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 market for machine tools is international in scope. We have both significant foreign sales and foreign manufacturing operations. During fiscal 2008, more than 75% of our revenues were attributable to customers located abroad. That percentage has since decreased to approximately 68%, due primarily to deterioration of the European and Asian markets for machine tool products as a result of the global recession. We sell our products through more than 100 independent agents and distributors in countries throughout North America, Europe and Asia. We also have our own direct sales and service organizations in Canada, China, France, Germany, Italy, Poland, Spain, Singapore, 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 the U.S. Dollar strengthens in value relative to a foreign currency, as has been the case since the beginning of fiscal 2009, sales made, and expenses incurred, in that currency when translated to U.S. Dollars for reporting in our financial statements, are lower than would be the case when the U.S. Dollar is weaker. In our comparison of period-to-period results, we discuss the effect of currency translation on those results.

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 significant growth in our sales and earnings between the beginning of fiscal 2003 and the end of fiscal 2008. The primary drivers of this growth were the strong worldwide demand for machine tools during that period, the expansion of our product line to include higher-price and higher-margin products, increased customer acceptance of our products and the strength of our selling and manufacturing operations outside the United States.

Since the beginning of fiscal 2009, our operating results 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, during the current recession, customers who might otherwise want to purchase capital goods have found it difficult to obtain financing due to disruptions in the credit markets. During fiscal 2009, these conditions have had the greatest impact on our European sales region, the primary market for our more expensive, higher-margin machines. As a result, we experienced overall declines of 62% in sales and 65% in orders during the first three quarters of fiscal 2009 in comparison to the same period of fiscal 2008, and our European sales region experienced declines of 67% in sales and 70% in orders.

In response to these adverse market conditions, 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. Monthly unit production levels for the third and fourth quarters of fiscal 2009 have been reduced by more than 80% from fiscal 2008 levels in an effort to decrease inventories.

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

Sales and Service Fees. Sales and service fees for the third quarter of fiscal 2009 were $19.0 million, a decrease of $38.3 million, or 67%, from the third quarter of fiscal 2008. The drop of third quarter revenues was primarily the result of the adverse impact of the global economic recession on demand for machine tools. A stronger U.S. Dollar when translating foreign sales to U.S. Dollars for financial reporting purposes during the 2009 period accounted for approximately $1.7 million of the decrease.

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

Net Sales and Service Fees by Geographic Region

                         Three months ended July 31,                     Change
                        2009                     2008              Amount          %
North America   $  5,809        30.5 %   $ 10,643        18.6 %   $  (4,834 )     (45.4 )%
Europe            11,777        61.9 %     43,071        75.1 %     (31,294 )     (72.7 )%
Asia Pacific       1,453         7.6 %      3,604         6.3 %      (2,151 )     (59.7 )%
Total           $ 19,039       100.0 %   $ 57,318       100.0 %   $ (38,279 )     (66.8 )%

The decrease in sales was primarily driven by lower volume, particularly for higher priced VMX machines (which are principally marketed in the European sales region), and continued pricing pressures globally. Unit shipments decreased in the North America, Europe and Asia Pacific sales regions by 51%, 68% and 57%, respectively.

Net Sales and Service Fees by Product Category
                                    Three months ended July 31,                         Change
                                 2009                        2008                Amount           %
Computerized Machine
Tools                   $  15,552          81.7 %   $  50,991          89.0 %   $ (35,439 )       (69.5 )%
Service Fees, Parts
and Other                   3,487          18.3 %       6,327          11.0 %      (2,840 )       (44.9 )%
Total                   $  19,039         100.0 %   $  57,318         100.0 %   $ (38,279 )       (66.8 )%

Unit sales of computerized machine tools during the third quarter of fiscal 2009 decreased by 62% from the corresponding period in fiscal 2008.

