NATIONAL INSTRUMENTS CORP /DE/ - 10-K Annual Report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)
|X| Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For the fiscal year ended: December 31, 2000

OR

|_| Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934

For the transition period from ____________ to ____________

Commission File Number 0-25426

NATIONAL INSTRUMENTS CORPORATION
(Exact name of registrant as specified in its charter)

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Delaware 74-1871327
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
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11500 North Mopac Expressway
Austin, Texas 78759
(address of principal executive (zip code)
offices)
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Registrant's telephone number, including area code: (512) 338-9119
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Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)

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. [ ]

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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .

The aggregate market value of voting stock held by non-affiliates of the
registrant at the close of business on February 2, 2001, was $1,483,331,318
based upon the last sales price reported for such date on the NASDAQ National
Market System. For purposes of this disclosure, shares of Common Stock held by
persons who hold more than 5% of the outstanding shares of Common Stock and
shares held by officers and directors of the registrant as of December 31, 2000
have been excluded in that such persons may be deemed to be affiliates. This
determination is not necessarily conclusive.

At the close of business on February 2, 2001, registrant had outstanding
50,690,054 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

Part I and Part III incorporate certain information by reference from the
definitive proxy statement for the Annual Meeting of Stockholders to be held on
May 8, 2001 (the "Proxy Statement").

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PART I

Certain information required by Part III is omitted from this Report in
that the Registrant intends to file a definitive proxy statement pursuant to
Regulation 14A with the Securities and Exchange Commission (the "Proxy
Statement") relating to its annual meeting of stockholders not later than 120
days after the end of the fiscal year covered by this Report, and such
information is incorporated by reference herein.

ITEM 1. BUSINESS

National Instruments Corporation (the "Company" or "National Instruments")
is a leading supplier of measurement and automation products that engineers and
scientists use in a wide range of industries. These industries are spread across
a large and diverse market for test and measurement ("T&M") and industrial
automation ("IA") applications. The Company provides flexible application
software and modular, multifunction hardware that users combine with
industry-standard computers, networks and the Internet to create measurement and
automation systems, which the Company also refers to as "virtual instruments."

A virtual instrument is a user-defined measurement and automation system
that consists of an industry standard computer or workstation equipped with the
Company's user-friendly application software, cost-effective hardware and driver
software. Virtual instrumentation represents a fundamental shift from
traditional hardware-centered instrumentation systems to software-centered
systems that exploit the computational, display, productivity and connectivity
capabilities of computers, networks and the Internet. Because virtual
instruments exploit these computation, connectivity, and display capabilities,
users can define and change the functionality of their instruments, rather than
being restricted by fixed-functions imposed by traditional instrument vendors.
The Company's products empower users to monitor and control traditional
instruments, create innovative computer-based systems that can replace
traditional instruments at a lower cost, and develop systems that integrate
measurement functionality with industrial automation. The Company believes that
giving users flexibility to create their own user-defined virtual instruments
for an increasing number of applications in a wide variety of industries, and
letting users leverage the latest technologies from computers, networking and
communications shortens system development time and reduces both short- and
long-term costs of developing, owning and operating measurement and automation
systems, and improves efficiency and precision of applications spanning
research, design, production and service.

The Company is based in Austin, Texas and was incorporated under the laws
of the State of Texas in May 1976 and was reincorporated in Delaware in June
1994. On March 13, 1995, the Company completed an initial public offering of
shares of its Common Stock. The Company's Common Stock, $0.01 par value, is
quoted on the NASDAQ National Market System under the trading symbol NATI.

Industry Background

Engineers and scientists have long used instruments to observe, better
understand and manage the real-world phenomena, events and processes related to
their industries or areas of expertise. Instruments measure and control
electrical signals, such as voltage, current and power, and physical phenomena,
such as temperature, pressure, speed, flow, volume, torque and vibration. Common
instruments include voltmeters, signal generators, oscilloscopes, dataloggers,
spectrum analyzers, cameras, and temperature and pressure monitors and
controllers. Instruments generally perform three basic functions: data
acquisition and control; data analysis; and presentation of results. Instruments
are used pervasively in research, education, manufacturing and service
applications in numerous fields including electronics, automotive, aerospace,
telecommunications, medical research and pharmaceutical, semiconductor and
petrochemical.

Instruments and systems are used to facilitate research as well as product
design, production and service. In research and development settings, scientists
and engineers use instruments and systems to collect and analyze experimental
data and simulate manufacturing processes or techniques. In manufacturing
environments, engineers use instruments and systems to test and verify the
proper operation of the products being manufactured and to monitor and control
the manufacturing machines and processes. In service contexts, instruments and
systems are used to monitor, troubleshoot and repair products and processes.

