              $
              43,343
 
 4.
              DEBT
                  AGREEMENTS
 
 As
        of
        October 31, 2007 we had no debt or borrowings outstanding under our domestic
        and
        European bank credit facilities.  The $4.0 million mortgage balance
        outstanding as of October 31, 2006 was paid in full on April 30, 2007. As
        of
        October 31, 2007 and 2006, we had $1,081,000 and $262,000, respectively,
        of
        outstanding letters of credit issued to non-U.S. suppliers for inventory
        purchase commitments.  As of October 31, 2007, we had unutilized
        credit facilities of $11.2 million available for either direct borrowings
        or
        commercial letters of credit.
 
 Domestic
        Bank Credit
        Facility.We had no borrowings outstanding under our domestic
        bank credit facility at October 31, 2007 and 2006.  Interest on the
        domestic bank credit facility was at rates ranging from 6.75% to 7.5% at
        October
        31, 2007 and from 6.0% to 7.5% at October 31, 2006.
 
 Effective
        October 26, 2004, we amended our $8.0 million domestic bank credit agreement
        to
        extend the maturity date to January 31, 2008, and convert it to an unsecured
        facility except for a continuation of the pledge of stock of two
        subsidiaries.  Borrowings may be made in U.S. Dollars, Euros or Pounds
        Sterling.  Interest on all outstanding borrowings is payable at LIBOR
        for the respective currency plus an applicable margin, or, at our option,
        the
        bank’s prime rate plus a specified margin based on the ratio of our Total Funded
        Debt to EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization)
        ratio, as follows:
 
 Ratio
                  of Total Funded Debt/EBITDA ratio
              
              LIBOR
                  Margin
              
              Prime
                  MarginGreater
                  than 3.0
              
              2.75%
              
              0.0%Greater
                  than 2.5 and less than or equal to 3.0
              
              2.0%
              
              (.25%)Greater
                  than 2.0 and less than or equal to 2.5
              
              1.5%
              
              (.50%)Less
                  than or equal to 2.0
              
              1.0%
              
              (.75%)
 
 The
        ratio
        of our Total Funded Debt to EBITDA at October 31, 2007 was 0.0, as we had
        no
        debt outstanding.  The applicable margin is adjusted on the first day
        of the month following the month after each quarter end.  The
        availability under the facility is not limited by a borrowing base, unless
        the
        ratio exceeds 3.0.
 
 The
        agreement requires that Maximum Consolidated Total Indebtedness to Consolidated
        Total Capitalization, as defined in the agreement, not exceed 0.275 to 1.0
        and
        our fixed charge coverage ratio not be less than 1.25 to 1.0.  The
        agreement also requires that we have positive net income for the four previous
        quarters.
 
 European
        Bank Credit Facility.The terms and conditions of the October 2004 domestic bank credit
        facility amendment also apply to the revolving credit and overdraft facility
        for
        our U.K. subsidiary.
 
 39
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS – Continued
 
 On
        January 11, 2006, we renewed this credit facility with a European bank for
€1.5
        million.  The termination date is unspecified.  Interest on
        the facility is payable at a floating rate, 7.75% at October 31,
        2007.  Although the facility is uncollateralized, the bank reserves
        the right to require collateral in the event of increased risk
        evaluation.  We had no borrowings outstanding under this facility at
        October 31, 2007 and 2006.
  On
        December 7, 2007, we entered into a new domestic credit agreement that provides
        us with a $30.0 million unsecured revolving credit facility and a separate
        letter of credit facility in the amount of 100.0 million New Taiwan
        Dollars.  On the same day, we entered into a Taiwan revolving credit
        agreement of 100.0 million New Taiwan Dollars which is an uncommitted demand
        credit facility. In the event the Taiwan facility is not available, the Taiwan
        letter of credit facility from the domestic agreement would enable us to
        provide
        credit enhancement to a replacement lender in Taiwan. We also entered into
        a
£1.0 million revolving credit facility in the United Kingdom.
  The
        new
        domestic and U.K. facilities, which mature on December 7, 2012, replace our
        prior agreements, which would have matured on January 31, 2008.  We
        incurred no early termination or prepayment penalties in connection with
        replacement of these prior facilities.
  Borrowings
        under the new domestic facility may be used for general corporate purposes
        and
        will bear interest at a LIBOR-based rate or an alternate base rate, in each
        case, plus an applicable margin determined by reference to the ratio of the
        interest-bearing debt and obligations and the undrawn face amount of all
        letters
        of credit outstanding, on a consolidated basis, to consolidated EBITDA. 
Based on the most recent determination of that ratio, the applicable margin
        under the new domestic facility will be less than it would have been under
        the
        prior facility. The new domestic facility contains customary affirmative
        and
        negative covenants and events of default for an unsecured commercial bank
        credit
        facility, including, among other things, limitations on consolidations, mergers
        and sales of assets. The financial covenants contained in this agreement
        are a
        minimum quarterly consolidated net income covenant and a covenant establishing
        a
        maximum ratio of consolidated total indebtedness to total indebtedness and
        net
        worth. Other covenants contained in the agreement are not materially different
        from those contained in the prior facility, except that it no longer includes
        covenants relating to collateral and minimum collateral valuations, as the new
        domestic facility is unsecured. The fixed charge coverage ratio, minimum
        consolidated net worth financial covenants, and the borrowing base restrictions
        that were part of the prior facility are not included in the new domestic
        agreement and are no longer applicable.
  5.
              FINANCIAL
                  INSTRUMENTS
 
 The
        carrying amounts for trade receivables and payables approximate their fair
        values.  Long-term debt, including the current portion, is estimated
        based on quoted market prices for similar issues or on current rates offered
        to
        us for debt with the similar terms and maturities and is stated at fair
        value.
 