Orders. New order bookings in the third quarter of fiscal 2009, were $17.9 million, a decrease of $34.5 million, or 66%, compared to the prior year period, while unit orders declined by 63%. Orders in the North America, Europe and Asia Pacific regions decreased $5.4 million, or 50%, $27.3 million, or 71%, and $1.8 million, or 61%, respectively. The impact of currency translation on new orders booked in the third quarter was consistent with the impact on sales.

Gross Profit. Gross margin for the third quarter of fiscal 2009 was 28%, compared to 36% for the 2008 period. The decrease in margin as a percentage of sales was primarily due to lower sales of higher-margin VMX machines in the European sales region, the impact of fixed costs on lower sales volume, and competitive pricing pressures on a global basis.

Operating Expenses. Selling, general and administrative expenses were $7.2 million, a decrease of $4.6 million, or 39%, 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 to U.S. Dollars for financial reporting purposes.

Operating Income (Loss). The operating loss for the third quarter of fiscal 2009 was $1.9 million compared to operating income of $9.1 million for the prior year period. The reduction in operating income year-over-year was primarily due to the reduction in sales, primarily those for the higher-margin VMX machines in the European sales region, and global competitive pricing pressures.

Other (Income) Expense, net. The increase in other income of $0.6 million was primarily due to net realized gains on hedge contracts closed before maturity due to forecasted reductions in production and sales, and unrealized gains from foreign currency fluctuations on payables and receivables, net of foreign currency forward exchange contracts. These net gains were partially offset by a loss in our equity investment of an affiliated Taiwan contract manufacturer.

Income Taxes. Our effective tax rate for the third quarter of fiscal 2009 was 31% in comparison to 34% for the same period in fiscal 2008. Our provision for income taxes during the third quarter of fiscal 2009 was approximately $3.5 million lower than in the same period in fiscal 2008 as a result of the decrease in operating income before income taxes.

Nine months Ended July 31, 2009 Compared to Nine months Ended July 31, 2008

Sales and Service Fees. Sales and service fees for the first nine months of fiscal 2009 were $67.8 million, a decrease of $108.7 million, or 62%, over the first nine months of fiscal 2008. The decrease in sales and service fees was primarily the result of the adverse impact of the current global recession on demand for machine tools. A stronger U.S. Dollar when translating foreign sales to U.S. Dollars for financial reporting purposes during the 2009 period accounted for approximately $7.9 million of the decrease.

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

Net Sales and Service Fees by Geographic Region

                          Nine months ended July 31,                       Change
                        2009                     2008                Amount          %
North America   $ 21,618        31.9 %   $  35,427        20.1 %   $  (13,809 )     (39.0 )%
Europe            42,879        63.2 %     130,776        74.1 %      (87,897 )     (67.2 )%
Asia Pacific       3,338         4.9 %      10,323         5.8 %       (6,985 )     (67.7 )%
Total           $ 67,835       100.0 %   $ 176,526       100.0 %   $ (108,691 )     (61.6 )%

The decrease in sales was primarily driven by lower volume, particularly for higher priced VMX machines (which are principally marketed in the European sales region), and continued pricing pressures globally.

Net Sales and Service Fees by Product Category
                                    Nine months ended July 31,                           Change
                                 2009                        2008                 Amount           %

Computerized Machine
Tools                   $  56,019          82.6 %   $ 157,977          89.5 %   $ (101,958 )       (64.5 )%
Service Fees, Parts
and Other                  11,816          17.4 %      18,549          10.5 %       (6,733 )       (36.3 )%
Total                   $  67,835         100.0 %   $ 176,526         100.0 %   $ (108,691 )       (61.6 )%

Unit sales of computerized machine tools during the first nine months of fiscal 2009 decreased by 58% from the corresponding period in fiscal 2008.

Orders. New order bookings in the first nine months of fiscal 2009, were $60.6 million, a decrease of $111.9 million, or 65%, over the prior year period. Of that decrease, North America, Europe, and Asia Pacific orders decreased $15.3 million, or 45%, $89.6 million, or 70%, and $7.1 million, or 72%, respectively.