Traditional Instrument Applications for Measurement and Automation

Instrument applications can be generally categorized as either T&M or IA.
T&M applications generally involve testing during the design, manufacture and
service of a wide variety of products. IA applications generally involve
automating the machinery and processes used in the production and distribution
of a wide variety of products and materials.

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A typical T&M instrument is a stand-alone unit that has input, output and
analysis capabilities; knobs, switches and push buttons for user operation; and
gauges, meters or other displays for visual data presentation. Traditionally,
most T&M instruments were vendor-defined, fixed-function devices designed to
address specific applications. As a result, users had limited flexibility to
adapt their instruments to changing requirements. In the 1960's, vendors began
to incorporate integrated circuits, including programmable microcontrollers, to
increase instrument flexibility. In the mid-1970's, the General Purpose
Interface Bus ("GPIB" or "IEEE 488") was developed as a standard interface to
connect instruments to external computers. The first computer controllers for
GPIB instruments were based on proprietary hardware architectures. In the later
1970's, some minicomputers with general purpose but complex operating systems
were equipped for GPIB instrument control. In the early 1980's, personal
computers with limited processing power equipped with MS-DOS, a standard,
character-based operating system, began replacing minicomputers as the preferred
platforms for instrument control applications. In the 1990s, personal computers
with Windows operating systems and graphics-based application software grew in
popularity and became the dominant platforms for instrument control
applications. In the late 1990s, connectivity to the Internet and the ability
for personal computers to integrate and share data throughout the enterprise
further increased the popularity and use of PC-based instrumentation systems,
and new web-enabled tools enabled users to begin to easily leverage the internet
for networked and distributed measurement applications.

IA systems have long included mechanical devices, analog gauges and
meters, and since the 1960's, have also included electronic instruments such as
data loggers and strip chart recorders. In the 1970's, programmable logic
controllers ("PLCs"), special-purpose, proprietary stand-alone industrial
computers, were introduced and were used primarily for "discrete" manufacturing
applications such as automobile assembly. PLCs have traditionally had primitive
operator interface panels incorporating buttons, lights and indicators. In
parallel, sophisticated instrumentation systems called distributed control
systems ("DCSs") were also adopted to provide computer control of large-scale
continuous processes, such as those found in oil refineries. DCSs integrated a
variety of sensors and control elements using both analog and digital
connections, all controlled by a central computer running proprietary software.
In the mid-1980's, another approach became available when industrial PC-based IA
systems came into use. These early PC-based systems generally ran proprietary,
vendor-defined software and incorporated plug-in data acquisition boards or
interfaced to PLCs. In the 1990's, Ethernet networks grew in popularity as a
standard for connectivity between IA devices, instruments, and systems, and
personal computers with high-speed processors running Windows based operating
systems. In addition, graphics-based application software grew in popularity as
platforms for supervision and control of IA systems and applications. Finally,
just as in T&M applications, in the late 1990's connectivity to the internet
enabled users to leverage networked applications via the internet.

Limitations of Traditional Approaches to Instrumentation

Instruments and systems for both T&M and IA applications have historically
shared common limitations, including: fixed, vendor-defined functionality;
proprietary, closed architectures that were generally difficult to program and
integrate with other systems; and inflexible operator interfaces that were
usually cumbersome to operate and change. These problems have been further
complicated in IA applications because specialized data transfer and
communications standards have not evolved rapidly or been widely adopted. For
example, PLCs, while greatly improving control of individual processes, created
multiple "islands of information" that were generally unable to communicate or
share data with other systems throughout the manufacturing enterprise.
Furthermore, proprietary instrumentation systems have traditionally been very
expensive, with IA system prices ranging as high as several million dollars and
T&M instrumentation system prices often ranging in the hundreds of thousands of
dollars. In addition, the limitations on programmability of traditional systems
means that adopting these systems to changing requirements is both expensive and
time consuming, and users are often required to purchase multiple single-purpose
instruments.

Although desktop computers in the 1980's typically were based on open
architectures, until the 1990's they lacked higher-level application software
development tools and intuitive graphical user interfaces ("GUIs").
Consequently, the process of creating intuitive operator interface and control
panels was difficult and expensive. These early desktop computers also lacked
the power to rapidly process and analyze the volume of data characteristic of
many high data rate T&M and IA applications. In addition, desktop computers were
difficult to network reliably until standard network operating systems evolved
late in the decade. For all of these reasons, users and vendors were relatively
slow to incorporate desktop computers in their instrumentation systems.