 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 $133.1 million and $112.7 million at October 31, 2007 and 2006,
        respectively.  The net fair value of derivative assets recorded in
        Other Current Assets at October 31, 2007 and 2006 was $485,000 and $49,000,
        respectively.  The net fair value of derivative liabilities recorded
        in Accrued Expenses at October 31, 2007 and 2006 was $3.7 million and $810,000,
        respectively.  Current market prices were used to estimate the fair
        value of the foreign currency forward exchange contracts.
 
 40
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS - Continued
 
 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.
 
 6.
              INCOME
                  TAXES
 
 Deferred
        tax assets and liabilities are determined based on the difference between
        the
        amounts used for financial reporting purposes and tax basis of assets and
        liabilities using enacted tax rates in effect for the year in which the
        differences are expected to reverse.  Significant components of our
        deferred tax assets and liabilities at October 31, 2007 and 2006 were as
        follows
        (in thousands):
 
 October
                  312007
              
              
              2006Tax
                  effects of future tax deductible items related to:Current:Inter-company
                  profit in inventory
              
              $
              5,176
              
              
              $
              3,307Derivative
                  liabilities
              
              
              1,820
              
              
              
              189Accrued
                  inventory reserves
              
              
              991
              
              
              
              968Accrued
                  warranty expenses
              
              
              158
              
              
              
              136Deferred
                  compensation
              
              
              214
              
              
              
              185Other
                  accrued expenses
              
              
              280
              
              
              
              547Total
                  current deferred tax assets
              
              
              8,639
              
              
              
              5,332Non-current:Other
              
              
              224
              
              
              
              --Goodwill
              
              
              --
              
              
              
              54Total
                  deferred tax assets
              
              
              8,863
              
              
              
              5,386Tax
                  effects of future taxable differences related to:Current:Derivative
                  assets
              
              
              (369
              )
              
              
              --Other
              
              
              (12
              )
              
              
              --Total
                  current deferred tax liabilities
              
              
              (381
              )
              
              
              --Non-current:Accelerated
                  tax deduction and other tax over book deductions related to property,
                  equipment and software
              
              
              (2,730
              )
              
              
              (2,552
              )Total
                  deferred tax liabilities
              
              
              (3,111
              )
              
              
              (2,552
              )Net
                  tax effects of temporary differences
              
              
              5,752
              
              
              
              2,834Tax
                  effects of carryforward benefits:U.S.
                  federal and state net operating loss carryforwards,
              
              
              --
              
              
              
              34Foreign
                  net operating loss carryforwards, with no expiration
              
              
              600
              
              
              
              1,033U.S.
                  federal and state general business tax credits
              
              
              --
              
              
              
              100Tax
                  effects of carryforwards
              
              
              600
              
              
              
              1,167Tax
                  effects of temporary differences and carryforwards, net
              
              
              6,352
              
              
              
              4,001Less
                  valuation allowance
              
              
              50
              
              
              
              112Net
                  deferred tax asset
              
              $
              6,302
              
              
              $
              3,889
  41
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS - Continued
 
 Except
        as
        indicated above, our carryforwards and tax credits expire at specific future
        dates and utilization of certain carryforwards and tax credits are limited
        to
        specific amounts each year.  Realization is entirely dependent upon
        generating sufficient future earnings in specific tax jurisdictions prior
        to the
        expiration of the loss carryforwards and tax credits.  Net operating
        losses utilized were approximately $1.8 million in 2007 and approximately
        $3.2
        million in 2006.
 
 We
        operate in a highly cyclical industry and incurred significant operating
        losses
        in fiscal 2001 and 2002 for which a valuation allowance was
        maintained.  During the fourth quarter of fiscal 2005, after examining
        a number of factors, including historical results and near term earning
        projections, this valuation allowance was reduced to $221,000.  The
        valuation allowance on our remaining deferred tax assets at the end of fiscal
        2007 is $50,000.
 
 In
        the
        fiscal year ended October 31, income (loss) before income taxes and the
        provision (benefit) for income taxes consisted of the following:
 
 Income
                  (loss) before income taxes (in thousands):
              
              Year
                  Ended October 312007
              
              
              2006
              
              
              2005Domestic
              
              $
              20,463
              
              
              $
              13,688
              
              
              $
              9,834Foreign
              
              
              12,302
              
              
              
              9,426
              
              
              
              6,248$
              32,765
              
              
              $
              23,114
              
              
              $
              16,082The
                  provision for income taxes consists of:Current:Federal
              
              $
              8,304
              
              
              $
              4,306
              
              
              $
              3,457State
              
              
              986
              
              
              
              1,053
              
              
              
              279Foreign
              
              
              3,802
              
              
              
              2,767
              
              
              
              2,25913,092
              
              
              
              8,126
              
              
              
              5,995Deferred:Federal
              
              
              (1,657
              )
              
              
              (787
              )
              
              
              (4,685
              )State
              
              
              --
              
              
              
              --
              
              
              
              (553
              )Foreign
              
              
              441
              
              
              
              296
              
              
              
              (1,118
              )(1,216
              )
              
              
              (491
              )
              
              
              (6,356
              )$
              11,876
              
              
              $
              7,635
              
              
              $
              (361
              )Differences
                  between the effective tax rate and U.S. federal income tax rate
                  were (in
                  thousands):Tax
                  at U.S. statutory rate
              
              $
              11,468
              
              
              $
              7,858
              
              
              $
              5,468Effect
                  of tax rates of international jurisdictions In excess (less than)
                  of U.S.
                  statutory rates
              
              
              38
              
              
              
              (37
              )
              
              
              81State
                  income taxes
              
              
              798
              
              
              
              883
              
              
              
              279Deferred
                  tax asset valuation adjustment
              
              
              62
              
              
              
              109
              
              
              
              (2,342
              )Utilization
                  of net operating loss carryforwards
              
              
              --
              
              
              
              --
              
              
              
              (3,740
              )Permanent
                  items
              
              
              259
              
              
              
              (632
              )
              
              
              (155
              )Others
              
              
              (749
              )
              
              
              (546
              )
              
              
              48Provision
                  for (benefit from) income taxes
              
              $
              11,876
              
              
              $
              7,635
              
              
              $
              (361
              )
 
 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, 2007 are approximately
        $27.8
        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.
 