Gross Profit. Gross margin for the first nine months of fiscal 2009 was 28%, compared to 37% for the 2008 period. The decrease in margin as a percentage of sales was primarily due to a lower sales of higher-margin VMX machines in the European sales region, the impact of fixed costs on lower sales volume, and global competitive pricing pressures.

Operating Expenses. Selling, general and administrative expenses were $22.7 million for the first nine months of fiscal 2009, a reduction of $13.1 million, or 37%, from the 2008 period, reflecting various initiatives to reduce expenses that have included management and employee pay reductions, workforce reductions, the suspension of corporate 401K matching contributions, and restriction of travel and other expenditures. The reduction in expenses also included the favorable effect of a stronger U.S. Dollar in 2009 when translating foreign operating expenses to U.S. Dollars for financial reporting purposes.

Operating Income (Loss). The operating loss for the first nine months of fiscal 2009 was $3.7 million compared to operating income of $30.2 million, for the prior year period. The reduction in operating income (loss) year-over-year was primarily due the reduction in sales, primarily those for higher-margin VMX machines in the European sales region, and global competitive pricing pressures.

Other (Income) Expense, net. The increase in other income of $3.1 million was primarily due to net realized gains on hedge contracts closed before maturity due to forecasted reductions in production and sales, and unrealized gains from foreign currency fluctuations on payables and receivables, net of foreign currency forward exchange contracts. These net gains were partially offset by a loss in our equity investment of an affiliated Taiwan contract manufacturer.

Income Taxes. Our provision for income taxes during the first nine months of fiscal 2009 was $11.1 million lower than in the same period in fiscal 2008 as a result of the decrease in operating income before income taxes.

LIQUIDITY AND CAPITAL RESOURCES

At July 31, 2009, we had cash of $26.7 million, compared to cash and short term investments of $33.1 million at October 31, 2008. Approximately 66% of the $26.7 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 $70.5 million at July 31, 2009, compared to $67.1 million at October 31, 2008. The $3.4 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 July 31, 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 fourth quarter of the current fiscal year, we would not be permitted to borrow under our 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 minimize losses and sustain cash flow during these current economic conditions we have significantly reduced our production levels, eliminated overtime, reduced our work force, eliminated hiring and salary increases and reduced pay for 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.

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

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

NEW ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS 141R"), which is a revision of SFAS No. 141 "Business Combinations." SFAS 141R changes the way in which we will account for business combinations as it introduces new purchase accounting concepts, expands the use of fair value accounting related to business combinations and changes the subsequent period accounting for certain acquired assets and liabilities, and among other things, includes a substantial number of new disclosure requirements. SFAS 141R will be applied prospectively on business combinations with acquisition dates in fiscal years beginning on or after December 15, 2008. SFAS 141R may have a material impact on future acquisitions.

In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51" ("SFAS 160"). SFAS 160 changes the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity. SFAS 160 requires retroactive adoption of the presentation and disclosure requirements for existing minority interests. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. We do not expect that the adoption of SFAS No. 160 will have a material impact on our consolidated financial statements or results of operations.

In April 2009, the FASB issued FASB Staff Position (FSP) FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments," which amends SFAS No. 107, "Disclosures about Fair Value of Financial Instruments" and Accounting Principles Board (APB) Opinion No. 28, "Interim Financial Reporting". The FSP requires the SFAS No. 107 disclosures about the fair value of financial instruments to be presented in interim financial statements in addition to annual financial statements. The FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009. The adoption of the FSP does not impact on our consolidated financial statements 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 nine 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 July 31, 2009, our FIN 48 liabilities were $629,000. 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 July 31, 2009, we had 56 outstanding third party guarantees totaling approximately $2.5 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 accrue for potential liabilities under these guarantees when we believe a loss is probable and can be estimated. The accrual recorded at July 31, 2009 and October 31, 2008 was not material.

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.