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In the 1990's, desktop and portable computers improved significantly in
data and graphics processing power, storage, communication, and networking
capabilities, user-friendliness and reliability. Nevertheless, users accustomed
to the flexibility, efficiency, power and open architecture of these
later-generation computers, and the highly evolved application software
available for business computing needs, have been generally frustrated in their
efforts to integrate these computers into measurement and automation solutions.
Standard desktop computers were not equipped with the hardware connections
required to control many types of instruments and lacked
instrumentation-specific application development tools, including GUI
development environments. Neither standard programming languages such as C/ C++
and Visual Basic, nor operating systems such as Windows, Linux and UNIX, are
"measurement aware." Without the aid of instrumentation-specific software to
facilitate the integration of various instrumentation system capabilities and
components, engineers and scientists could not easily utilize the full potential
of computers, networks and the Internet to meet their measurement and automation
requirements.

The Company's Approach to Measurement and Automation

The Company pioneered a new computer-based approach to measurement and
automation called virtual instrumentation in 1986 when it introduced its LabVIEW
application software, which is a graphical programming environment that empowers
users to easily build their own computer-based instruments and systems to meet
their specific measurement and automation needs. While a traditional instrument
bundles the data acquisition, analysis and presentation functions in a single,
stand-alone unit, "virtual instrument" system consists of industry standard
computers or workstations equipped with the Company's user-friendly application
software, cost-effective hardware and driver software that together perform the
functions of instruments. By unbundling the key instrumentation functions,
virtual instruments represent a fundamental shift from hardware-centered
instrumentation systems to software-centered systems that exploit the
computational, display, productivity and connectivity capabilities of computers,
networks and the Internet. The Company's application software products give
users the power and flexibility to define, implement, modify and control the
core data acquisition, analysis, and presentation functions of instruments with
their computer. Users can mix and match their choice of the Company's DAQ, GPIB,
VXI, PXI, image acquisition, motion control or industrial communications
products to create virtual instrumentation systems that meet their specific
instrumentation needs. The Company's products empower users to monitor and
control instruments, create innovative computer-based systems that can replace
instruments at a lower cost, and integrate measurement functionality with
industrial automation and standard network connectivity to improve efficiency
and precision of applications spanning research, design, production and service.
Because much of the instrumentation functionality resides in the software, in a
significant sense, the software is the instrument.

User Benefits

Compared with traditional solutions, the Company believes its products and
computer-based, virtual instrumentation approach provide the following
significant customer benefits:

Performance, Ease-of-Use and Efficiency

The Company's virtual instrument application software brings the power and
ease-of-use of computers, networks and the Internet to the instrumentation
market. With features such as graphical programming, automatic code generation
capabilities, graphical tools libraries, ready-to-use example programs and
libraries of specific instrumentation functions, users can quickly build a
virtual instrument system that meets their individual application needs. For
example, a user may build the data acquisition and analysis functions of an
instrument by selecting and connecting icons representing particular
instrumentation functions and may customize the display on the computer's
monitor to reflect the desired presentation. With faster time to solution, users
have more time to optimize system functionality and performance, and can devote
more time to their core work rather than to programming instruments. In
addition, the continuous improvement in performance of PCs and the Internet,
which are the core platform for the Company's approach, result in direct
performance benefits for virtual instrument users in the form of faster
execution for software-based measurement and automation applications, resulting
in shorter test times and faster automation, and higher manufacturing
throughput.

Modularity, Reusability and Reconfigurability

The Company's products include reusable hardware and software modules that
offer considerable flexibility in configuring systems. This ability to reuse and
reconfigure instrument systems allows users to reduce development time and
maximize efficiency by eliminating duplicated programming efforts and to quickly
adapt their instruments to new and changing needs. In addition, these features
help protect both hardware and software investments against obsolescence.

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Mix and Match Capabilities

The flexibility of the Company's virtual instrumentation approach permits
users to mix and match many combinations of GPIB, VXI, DAQ, PXI, image
acquisition, motion control and industrial communications products to build
customized measurement and automation solutions. The Company's open product
architecture provides a high level of integration between the Company's products
and other industry standard instrumentation products. This approach provides
users with the flexibility to mix and match the Company's and third-party
hardware components when developing custom virtual instrumentation systems.

Long-Term Compatibility Across Multiple Computer Platforms

The Company offers a variety of multi-platform software products so users
can choose the platform and programming methodology that best meets their needs
and skills. These software products also have portable, open architectures so
users can move their applications among multiple platforms and operating
systems. In addition, the Company strives to ensure long-term compatibility
between its products and the latest industry-standard computers, operating
systems, programming languages and tools, as well as backward compatibility with
its own product offerings.