 42
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS - Continued
 
 7.
              EMPLOYEE
                  BENEFITS
 
 We
        have
        defined contribution plans that include a majority of our employees, under
        which
        our contributions are discretionary.  The purpose of these plans is
        generally to provide additional financial security during retirement by
        providing employees with an incentive to save throughout their
        employment.  Our contributions to the plans are based on employee
        contributions or compensation.  Our contributions totaled $460,200,
        $382,300, and $243,800, for the years ended October 31, 2007, 2006 and 2005,
        respectively.
 
 We
        also
        have life insurance agreements with our executive officers. In fiscal 2005,
        we
        purchased the insurance policies from the executive officers.  The
        insurance premiums we paid will be repaid from the cash surrender value of
        the
        policies when the policies are terminated or exercised.
 
 8.
              STOCK
                  OPTIONS
 
 In
        March
        2007, the 1997 Stock Option and Incentive Plan, which allowed us to grant
        awards
        of options to purchase shares of our common stock, stock appreciation rights,
        restricted shares and performance shares, expired and we may no longer make
        awards under this plan.  Options granted under the plan prior to March
        2007 remain exercisable for a period up to ten years after the date of grant
        and
        vest in equal annual installments as specified by the Compensation Committee
        of
        our Board of Directors at the time of grant.  The exercise price of
        options intended to qualify as incentive stock options may not be less than
        100%
        of the fair market value of a share of common stock on the date of
        grant.  During fiscal 2007, options to purchase 45,700 shares were
        exercised resulting in cash proceeds of approximately
        $186,700.  During fiscal 2006, options to purchase 126,300 shares were
        exercised resulting in cash proceeds of approximately $562,500.  The
        tax benefit from the exercise of stock options was approximately $298,000
        and
        $744,000 for fiscal 2007 and 2006, respectively.
 
 Effective
        November 1, 2005, we adopted SFAS No. 123(R), “Share Based Payment,” using the
        modified prospective method, and began applying its provisions to all options
        granted as well as to the nonvested portion of previously granted options
        outstanding at that date.  Compensation expense is determined at the
        date of grant using the Black-Scholes valuation model.
 
 On
        November 16, 2006, the Compensation Committee of the Board of Directors granted
        options with respect to 40,000 shares under the 1997 Plan to certain employees
        and directors.  The fair value of options awarded was estimated on the
        date of grant using a Black-Scholes valuation model with assumptions for
        expected volatility based on the historical volatility of the Company’s stock of
        110%, contractual term of the options of ten years and a risk-free interest
        rate
        based upon a three-year U.S. Treasury yield as of the date of grant of
        4.7%.  The options granted to employees vest in three equal annual
        installments and the directors’ options were granted with immediate vesting as
        of the date of grant.
 
 The
        weighted-average fair value of options granted during fiscal 2007 was $22.84
        and
        $24.97 for employees and directors, respectively.   We recorded
        $480,000 and $17,000 of stock-based compensation expense during the fiscal
        year
        ending October 31, 2007 and 2006, respectively for options granted under
        the
        1997 Plan.  We expect to record additional compensation expense of
        approximately $57,000 per quarter, ratably, over the next two
        years.  Prior to fiscal 2007, no stock options had been granted since
        fiscal 2002.
 
 43
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS - Continued
 
 A
        summary
        of the status of the options as of October 31, 2007, 2006 and 2005 and the
        related activity for the year is as follows:
 
 Shares
                  Under Option*
              
              
              Weighted
                  Average Exercise Price Per ShareBalance
                  October 31, 2004
              
              
              403,053
              
              
              $
              3.71Granted
              
              
              --
              
              
              
              --Cancelled
              
              
              --
              
              
              
              --Expired
              
              
              (2,000
              )
              
              
              2.15Exercised
              
              
              (185,653
              )
              
              
              3.82Balance
                  October 31, 2005
              
              
              215,400
              
              
              $
              3.63Granted
              
              
              --
              
              
              
              --Cancelled
              
              
              --
              
              
              
              --Expired
              
              
              (400
              )
              
              
              2.15Exercised
              
              
              (126,300
              )
              
              
              4.45Balance
                  October 31, 2006
              
              
              88,700
              
              
              $
              2.46Granted
              
              
              40,000
              
              
              
              26.69Cancelled
              
              
              --
              
              
              
              --Expired
              
              
              --
              
              
              
              --Exercised
              
              
              (45,700
              )
              
              
              4.08Balance
                  October 31, 2007
              
              
              83,000
              
              
              $
              13.24
 *Does
          not include non-qualified
          options granted to the Board of Directors outside of the 1990 Stock Option
          Plan
          and 1997 Stock Option and Incentive Plan which expired or were exercised
          as of
          December 2004.
 
 The
        total
        intrinsic value of stock options exercised during the twelve months ended
        October 31, 2007, 2006 and 2005 was approximately $2.4 million, $2.7 million
        and
        $2.6 million respectively.
 
