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 between fiscal 2002 and the beginning of fiscal 2009 has been the increasing worldwide demand for machine tools during that period, the expansion of our product line that includes more expensive, higher-margin products, customer acceptance of our products and our successes in selling and manufacturing outside the United States.

The market for machine tools is international in scope. We have both significant foreign sales and foreign manufacturing operations. During fiscal 2008, more than 75% of our revenues were attributable to customers located abroad. The percentage of revenues attributable to customers located abroad decreased during the first two quarters of fiscal 2009 to approximately 67%, 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, Spain, Poland, Singapore, China, South Africa, and the United Kingdom. Our 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. 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.

Since the fourth quarter of fiscal 2008, we have been adversely affected by the ongoing global recession. During periods of adverse economic conditions, manufacturers and suppliers of capital goods, such as our company, are often the first to experience reductions in demand as their customers defer or eliminate investments in capital equipment. Additionally, customers who may want to purchase capital goods often find it difficult to obtain financing due to disruptions in the credit markets. During the first half of fiscal 2009, these conditions had the greatest impact on the European sales region where we primarily market our more expensive, higher-margin machines. As a result, we experienced a 59% decline in sales and a 65% decline in orders during the first half of fiscal 2009 in comparison to the same period of fiscal 2008.

We have implemented various initiatives to reduce expenses, including management and employee pay reductions, workforce reductions, the suspension of corporate 401K matching contributions and restrictions on travel expenditures, while staying committed to our strategic plan of product innovation and penetration of developing markets. We are also taking 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 not be fully realized until the end of calendar year 2009. We will continue to take actions to control costs and manage cash flow so long as current market conditions persist.

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

RESULTS OF OPERATIONS

Three Months Ended April 30, 2009 Compared to Three Months Ended April 30, 2008

Sales and Service Fees. Sales and service fees for the second quarter of fiscal 2009 were $20.5 million, a decrease of $37.8 million, or 65%, from the second quarter of fiscal 2008. The drop of second quarter revenues was primarily the result of the global economic recession. 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 second quarter of fiscal 2009 were approximately $3.2 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 second quarter of 2008.

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

Net Sales and Service Fees by Geographic Region

                        Three months ended April 30,                     Change
                        2009                     2008              Amount          %
North America   $  6,171        30.1 %   $ 11,706        20.1 %   $  (5,535 )     (47.3 )%
Europe            13,042        63.7 %     42,653        73.2 %     (29,611 )     (69.5 )%
Asia Pacific       1,276         6.2 %      3,926         6.7 %      (2,650 )     (67.5 )%
Total           $ 20,489       100.0 %   $ 58,285       100.0 %   $ (37,796 )     (64.9 )%

Similar to the first quarter of fiscal 2009, sales were down sharply across all regions due to the worldwide recession. In addition to declining volume and the unfavorable impact of currency translation, approximately 29% of the sales decline was attributable to a decrease in sales of our more expensive, higher-margin VMX machines in the Europe sales region, and global competitive pricing pressures.

Net Sales and Service Fees by Product Category
                                   Three months ended April 30,                         Change
                                 2009                        2008                Amount           %
Computerized Machine
Tools                   $  16,518          80.6 %   $  52,062          89.3 %   $ (35,544 )       (68.3 )%
Service Fees, Parts
and Other                   3,971          19.4 %       6,223          10.7 %      (2,252 )       (36.2 )%
Total                   $  20,489         100.0 %   $  58,285         100.0 %   $ (37,796 )       (64.9 )%

Sales of computerized machine tools during the second quarter of fiscal 2009 decreased 68% from the corresponding period in fiscal 2008. The decrease in sales of computerized machine tools was due to lower demand stemming from the worldwide recession, the significant decline in sales of our more expensive, higher-margin VMX machines, global competitive pricing pressures and fluctuations in currency exchange rates.