Network and Integrate with Customers' Computing Environments

The Company's products facilitate connectivity of measurement and
automation systems with the enterprise by utilizing industry communication
standards such as the Web, Ethernet and TCP/IP. The Company's products provide
integrated Web support, data and file transfer between computers, distributed
access to databases and remote test and measurement and process monitoring
capabilities. In addition, the Company's products are also compatible with a
wide variety of familiar, easy-to-use software applications such as word
processors, spreadsheets, Web browsers, and databases. In many cases, a single
computer or workstation can serve both the instrumentation and general purpose
computing needs of scientists and engineers.

Large User Base

The Company supports and encourages the sharing of ideas, derived software
libraries and modules among its broad user base through its NI.com Web site,
user groups, newsletters, conferences and seminars. This large base of users
stimulates the expansion of the Company's network of approximately 600 third
party system integrators and consultants, who can save users time and money by
providing value-added expertise, software programs and integration of systems
for use with the Company's products.

Lower Total Solution Cost

The Company believes that its products and solutions offer
price/performance advantages over traditional instrumentation. Virtual
instrumentation provides users the ability to utilize industry standard
computers and workstations equipped with modular and reusable application
software, cost-effective hardware and driver software that together perform the
instrumentation functions that would otherwise be performed by costly,
proprietary instrumentation systems. In addition, virtual instrumentation gives
users the flexibility and portability to adapt to changing needs, whereas
traditional closed systems are both expensive and time consuming to adapt, if
adaptable at all.

Strategy

The Company's objective is to be a leading supplier of measurement and
automation products and solutions to engineers, scientists and others in both
T&M and IA applications. To achieve this objective, the Company is pursuing a
strategy that includes the following elements:

Expand Broad Customer Base

Serve A Large and Diverse Market. The Company's products and services are
designed to serve a broad customer base across many industries. The Company
defines product features and capabilities by working closely with technically
sophisticated customers and seeks to achieve high unit volumes by selling these
same products to a large base of customers with diverse measurement and
automation needs.

Support Many Computer and Instrument Options. The Company diversifies its
customer base by accommodating many popular computer platforms and a variety of
instrumentation options. In addition, the Company expects to continue to create
or adapt products for computer systems and instrumentation options that gain
market acceptance. Customers are provided a range of price/performance options
through the Company's extensive line of products.

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Provide Worldwide Marketing and Distribution. The Company uses multiple
coordinated distribution channels in its major world markets. The Company
devotes significant resources to direct sales activities in the United States
and in key international markets. In addition to its direct sales channel, the
Company's other distribution channels include distributors, OEMs, VARs and
systems integrators and consultants. By using this broad range of channels, the
Company seeks to develop and maintain relations with its customers and prospects
and to provide the levels of support, training and education required by the
market. To address the range of sales opportunities, the Company expects to
continue to pursue value-added sales channels through formal relationships with
OEMs, VARs, consultants or other third parties when such relationships can add
significant value to its products or revenues. The Company intends to expand
each of these distribution networks to take advantage of market opportunities.

Acquire New Technologies. The Company has in the past acquired companies,
products, and technologies to augment its product offerings, and intends to
continue to seek opportunities to satisfy customer needs and build market
penetration through acquisitions of new products and technologies in the future.
In connection with these acquisitions, the Company has leveraged its established
sales channels in an effort to accelerate the delivery of the acquired product
to the market and build market share.

Target Academic Environments. The Company markets and sells its products
to colleges and universities, increasing the potential for future growth as
students gain experience using the Company's products before entering the work
force.

Maintain High Levels of Customer Satisfaction

Offer Innovative Modular and Integrated Solutions. The Company intends to
continue to deliver innovative, modular software and hardware tools with open,
portable architectures that can be easily integrated to create instrumentation
systems and solutions. The Company solicits regular feedback from its customers,
resulting in the addition of new product features and enhanced performance, to
help ensure that existing and new products meet or surpass customer
expectations.

Provide Global Customer Support and Education. The Company's sales and
marketing engineers have the technical expertise necessary to understand
customers' instrumentation application needs and work with them to identify
cost-effective solutions using the virtual instrumentation approach. The Company
also offers comprehensive customer support, including technical support via the
NI.com Web site, electronic mail, bulletin boards, fax and telephone,
newsletters, warranty service and repair, upgrade programs, free and paid
seminars and technical classes. In 2000 the Company continued to invest heavily
to leverage the Web for customer support. Through the Company's NI.com Web site,
customers have access to a growing range of support options to solve their own
problems directly over the Web, including software downloads, upgrades and bug
fixes, automated product configuration tools, knowledge databases of common
questions and answers, online seminars, and discussion forums.