 As
        of
        October 31, 2007, the total intrinsic value of outstanding stock options
        already
        vested and expected to vest was $3.6 million. The intrinsic value of options
        that are outstanding and exercisable as of October 31, 2007 was $3.0
        million.  Stock options outstanding and exercisable on October 31,
        2007, are as follows:
 
 Range
                  of Exercise Prices Per Share
              
              
              Shares
                  Under Option
              
              
              Weighted
                  Average Exercise Price Per Share
              
              
              Weighted
                  Average Remaining Contractual Life in YearsOutstanding$
              2.125
                – 5.125
              
              
              
              45,500
              
              
              $
              2.15
              
              
              
              2.35.813
                – 8.250
              
              
              
              --
              
              
              
              --
              
              
              
              --26.690
              
              
              
              37,500
              
              
              $
              26.69
              
              
              
              4.1$
              2.125
                – 26.690
              
              
              
              83,000
              
              
              $
              13.24
              
              
              
              4.1Exercisable$
              2.125
                – 5.125
              
              
              
              45,500
              
              
              $
              2.15
              
              
              
              --5.813
                – 8.250
              
              
              
              --
              
              
              
              --
              
              
              
              --26.690
              
              
              
              17,500
              
              
              $
              26.69
              
              
              
              --$
              2.125
                – 26.690
              
              
              
              63,000
              
              
              $
              8.97
              
              
              
              --
  44
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS - Continued
 
 On
        November 15, 2007, the Board of Directors of the Company adopted the 2008
        Equity
        Incentive Plan and directed that it be submitted to the shareholders for
        consideration at the 2008 annual meeting of shareholders.
 
 9.           RELATED
        PARTY TRANSACTIONS
 
 Prior
        to
        August 16, 2007, we owned approximately 24% of one of our Taiwanese-based
        contract manufacturers, Quaser Machine Tools, Inc.  This investment
        was accounted for using the equity method and was included in Investments
        and
        Other Assets on the Consolidated Balance Sheets.  On August 16, 2007,
        we entered into a contract for the sale of our shares for $2.1 million, which
        was approximately our carrying value.  The sale closed during the
        fourth quarter of 2007.  We did not recognize any material gain or
        loss as a result of this transaction.  As a result of this sale, we
        recognized a liability of $740,000 related to the tax gain on the sale of
        the
        investment.  Purchases of product from this contract manufacturer
        totaled $3.4 million, $2.0 million and $2.7 million for the years ended October
        31, 2007, 2006 and 2005, respectively.  Sales of product to this
        contract manufacturer were $176,000, $70,000 and $117,000 in fiscal 2007,
        2006
        and 2005 respectively.  Trade payables to this contract manufacturer
        were $857,000 at October 31, 2007, and $256,000 at October 31,
        2006.  Trade receivables were $37,000 at October 31, 2007, and $32,000
        at October 31, 2006.
 
 As
        of
        October 31, 2007, we owned 35% of Hurco Automation, Ltd. (HAL), a Taiwan
        based
        company.  HAL’s scope of activities includes the design, manufacture,
        sales and distribution of industrial automation products, software systems
        and
        related components, including control systems and components produced under
        contract for sale exclusively to us.  We are accounting for this
        investment using the equity method.  The investment of $2.4 million
        and $2.0 million at October 31, 2007 and 2006 is included in Investments
        and
        Other Assets on the Consolidated Balance Sheets.  Purchases of product
        from this supplier amounted to $11.7 million, $10.5 million and $7.7 million
        in
        2007, 2006 and 2005, respectively.  Sales of product to this supplier
        were $1.9 million, $2.0 million and $1.8 million for the years ended October
        31,
        2007, 2006 and 2005, respectively.  Trade payables to HAL were $2.4
        million and $1.9 million at October 31, 2007 and 2006,
        respectively.  Trade receivables from HAL were $426,000 and $235,000
        at October 31, 2007 and 2006, respectively.
 
 Summary
        financial information for these two related parties is as follows:
 
 (in
                  thousands)
              
              2007
                  (1)
              
              
              2006
              
              
              2005Net
                  Sales
              
              $
              58,053
              
              
              $
              58,286
              
              
              $
              50,896Gross
                  Profit
              
              
              10,061
              
              
              
              10,932
              
              
              
              8,947Operating
                  Income
              
              
              3,757
              
              
              
              4,209
              
              
              
              2,676Net
                  Income
              
              
              3,467
              
              
              
              3,727
              
              
              
              2,313Current
                  Assets
              
              $
              36,945
              
              
              $
              27,903
              
              
              $
              21,553Non-current
                  Assets
              
              
              10,636
              
              
              
              7,684
              
              
              
              1,824Current
                  Liabilities
              
              
              18,785
              
              
              
              20,156
              
              
              
              14,857
 (1)Financial
          information for Quaser Machine Tools for fiscal 2007 includes financial
          information through the date of sale.
  45
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS – Continued
 
 10.
              CONTINGENCIES
                  AND
                  LITIGATION
 
 We
        are
        involved in various claims and lawsuits arising in the normal course of
        business.  We do not expect any of these claims, individually or in
        the aggregate, to have a material adverse effect on our consolidated financial
        position or results of operations.
 
 11.
              GUARANTEES
 
 During
        fiscal 2003, we adopted Financial Accounting Standards Board (FASB)
        Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure
        Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
        of
        Others, an interpretation of FASB Statements No. 5, 57 and 107 and Rescission
        of
        FASB Interpretation No. 34.”  FIN 45 clarifies the requirements of
        FASB Statement No. 5, Accounting for Contingencies, relating to the guarantor’s
        accounting for, and disclosures of, the issuance of certain types of
        guarantees.
 
 From
        time
        to time, our subsidiaries guarantee third party payment obligations in
        connection with the sale of certain machines to customers that use
        financing.  At October 31, 2007, we had 54 outstanding third party
        guarantees totaling approximately $1.6 million. The terms of our subsidiaries
        guarantees are consistent with the underlying customer financing terms. Upon
        shipment, the customer has the risk of ownership. The customer does not obtain
        title until the machine is paid in full. A retention of title clause allows
        us
        to obtain the machine if the customer defaults on the lease.  We
        believe that the proceeds obtained from liquidation of the machine would
        cover
        any payments required by the guarantee.
 