Orders. New order bookings in the second quarter of fiscal 2009, were $18.1 million, a decrease of $40.8 million, or 69%, compared to the prior year period. Orders in the North America, Europe and Asia Pacific regions decreased $6.2 million, or 56%, $31.6 million, or 72%, and $3.0 million, or 75%, respectively, continuing a decrease that began in the first quarter as Hurco customers, consisting primarily of small job shops, reacted to the economic downturn in their markets. The impact of currency translation on new orders booked in the second quarter and first half was consistent with the impact on sales.

Gross Margin. Gross margin for the second quarter of fiscal 2009 was 26%, compared to 35% for the 2008 period. The decrease in margin as a percentage of sales was primarily due to a lower sales volume, the significant decline in sales of higher-margin VMX machines in the European sales region, and global competitive pricing pressures.

Operating Expenses. Selling, general and administrative expenses were $7.5 million, a decrease of $4.2 million, or 36%, from the corresponding period in 2008, reflecting lower sales commissions, the benefit of cost reduction initiatives, and the favorable effect of a stronger U.S. Dollar in 2009 when translating foreign operating expenses for financial reporting purposes.

Operating Income (Loss). The operating loss for the second quarter of fiscal 2009 was $2.3 million, or 11% of sales and service fees, compared to operating income of $8.7 million, or 15% of sales and service fees, for the prior year period. The reduction in operating income year-over-year was primarily due to lower demand globally as a result of the worldwide recession, lower sales of VMX machines in the European sales region, and global competitive pricing pressures.

Other (Income) Expense, net. The increase in other income of $2.1 million for the second quarter of fiscal 2009 compared to the same period in fiscal 2008 was primarily due to $2.2 million of net realized gains on hedge contracts closed before maturity due to forecasted reductions in production and sales for the next six months.

Income Taxes. Our effective tax rate for the second quarter of fiscal 2009 of approximately 42% is higher than the 36% for the same period in fiscal 2008 primarily due to net losses in international jurisdictions that have tax rates that are lower than U.S. statutory rates. Our provision for income taxes during the second quarter of fiscal 2009 was approximately $3.3 million lower than in the same period in fiscal 2008 as a result of the decrease in operating income.

Six months Ended April 30, 2009 Compared to Six months Ended April 30, 2008

Sales and Service Fees. Sales and service fees for the first half of fiscal 2009 were $48.8 million, a decrease of $70.4 million, or 59%, over the first half of fiscal 2008. The decrease in sales and service fees was primarily the result of the current global recession. 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 half of fiscal 2009 were approximately $6.1 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 half of fiscal 2008.

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

Net Sales and Service Fees by Geographic Region

                          Six months ended April 30,                      Change
                        2009                     2008               Amount          %
North America   $ 15,808        32.4 %   $  24,785        20.8 %   $  (8,977 )     (36.2 )%
Europe            31,102        63.7 %      87,705        73.6 %     (56,603 )     (64.5 )%
Asia Pacific       1,886         3.9 %       6,718         5.6 %      (4,832 )     (72.0 )%
Total           $ 48,796       100.0 %   $ 119,208       100.0 %   $ (70,412 )     (59.1 )%

Sales were down sharply across all regions due to the worldwide recession that resulted in lower demand for our products combined with the significant decline in sales of our more expensive, higher-margin VMX machines, global competitive pricing pressures and fluctuations in currency exchange rates.

Net Sales and Service Fees by Product Category
                                    Six months ended April 30,                          Change
                                 2009                        2008                Amount           %

Computerized Machine
Tools                   $  40,466          82.9 %   $ 106,986          89.7 %   $ (66,520 )       (62.2 )%
Service Fees, Parts
and Other                   8,330          17.1 %      12,222          10.3 %      (3,892 )       (31.9 )%
Total                   $  48,796         100.0 %   $ 119,208         100.0 %   $ (70,412 )       (59.1 )%

Sales of computerized machine tools during the first half of fiscal 2009 decreased 62% over the corresponding period in fiscal 2008. The decrease in sales of computerized machine tools was due to lower demand stemming from the worldwide recession, the significant decline in sales of our more expensive, higher-margin VMX machines, global competitive pricing pressures and fluctuations in currency exchange rates.

