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 primary drivers of the sustained growth we experienced until the first quarter of fiscal 2009 resulted from the 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 foreign manufacturing operations. During fiscal 2008, more than 75% of our revenues were attributable to customers located abroad. The percentage of revenues attributable to customers located abroad decreased during the first quarter of fiscal 2009 to approximately 66%, due in part to deterioration of the European and Asian markets for machine tool products as well as the effect of a stronger 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.

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.

Like many other businesses, we have been adversely affected by the ongoing global economic crisis. During periods of declining economic conditions, manufacturers and suppliers of capital goods are often the first to experience reductions in demand as their customers defer or eliminate investments in capital equipment. Additionally, unlike other economic downturns, during the past two quarters customers who wanted to purchase capital goods found it difficult to obtain financing due to the tight global credit market. Primarily as a result of these two factors, we experienced a 54% decline in sales and a 60% decline in orders during the first quarter of fiscal 2009 in comparison to the first quarter of fiscal 2008.

Starting in the fourth quarter of fiscal 2008, we implemented various initiatives to reduce expenses while staying committed to our strategic plan of product innovation and penetration of developing markets. We also took 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 will continue to take actions to control costs and manage cash flow so long as current market conditions persist.

We believe that the absence of outstanding debt and our cash position provide us with the capability to weather the current global economic crisis.

RESULTS OF OPERATIONS

Three Months Ended January 31, 2009 Compared to Three Months Ended January 31, 2008

Sales and Service Fees. Sales and service fees for the first quarter of fiscal 2009 were $28.3 million, a decrease of $32.6 million, or 54%, from the first quarter of fiscal 2008. The drop of first quarter revenues was primarily the result of the global economic downturn. Due to the effects of a stronger U.S. Dollar when translating foreign sales to U.S. Dollars for financial reporting purposes, sales and service fees for the first quarter of fiscal 2009 were approximately $2.9 million, or 5%, less than would have been the case if foreign sales had been translated at the same rate of exchange that was utilized for the first quarter of 2008.

The following tables set forth net sales (in thousands) by geographic region and product category for the first quarter of 2009 and 2008:

Net Sales and Service Fees by Geographic Region

                                 January 31,                            Increase
                        2009                     2008              Amount          %
North America   $  9,636        34.0 %   $ 13,079        21.5 %   $  (3,443 )     (26.3 %)
Europe            18,060        63.8 %     45,052        73.9 %     (26,992 )     (59.9 %)
Asia Pacific         611         2.2 %      2,792         4.6 %      (2,181 )     (78.1 %)
Total           $ 28,307       100.0 %   $ 60,923       100.0 %   $ (32,616 )     (53.5 %)

Sales were down sharply across all regions due to the economic disruption that has had an adverse effect on all markets around the world. In addition to declining volume and the impact of currency translation, approximately 15% of the sales decline was attributable to a drop in sales of VMX machines in the Europe sales region.

Net Sales and Service Fees by Product Category
                                            January 31,                                Increase
                                 2009                        2008                Amount           %
Computerized Machine
Tools                   $  23,948          84.6 %   $  54,924          90.2 %   $ (30,976 )       (56.4 %)
Service Fees, Parts
and Other                   4,359          15.4 %       5,999           9.8 %      (1,640 )       (27.3 %)
Total                   $  28,307         100.0 %   $  60,923         100.0 %   $ (32,616 )       (53.5 %)

Sales of computerized machine tools during the first quarter of fiscal 2009 decreased 56% from the corresponding period in fiscal 2008. The decrease was driven primarily by a deterioration of 32% in overall shipments. The remaining change is due to the impact of unfavorable mix, particularly higher-priced VMX machines and changes due to fluctuations in currency exchange rates.

Orders. New order bookings in the first quarter of fiscal 2009, were $24,516,000, a decrease of $36,631,000, or 60%, compared to the prior year period. Orders in the North America, Europe and Asia Pacific regions decreased $3,655,000, or 30%, $30,754,000, or 67% and $2,222,000, or 79%, respectively. The decline in orders we experienced at the end of fiscal 2008 continued and worsened as our customers, consisting primarily of small job shops, reacted to the deteriorating conditions in the markets they serve. The impact of currency translation on new orders booked for the first quarter was consistent with the impact on sales.

Gross Margin. Gross margin for the first quarter of fiscal 2009 was 30%, compared to 41% for the 2008 period. The decrease in margin rate was primarily due to lower overall volume, and particularly in sales of higher margin VMX machines in the Europe sales region.

Operating Expenses. Selling, general and administrative expenses were $8,029,000 for the first quarter of fiscal 2009, a decrease of $4,347,000, or 35%, from the 2008 period, reflecting lower sales commissions, cost reduction initiatives and the favorable effect of a stronger U.S. Dollar during the 2009 period when translating foreign operating expenses for financial reporting purposes.

Operating Income. Operating income for the first quarter of fiscal 2009 was $0.5 million, or 2% of sales and service fees, compared to $12.5 million, or 20% of sales and service fees, for the prior year period. The reduction in operating income year-over-year was primarily due to lower overall volume, and particularly in sales of higher margin VMX machines in the Europe sales region.