 We
        provide warranties on our products with respect to defects in material and
        workmanship. The terms of these warranties are generally one year for machines
        and shorter periods for service parts.  We recognize a reserve with
        respect to this obligation at the time of product sale, with subsequent warranty
        claims recorded against the reserve. The amount of the warranty reserve is
        determined based on historical trend experience and any known warranty issues
        that could cause future warranty costs to differ from historical
        experience.  A reconciliation of the changes in our warranty reserve
        is as follows (in thousands):
 
 10/31/07
              
              
              10/31/06Balance,
                  beginning of period
              
              $
              1,926
              
              
              $
              1,618Provision
                  for warranties during the period
              
              
              2,459
              
              
              
              2,139Charges
                  to the accrual
              
              
              (2,087
              )
              
              
              (1,893
              )Impact
                  of foreign currency translation
              
              
              151
              
              
              
              62Balance,
                  end of period
              
              $
              2,449
              
              
              $
              1,926
  46
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS – Continued
  
 12.
              OPERATING
                  LEASES
  We
        lease
        facilities, certain equipment and vehicles under operating leases that expire
        at
        various dates through 2014.  Future payments required under operating
        leases as of October 31, 2007, are summarized as follows (in
        thousands):
 
 2008
              
              $
              1,7102009
              
              
              1,0442010
              
              
              6392011
              
              
              414Thereafter
              
              
              355Total
              
              $
              4,162
 
 Lease
        expense for the years ended October 31, 2007, 2006, and 2005 was $2.3 million,
        $1.9 million, and $1.8 million, respectively.
 
 We
        recorded approximately $180,000 of lease income during fiscal 2007 from
        subletting 50,000 square feet of our Indianapolis facility.  The
        sublease expires on April 30, 2010.
  47
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS - Continued
 
 13.
              QUARTERLY
                  HIGHLIGHTS
                  (Unaudited)
 
 First
                  Quarter
              
              
              Second
                  Quarter
              
              
              Third
                  Quarter
              
              
              Fourth
                  Quarter2007
                  (In thousands, except per share data)Sales
                  and service fees
              
              $
              46,878
              
              
              $
              42,494
              
              
              $
              48,555
              
              
              $
              50,120Gross
                  profit
              
              
              17,324
              
              
              
              16,349
              
              
              
              18,417
              
              
              
              18,992Gross
                  profit margin
              
              
              37.0
              %
              
              
              38.5
              %
              
              
              37.9
              %
              
              
              37.9
              %Selling,
                  general and administrative expenses
              
              
              9,250
              
              
              
              9,405
              
              
              
              10,228
              
              
              
              11,241Operating
                  income
              
              
              8,074
              
              
              
              6,944
              
              
              
              8,189
              
              
              
              7,751Provision
                  (benefit) for income taxes
              
              
              2,998
              
              
              
              2,764
              
              
              
              3,659
              
              
              
              2,455Net
                  income
              
              
              5,395
              
              
              
              4,680
              
              
              
              5,163
              
              
              
              5,651Income
                  per common share – basic
              
              $
              0.85
              
              
              $
              0.73
              
              
              $
              0.81
              
              
              $
              0.88Income
                  per common share – diluted
              
              $
              0.84
              
              
              $
              0.73
              
              
              $
              0.80
              
              
              $
              0.88First
                  Quarter
              
              
              Second
                  Quarter
              
              
              Third
                  Quarter
              
              
              Fourth
                  Quarter2006
                  (In thousands, except per share data)Sales
                  and service fees
              
              $
              31,894
              
              
              $
              36,861
              
              
              $
              36,597
              
              
              $
              43,164Gross
                  profit
              
              
              10,927
              
              
              
              13,179
              
              
              
              12,835
              
              
              
              16,384Gross
                  profit margin
              
              
              34.3
              %
              
              
              35.8
              %
              
              
              35.1
              %
              
              
              38.0
              %Selling,
                  general and administrative expenses
              
              
              6,296
              
              
              
              7,140
              
              
              
              7,392
              
              
              
              9,869Operating
                  income
              
              
              4,631
              
              
              
              6,039
              
              
              
              5,443
              
              
              
              6,515Provision
                  (benefit) for income taxes
              
              
              1,618
              
              
              
              2,250
              
              
              
              1,646
              
              
              
              2,120Net
                  Income
              
              
              3,033
              
              
              
              3,929
              
              
              
              3,802
              
              
              
              4,714Income
                  per common share – basic
              
              $
              0.49
              
              
              $
              0.62
              
              
              $
              0.60
              
              
              $
              0.75Income
                  per common share – diluted
              
              $
              0.48
              
              
              $
              0.62
              
              
              $
              0.59
              
              
              $
              0.74
  48
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS - Continued
 
 14.
              SEGMENT
                  INFORMATION
 
 We
        operate in a single segment: industrial automation equipment.  We
        design and produce interactive computer control systems and software and
        computerized machine tools for sale through our own distribution network
        to the
        worldwide metal working market.  We also provide software options,
        control upgrades, accessories and replacement parts for our products, as
        well as
        customer service and training support.
 
 We
        sell
        our products through more than 170 independent agents and distributors in
        countries throughout North America, Europe and Asia.  The Hurco line
        is the primary line for the majority of our distributors globally even though
        some may carry competitive products.  We also have our own direct
        sales personnel in Canada, England, France, Germany, Italy, Singapore and
        China,
        which are among the world's principal machine tool consuming
        countries.  During fiscal 2007, no distributor accounted for more than
        5% of our sales and service fees.  Approximately ­­­89% of
        the worldwide demand for computerized machine tools and computer control
        systems
        comes from outside the U.S.  In fiscal 2007, more than two-thirds of
        our revenues were from overseas customers and no single end-user of our products
        accounted for more than 5% of our total sales and service fees.
 