Orders. New order bookings in the first half of fiscal 2009, were $42.7 million, a decrease of $77.4 million, or 65%, over the prior year period. Of that decrease, Europe, North America and Asia Pacific orders decreased $62.3 million, or 69%, $9.9 million, or 42%, and $5.2 million, or 77%, respectively.

Gross Margin. Gross margin for the first half of fiscal 2009 was 28%, compared to 38% for the 2008 period. The decrease in margin as a percentage of sales was primarily due to a lower sales volume, the decline in sales of higher-margin VMX machines in the European sales region, and global competitive pricing pressures.

Operating Expenses. Selling, general and administrative expenses were $15.5 million for the first half of fiscal 2009, a reduction of $8.5 million from the 2008 period, reflecting various initiatives to reduce expenses that include management and employee pay reductions, workforce reductions, the suspension of corporate 401K matching contributions, and restriction on travel and other expenditures. The reduction in expenses also includes the favorable effect of a stronger U.S. Dollar in 2009 when translating foreign operating expenses for financial reporting purposes.

Operating Income (Loss). The operating loss for the first half of fiscal 2009 was $1.8 million, or 4% of sales and service fees, compared to operating income of $21.1 million, or 18% of sales and service fees, for the prior year period. The reduction in operating income (loss) year-over-year was primarily due to lower demand globally as a result of the worldwide recession, lower sales of VMX machines in the Europe sales region, and global competitive pricing pressures.

Other (Income) Expense, net. The increase in other income of $2.5 million for the first half of fiscal 2009 compared to the same period in fiscal 2008 was primarily due to $2.2 million of net realized gains on hedge contracts closed before maturity due to forecasted reductions in production and sales for the next six months.

Income Taxes. Our provision for income taxes during the first half of fiscal 2009 was $7.6 million lower than in the same period in fiscal 2008 as a result of the decrease in operating income.

LIQUIDITY AND CAPITAL RESOURCES

At April 30, 2009, we had cash of $27.9 million, compared to cash and short term investments of $33.1 million at October 31, 2008. Cash used for operations totaled $893,000 for the quarter ended April 30, 2009 compared to $1.3 million in the prior year period. Cash used for investing activities was $1.6 million for the second fiscal quarter of 2009 compared to cash provided by investing activities of $4.9 million for the prior year period, primarily due to the sale of auction rate securities in the prior year. Approximately 67% of the $27.9 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 $69.5 million at April 30, 2009, compared to $67.1 million at October 31, 2008. The $2.4 million increase in working capital was primarily driven by reduced accounts payable as a result of lower production levels and a reduction in accrued expenses.

We have a number of domestic and international credit facilities, including a $30.0 million unsecured revolving line of credit. As of April 30, 2009, we had no borrowings outstanding under any of these facilities and were in compliance with all terms and conditions, including financial covenants. One of the financial covenants applicable to the $30.0 million credit facility requires us to report consolidated net income of not less than $0 for four consecutive quarters on a rolling basis. If we continue to report losses for the third and fourth quarters of the current fiscal year, we would not be permitted to borrow under our current loan agreement.

We believe our cash resources will 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 and software development costs. We funded these expenditures with cash flow from operations.

As of April 30, 2009, we had no debt under any of our credit facilities.

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

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

NEW ACCOUNTING PRONOUNCEMENTS

There are no recently issued accounting pronouncements that we have yet to adopt that are expected to have a significant effect on our financial position, results of operations, or cash flows.

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 six 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 April 30, 2009, our FIN 48 liabilities were $761,000. 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 of April 30, 2009, we had 51 outstanding third party guarantees totaling approximately $1.9 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 impact of the current global economic recession on demand for our products and our customers' access to credit and ability to pay us for the products they purchase;

· 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.