EXECUTIVE OVERVIEW

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

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

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

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

Our sales to foreign customers are denominated, and payments by those customers are made in the prevailing currencies-primarily the Euro and Pound Sterling-in the countries in which those customers are located, and our product costs are incurred and paid primarily in the New Taiwan Dollar and the U.S. Dollar. Changes in currency exchange rates may have a material effect on our operating results and consolidated balance sheets as reported under U.S. Generally Accepted Accounting Principles. For example, when a foreign currency increases in value relative to the U.S. Dollar, sales made (and expenses incurred) in that currency, when translated to U.S. Dollars for reporting in our financial statements, are higher than would be the case when that currency has a lower value relative to the U.S. Dollar. In our comparison of period-to-period results, we discuss not only the increases or decreases in those results as reported in our financial statements (which reflect translation to U.S. Dollars at exchange rates prevailing during the period covered by those financial statements), but also the effect that changes in exchange rates had on those results. For additional information on the impact of translation of foreign currencies and our hedging practices, see Note 1 of Notes to Consolidated Financial Statements.

Our high levels of foreign manufacturing and sales also subject us to cash flow risks due to fluctuating currency exchange rates. We seek to mitigate those risks through the use of various derivative instruments - principally foreign currency forward exchange contracts.

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

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

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

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

Results of Operations

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

                                          Percentage of Revenues                   Year-to-Year % Change
                                    2008           2007          2006               Increase (Decrease)
                                                                             '08 vs. '07          '07 vs. '06
Sales and service fees                100.0 %        100.0 %       100.0 %           19.1 %               26.6 %
Gross profit                           36.9 %         37.8 %        35.9 %           16.2 %               33.3 %
Selling, general and
administrative expenses                20.9 %         21.3 %        20.7 %           16.7 %               30.7 %
Operating income                       16.0 %         16.5 %        15.2 %           15.7 %               36.8 %
Other income (expense)*                (0.7 %)         0.9 %         0.5 %         (194.1 %)             133.8 %
Net income                             10.1 %         11.1 %        10.4 %            7.8 %               35.0 %

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

Fiscal 2008 Compared to Fiscal 2007

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

Net Sales and Service Fees by Geographic Region

The following table sets forth net sales and service fees by geographic region
for the years ended October 31, 2008 and 2007 (in thousands):

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

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

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

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

Net Sales and Service Fees by Product Category

The following table sets forth net sales and service fees by product category
for the years ended October 31, 2008 and 2007 (in thousands):

                                            October 31,                                Increase
                                 2008                        2007                 Amount           %

Computerized Machine
Tools                   $ 199,238          88.9 %   $ 165,832          88.2 %   $  33,406          20.1 %
Service Fees, Parts
and Other                  24,756          11.1 %      22,215          11.8 %       2,541          11.4 %
Total                   $ 223,994         100.0 %   $ 188,047         100.0 %   $  35,947          19.1 %

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

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

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

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

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

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

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

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

Fiscal 2007 Compared to Fiscal 2006

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

Net Sales and Service Fees by Geographic Region

The following table sets forth net sales and service fees by geographic region
for the years ended October 31, 2007 and 2006 (in thousands):

                                         October 31,                            Increase
                               2007                      2006                Amount        %
       North America   $  52,133        27.7 %   $  50,563        34.0 %   $  1,570        3.1 %
       Europe            125,446        66.7 %      87,735        59.1 %     37,711       43.0 %
       Asia Pacific       10,468         5.6 %      10,219         6.9 %        249        2.4 %
           Total       $ 188,047       100.0 %   $ 148,517       100.0 %   $ 39,530       26.6 %

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

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

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

Net Sales and Service Fees by Product Category

The following table sets forth net sales and service fees by product category
for the years ended October 31, 2007 and 2006 (in thousands):

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

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

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

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

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

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

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

Liquidity and Capital Resources

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

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

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

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

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

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

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

Contractual Obligations and Commitments

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

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

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

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

Off Balance Sheet Arrangements

From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of machines to customers that use financing. At October 31, 2008, 56 such guarantees were outstanding totaling approximately $1.7 million. Upon shipment, the customer has the risk of ownership. The customer does not obtain title until the machine is paid in full. We believe that the proceeds obtained from liquidation of the machine would cover any payments required by the guarantee.

Critical Accounting Policies and Estimates

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