 The
        following table sets forth the contribution of each of our product groups
        to our
        total sales and service fees during each of the past three fiscal years (in
        thousands):
 
 Net
                  Sales and Service Fees by
                  Product Category
              Year
                  ended October
                  31,2007
              
              
              2006
              
              
              2005Computerized
                  Machine Tools
              
              $
              165,832
              
              
              $
              128,946
              
              
              $
              107,313Computer
                  Control Systems and Software *
              
              
              5,291
              
              
              
              4,694
              
              
              
              4,129Service
                  Parts
              
              
              12,096
              
              
              
              10,494
              
              
              
              9,991Service
                  Fees
              
              
              4,828
              
              
              
              4,383
              
              
              
              4,076Total
              
              $
              188,047
              
              
              $
              148,517
              
              
              $
              125,509
 *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 were (in
        thousands):
 
 Revenues
                  by Geographic
                  Area
              
              Year
                  Ended October
                  312007
              
              
              2006
              
              
              2005Americas
              
              $
              50,010
              
              
              $
              48,711
              
              
              $
              42,968Germany
              
              
              58,860
              
              
              
              39,764
              
              
              
              36,039United
                  Kingdom
              
              
              19,326
              
              
              
              16,089
              
              
              
              11,917France
              
              
              11,019
              
              
              
              9,107
              
              
              
              7,949Other
                  Europe
              
              
              35,245
              
              
              
              22,113
              
              
              
              18,112Total
                  Europe
              
              
              124,450
              
              
              
              87,073
              
              
              
              74,017Asia
              
              
              12,493
              
              
              
              11,866
              
              
              
              7,161Other
                  Foreign
              
              
              1,094
              
              
              
              867
              
              
              
              1,363Total
                  Foreign
              
              
              138,037
              
              
              
              99,806
              
              
              
              82,541$
              188,047
              
              
              $
              148,517
              
              
              $
              125,509
 
 49
 
 HURCO
        COMPANIES,
        INC.
 NOTES
        TO CONSOLIDATED FINANCIAL
        STATEMENTS - Continued
 
 Long-lived
        tangible assets by geographic area were (in thousands):
 
 As
                  of October
                  312007
              
              
              2006
              
              
              2005United
                  States
              
              $
              7,795
              
              
              $
              8,308
              
              
              $
              8,034Foreign
                  countries
              
              
              5,489
              
              
              
              2,934
              
              
              
              3,117$
              13,284
              
              
              $
              11,242
              
              
              $
              11,151
 
 15.
              NEW
                  ACCOUNTING
                  PRONOUNCEMENTS
 
 In
        July
        2006, the FASB released Interpretation No. 48 “Accounting for Uncertainty in
        Income Taxes,” an interpretation of FASB Statement No.109 which clarifies the
        accounting and reporting for uncertainties in income taxes.  The
        interpretation prescribes a recognition threshold and measurement attribute
        for
        the financial statement recognition and measurement of a tax position taken
        or
        expect to be taken in a tax return.  FIN No. 48 also provides guidance
        on derecognition, classification, interest and penalties, accounting in interim
        periods, disclosure and transition.  We will be required to adopt and
        report the impact of FIN No. 48 in the first quarter of fiscal year
        2008.  Although we will not adopt this Statement until first quarter
        2008, we have assessed the potential impact and conclude that the adoption
        will
        not have a material effect on the consolidated financial
        statements.
 
 During
        2006, the FASB released Statement No. 157, “Fair Value Measurements”, a new
        standard which provides further guidance on using fair value to measure assets
        and liabilities, the information used to measure fair value and the effect
        of
        fair value measurements on earnings.  Statement 157 applies whenever
        other standards require (or permit) assets or liabilities to be measured
        at fair
        value, but does not expand the use of fair value in any new
        circumstances.  We will be required to adopt and report the impact of
        Statement 157 in the first quarter of fiscal year 2008.  Although we
        will not adopt this Statement until first quarter 2008, we have assessed
        the
        potential impact and conclude that the adoption will not have a material
        effect
        on the consolidated financial statements.
 
 In
        February 2007, the FASB released Statement No. 159, “The Fair Value Option for
        Financial Assets and Financial Liabilities”, a new standard that permits an
        entity to choose to measure many financial instruments and certain other
        items
        at fair value.  The objective of this statement is to improve
        financial reporting by providing entities with the opportunity to mitigate
        volatility in reported earnings caused by measuring related assets and
        liabilities differently without having to apply complex hedge accounting
        provisions.  Statement No. 159 is effective in the first quarter of
        fiscal 2008.  Although we will not adopt this Statement until first
        quarter 2008, we have assessed the potential impact and conclude that the
        adoption will not have a material effect on the consolidated financial
        statements.
 
 In
        September 2006, the Securities and Exchange Commission staff issued Accounting
        Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when
        Quantifying Misstatements in Current Year Financial Statements” (SAB
        108).  SAB 108 was issued in order to eliminate the diversity in
        practice surrounding how public companies quantify financial statement
        misstatements.  SAB 108 requires that registrants quantify errors
        using both a balance sheet and income statement approach and evaluate whether
        either approach results in a misstated amount that, when all relevant
        quantitative and qualitative factors are considered, is material.  We
        adopted the provisions of this Bulletin during fiscal 2007 and the adoption
        did
        not have a material effect on the consolidated financial
        statements.
 
 50
 
 Item
                  9.
              CHANGES
                  IN AND
                  DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
                  DISCLOSURES
 
 None.
 
 Item
                  9A.
              CONTROLS
                  AND
                  PROCEDURES
 
 We
        carried out an evaluation under the supervision and with participation of
        management, including the Chief Executive Officer and Chief Financial Officer,
        of the effectiveness of the design and operation of our disclosure controls
        and
        procedures as of October 31, 2007 pursuant to Rule 13a-15(b) under the
        Securities Exchange Act of 1934, as amended.  Based upon that
        evaluation, our management, including the Chief Executive Officer and Chief
        Financial Officer, concluded that our disclosure controls and procedures
        were
        effective as of the evaluation date.
 