Other (Income) Expense, net. The decrease in other expense of $391,000 is primarily the result of net transaction gains on foreign currency forward exchange contracts compared to net transaction losses in the prior year and due to the difference at the balance sheet date between the fair value of receivables and payables denominated in foreign currencies and the foreign exchange contract rates at which the derivatives were placed.

Income Taxes. Our effective tax rate for the first quarter of fiscal 2009 of approximately 36% was relatively unchanged compared to the same period in the prior year. Our provision for income taxes during the first quarter of fiscal 2009 was approximately $4.3 million lower than in the same period in fiscal 2008 as a result of the decrease in operating income.

LIQUIDITY AND CAPITAL RESOURCES

At January 31, 2009, we had cash and cash equivalents of $30.1 million, compared to cash and cash equivalents and short term investments of $33.1 million at October 31, 2008. Cash used for operations totaled $1.5 million for the quarter ended January 31, 2009, compared to $3.7 million in the prior year period. Cash provided by investing activities was $5.3 million for the first fiscal quarter of 2009, primarily due to the sale of our investments in auction rate securities which were sold at par value. Approximately 64% of the $30.1 million of cash and cash equivalents is denominated in U.S. Dollars. The remaining balances are held outside the U.S. in the local currencies of our various foreign entities and are subject to fluctuations in currency exchange rates.

Working capital, excluding cash and cash equivalents and short-term investments, was $69.2 million at January 31, 2009, compared to $67.1 million at October 31, 2008. The $2.1 million increase in working capital, excluding cash and cash equivalents and short-term investments, was primarily driven by reduced accounts payable as a result of lower production levels and a reduction in accrued expenses.

We expect our cash balance on hand and available borrowing capacity to permit us to stay committed to our strategic plan of product innovation and targeted penetration of developing markets. In order to sustain profitability and cash flow during these current economic conditions we have significantly reduced production levels, removed overtime, reduced our work force, eliminated hiring and salary increases and reduced pay for select salaried employees by 5-10%.

Capital expenditures were primarily for purchases of equipment for our manufacturing facilities. We funded these expenditures with cash flow from operations.

As of January 31, 2009, we had no debt or borrowings outstanding under our domestic and foreign bank credit facilities.

We have an effective "shelf" registration statement on file with the SEC that allows us to offer and sell a variety of securities, including common stock, preferred stock, warrants, depositary shares and debt securities, up to an aggregate amount of $200.0 million, if and when authorized by the Board of Directors. At present, we have no plans of offering or selling securities.

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

NEW ACCOUNTING PRONOUNCEMENTS

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

CRITICAL ACCOUNTING POLICIES

Our accounting policies, which are described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2008, require management to make significant estimates and assumptions using information available at the time the estimates are made. These estimates and assumptions significantly affect various reported amounts of assets, liabilities, revenues, and expenses. If our future experience differs materially from these estimates and assumptions, our results of operations and financial condition would be affected. There were no material changes to our critical accounting policies during the first three months of fiscal 2009.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

There have been no material changes related to contractual obligations and commitments from the information provided in our Annual Report on Form 10-K for the fiscal year ended October 31, 2008. As of January 31, 2009, our FIN 48 liabilities were $695,000. The periods in which the FIN 48 liabilities will be paid cannot be reliably estimated and are, therefore, excluded from our contractual obligations. For additional information regarding FIN 48, see Note 12 of Notes to Condensed Consolidated Financial Statements.

OFF BALANCE SHEET ARRANGEMENTS

From time to time, our subsidiaries guarantee third party payment obligations in connection with the sale of certain machines to customers that use financing. As January 31, 2009, we had 55 outstanding third party guarantees totaling approximately $1.7 million. The terms of our subsidiaries' guarantees are consistent with the underlying customer financing terms. Upon shipment, the customer has the risk of ownership, but does not obtain title until the machine is paid in full. A retention of title clause allows us to recover 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.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

Certain statements made in this report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the statements. These risks, uncertainties and other factors include:

· The current global economic crisis affecting customer demand and purchase of products and services;

· The cyclical nature of the machine tool industry;

· The risks of our international operations;

· The limited number of our manufacturing sources;

· The effects of changes in currency exchange rates;

· Our dependence on new product development;

· The need to make technological advances;

· Competition with larger companies that have greater financial resources;

· Changes in the prices of raw materials, especially steel and iron products;

· Possible obsolescence of our technology;

· Acquisitions that could disrupt our operations and affect operating results;

· Impairment of our goodwill or other assets;

· The need to protect our intellectual property assets;

· The impact of the continuing downturn in the U.S. economy;

· The impact of ongoing disruptions in the credit markets on our investment securities; and

· The effect of the loss of key personnel.

We discuss these and other important risks and uncertainties that may affect our future operation in Part I, Item 1A - Risk Factors in our most recent Annual Report on Form 10-K and may update that discussion in Part II, Item 1A - Risk Factors in this report or a Quarterly Report on Form 10-Q we file hereafter.

Readers are cautioned not to place undue reliance on these forward-looking statements. While we believe the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. This cautionary statement is applicable to all forward-looking statements contained in this report.