 There
        have been no changes in our internal control over financial reporting that
        occurred during the fourth quarter of the fiscal year ended October 31, 2007
        that have materially affected, or are reasonably likely to materially affect,
        our internal control over financial reporting.
 
 51
 
 Item
                  9B.
              OTHER
                  INFORMATION
 
 During
        the fourth quarter of fiscal 2007, the Audit Committee of the Board of Directors
        did not engage our independent registered public accounting firm to perform
        any
        non-audit services.  This disclosure is made pursuant to Section
        10A(i)(2) of the Securities Exchange Act of 1934, as added by Section 202
        of the
        Sarbanes-Oxley Act of 2002.
 
 The
        following graph illustrates the cumulative total shareholder return on Hurco
        common stock for the five-year period ended October 31, 2007, as compared
        to the
        Russell 2000 and a peer group consisting of traded securities for U.S. companies
        in the same three digit SIC group as Hurco (SIC 3540-3549 – Metal Working
        Machinery and Equipment).  The comparisons in this table are required
        by the SEC and are not intended to forecast or be indicative of possible
        future
        performance of Hurco common stock.
  
 10/02
                10/03
                10/04
                10/05
                10/06
                10/07Hurco
                    Companies,
                    Inc.
                100.00
                165.81
                924.52
                1150.32
                1681.29
                3683.87Russell
                    2000
                
                100.00
                143.37
                160.18
                179.53
                215.40
                235.37Peer
                    Group
                
                100.00
                108.67
                173.68
                185.05
                192.99
                237.90
 *The
          stock price performance
          included in this graph is not necessarily indicative of future stock price
          performance
 52
 
 PART
        III
 
 Item
                  10.
              DIRECTORS
                  AND
                  EXECUTIVE OFFICERS OF THE
                  REGISTRANT
 
 The
        information required by this item is hereby incorporated by reference to
        the
        definitive proxy statement for our 2008 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 hereby incorporated by reference to
        the
        definitive proxy statement for our 2008 annual meeting of
        shareholders.
 
 Item
                  12.
              SECURITY
                  OWNERSHIP OF
                  CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
                  MATTERS
 
 Except
        for the information concerning equity compensation plans, the information
        required by this item is hereby incorporated by reference to the definitive
        proxy statement for our 2008 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, 2007:
 
 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
              
              
              83,000
              
              
              $
              13.24
              
              
              
              --Equity
                  compensation plans not approved by security holders
              
              
              --
              
              
              
              --
              
              
              
              --Total
              
              
              83,000
              
              
              $
              13.24
              
              
              
              --
 
 As
        of
        October 31, 2007, there were no outstanding non-qualified options that had
        been
        granted outside of any plans approved by our shareholders.
 
 Item
                  13.
              CERTAIN
                  RELATIONSHIPS
                  AND RELATED
                  TRANSACTIONS
 
 The
        information required by this item is hereby incorporated by reference to
        the
        definitive proxy statement for our 2008 annual meeting of
        shareholders.
 
 53
 
 Item
                  14.
              PRINCIPAL
                  ACCOUNTANT
                  FEES AND SERVICES
 
 The
        information required by this item is hereby incorporated by reference to
        the
        definitive proxy statement for our 2008 annual meeting of
        shareholders.
 
 PART
        IV
 
 Item
                  15.
              EXHIBITS
                  AND FINANCIAL
                  STATEMENT SCHEDULES
 
 (a)
              1.
              Financial
                  Statements.  The following consolidated financial
                  statements of Registrant are included herein under Item 8 of Part
                  II:PageReport
                  of Independent Registered Public Accounting Firm – Crowe Chizek and
                  Company LLC
              
              27Report
                  of Independent Registered Public Accounting Firm – PricewaterhouseCoopers
                  LLP
              
              29Consolidated
                  Statements of Income – years ended October 31, 2007, 2006 and
                  2005
              
              30Consolidated
                  Balance Sheets – as of October 31, 2007 and 2006
              
              31Consolidated
                  Statements of Cash Flows – years ended October 31, 2007, 2006 and
                  2005
              
              32Consolidated
                  Statements of Changes in Shareholders’ Equity – years ended October 31,
                  2007, 2006 and 2005
              
              33Notes
                  to Consolidated Financial Statements
              
              342.
              Financial
                  Statement Schedule.  The following financial statement schedule
                  is included in this Item.PageSchedule
                  II - Valuation and Qualifying Accounts and Reserves
              
              55All
                  other financial statement schedules are omitted because they are
                  not
                  applicable or the required information is included in the consolidated
                  financial statements or notes thereto.(b)
              ExhibitsExhibits
                  being filed with this Form 10-K or incorporated herein by reference
                  are
                  listed on page 56.
  54
 
 Schedule
        II - Valuation and
        Qualifying Accounts and Reserves
 for
        the years ended October 31, 2007,
        2006, and 2005
 (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, 2007
              
              $
              635
              
              
              $
              128
              
              
              
              --
              
              
              $
              12
              (1)
              
              $
              751October
                  31, 2006
              
              $
              842
              
              
              $
              (227
              )
              
              
              --
              
              
              $
              (20
              )(2)
              
              $
              635October
                  31, 2005
              
              $
              723
              
              
              $
              169
              
              
              
              --
              
              
              $
              50
              (3)
              
              $
              842Accrued
                  warranty expenses For the year ended:October
                  31, 2007
              
              $
              1,926
              
              
              $
              2,610
              
              
              
              --
              
              
              $
              2,087
              
              
              $
              2,449October
                  31, 2006
              
              $
              1,618
              
              
              $
              2,201
              
              
              
              --
              
              
              $
              1,893
              
              
              $
              1,926October
                  31, 2005
              
              $
              1,750
              
              
              $
              1,646
              
              
              
              --
              
              
              $
              1,778
              
              
              $
              1,618
   (1)
              Receivable
                  write-offs of $20,000, net of cash recoveries on accounts previously
                  written off of $8,000.
  (2)
              Receivable
                  write-offs of $5,000, net of cash recoveries on accounts previously
                  written off of $25,000.
  (3)
              Receivable
                  write-offs of $50,000, net of cash recoveries on accounts previously
                  written off of $0.
  55
 
 EXHIBITS
        INDEX
 
 Exhibits
        Filed.  The following exhibits are filed with this
        report:
 
 10.1*
              Summary
                  compensation table.11
              Statement
                  re: computation of per share earnings.21
              Subsidiaries
                  of the Registrant.23.1
              Consent
                  of Independent Registered Public Accounting Firm, Crowe Chizek
                  and Company
                  LLC.23.2
              Consent
                  of PricewaterhouseCoopers LLP.31.1
              Certification
                  by the Chief Executive Officer, pursuant to Rule 13a-15(b) under
                  the
                  Securities and Exchange Act of 1934, as amended.31.2
              Certification
                  by the Chief Financial Officer, pursuant to Rule 13a-15(b) under
                  the
                  Securities and Exchange Act of 1934, as amended.32.1
              Certification
                  by the Chief Executive Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.32.2
              Certification
                  by the Chief Financial Officer pursuant to Section 906 of the
                  Sarbanes-Oxley Act of 2002.
 
 Exhibits
          Incorporated by
          Reference.  The following exhibits are incorporated into this
          report:
 
 3.1
              Amended
                  and Restated Articles of Incorporation of the Registrant, incorporated
                  by
                  reference to Exhibit 3.1 to the Registrant's Quarterly Report on
                  Form 10-Q
                  for the quarter ended July 31, 2000.3.2
              Amended
                  and Restated By-Laws of the Registrant as amended through September
                  27,
                  2006, incorporated by reference to Exhibit 3.1 to the Registrant’s Current
                  Report on Form 8-K filed on September 27, 2006.10.2
              Credit
                  Agreement dated as of December 7, 2007, between Hurco Companies,
                  Inc. And
                  JP Morgan Chase Bank, N.A. incorporated by reference to Exhibit
                  10.1 to
                  Current Report on Form 8-K filed December 12, 2007.10.3*
              Employment
                  Agreement between the Registrant and John G. Oblazney dated January
                  12,
                  2007, incorporated by reference to Exhibit 10.1 to the Registrant’s Annual
                  Report on Form 10-K for the year ended October 31,
                  2006.10.4*
              Employment
                  Agreement between the Registrant and James D. Fabris dated November
                  18,
                  1997, incorporated by reference as Exhibit 10.15 to the Registrant's
                  Quarterly Report on Form 10-Q for the quarter ended January 31,
                  1998.10.5*
              Employment
                  Agreement between the Registrant and Michael Doar dated November
                  13, 2001,
                  incorporated by reference as Exhibit 10.2 to the Registrant’s Quarterly
                  Report on Form 10-Q dated January 31, 2002.10.6*
              Amended
                  1997 Stock Option and Incentive Plan incorporated by reference
                  as Exhibit
                  10 to the Registrant’s Quarterly Report on Form 10-Q filed for the quarter
                  ended July 31, 2005.
  *
              The
                  indicated exhibit is a management contract, compensatory plan or
                  arrangement required to be listed by Item 601 of Regulation
                  S-K.
 
 56
 
 SIGNATURES
 
 Pursuant
        to the requirements of Section 13 or 15(d) of the Securities Exchange Act
        of
        1934, the Registrant has duly caused this Report to be signed on its behalf
        by
        the undersigned, thereunto duly authorized, this 10th day of January
        2008.
 
 HURCO
                COMPANIES, INC.By:
              /s/
                  John G. OblazneyJohn G. OblazneyVice-President,
                  Secretary,Treasurer
                  andChief
                  Financial Officer
  57
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, this report has
        been
        signed below by the following persons on behalf of the Registrant and in
        the
        capacities and on the dates indicated:
 
 Signature
                    and Title(s)
                
                Date/s/
                    Michael Doar
                
                January
                    10,
                    2008MichaelDoar,
                    Chairman of the Board, Chief
                    Executive Officer and Director of Hurco Companies,
                    Inc.(Principal
                    Executive
                    Officer)/s/
                    John G. Oblazney
                
                January
                    10,
                    2008JohnG.OblazneyVice-President,Secretary,
                    Treasurer and Chief
                    Financial Officer of Hurco Companies, Inc.(Principal
                    Financial
                    Officer)/s/
                    Sonja K. McClelland
                
                January
                    10,
                    2008SonjaK.McClellandCorporate
                    Controller, Assistant
                    Secretary of Hurco Companies, Inc.(Principal
                    Accounting
                    Officer)
 /s/
                    Stephen H. Cooper
                
                January
                    10,
                    2008StephenH.Cooper,
                    Director/s/
                    Robert W. Cruickshank
                
                January
                    10,
                    2008RobertW.Cruickshank,
                    Director/s/
                    Philip James
                
                January
                    10,
                    2008PhilipJames,
                    Director/s/MichaelP.Mazza
                
                January
                    10,
                    2008Michael
                    P. Mazza, Director/s/
                    Richard T. Niner
                
                January
                    10,
                    2008RichardT.Niner,
                    Director/s/
                    O. Curtis Noel
                
                January
                    10,
                    2008O.CurtisNoel,
                    Director/s/
                    Charlie Rentschler
                
                January
                    10,
                    2008CharlieRentschler,
                    Director
  58