Deliver Long-Term Compatibility. The Company emphasizes consistency in the
implementation of its products across different platforms and strives to
maintain a high degree of backward compatibility between existing and new
products, engendering a high degree of customer loyalty.

Leverage External and Internal Technology

Leverage Generally Available Technology. The Company leverages the
research and development efforts of vendors of personal computers and
workstations, operating systems, programming languages and software development
tools, and their suppliers. By integrating Web, networking and communications
capabilities directly in its software and hardware products, the Company's
products allow users of its virtual instrument approach to easily distribute
measurement and automation capabilities throughout factories and around the
world, easily integrate measurement and automation data throughout their
organization and across the enterprise and achieve advanced solutions at a lower
development cost.

Support Open Architecture on Multiple Platforms. The Company approaches
the market with an open architecture so users have the flexibility to combine
the Company's products with those from instrument suppliers, computer vendors
and competitors.

Leverage Core Technologies. The Company designs proprietary ASICs to
optimize performance and reduce production costs. The Company utilizes these
ASICs and its other internally developed hardware and software components in
multiple products to achieve consistency and compatibility between products.

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Develop and Support Industry Standards. The Company actively participates
in efforts to standardize key technologies by participating in industry
consortia and serving on standards committees, such as IEEE 488, VXI, Compact
PCI, PXI, PICmg, the Interchangeable Virtual Instrumentation Foundation, also
called IVI, Foundation Fieldbus, OPC, and ASAM, a new automotive measurement
standard. The Company's ongoing strategy is to conform its products to
established and emerging standards in both the general computer and the
instrumentation industries.

Products and Technology

The Company offers an extensive line of measurement and automation
products. Engineers, scientists and other users involved in T&M and IA
applications can use these products with computers, networks and the Internet to
develop customer-defined virtual instrument solutions. The Company's products
consist of application software, and hardware components together with related
driver software. In T&M applications, the Company's products can be used to
monitor and control traditional instruments or to create computer-based
instruments that can replace the traditional instruments. In IA applications,
the Company's products can be used in the same ways as in T&M and can also be
used to integrate measurement functionality with process automation
capabilities. The Company's products are designed to work either in an
integrated solution or separately. The Company believes that the flexibility,
functionality and ease of use of its application software promotes sales of the
Company's other software and hardware products.

Application Software

The Company believes that application software is playing an increasingly
important role in the development of computer-based instruments and systems in
measurement and automation applications. The Company's application software
products leverage the increasing capability of computers, networks and the
Internet for data analysis, connectivity and presentation power to bring
increasing efficiency and precision to measurement and automation applications.
The Company's application software products include LabVIEW, Measurement Studio,
Lookout, Measure, Virtual Bench, TestStand, DIAdem and DASYLab. The Company's
application software products are integrated with the Company's hardware/driver
software.

The Company offers a variety of software products for developing
measurement and automation applications to meet the different programming and
computer preferences of its customers. LabVIEW and Measurement Studio are
programming environments with which users can develop GUIs, control instruments
and acquire, analyze and present data. With these software products, users can
design custom virtual instruments by creating a GUI on the computer screen
through which they operate the actual program and control selected hardware.
Users can customize front panels with knobs, buttons, dials and graphs to
emulate control panels of instruments or add custom graphics to visually
represent the control and operation of processes. LabVIEW and Measurement Studio
also have ready-to-use libraries for controlling hundreds of programmable
instruments, including serial, GPIB and VXI, the Company's plug-in DAQ boards
and PXI/PCI computer-based instruments. Once created, virtual instruments can be
modified or used as components of another program by the original developer or
another user.

The principal difference between LabVIEW and Measurement Studio is in the
way users develop programs. With LabVIEW, users program graphically, developing
application programs by connecting icons to create "block diagrams" which are
natural design notations for scientists and engineers. With Measurement Studio,
a software package which upgraded and replaced LabWindows/CVI and
ComponentWorks, users may program with the conventional, text-based language of
C. Measurement Studio also includes application-specific OLE or ActiveX controls
and libraries to the Microsoft Visual Basic, Visual C++ and Borland Delphi
development environments.

The latest revisions of LabVIEW and Measurement Studio software packages
feature enhanced capabilities to allow users to more easily integrate the Web
into their computer-based instrumentation applications. In 2000, the Company
introduced a version of LabVIEW -- LabVIEW 6i. LabVIEW 6i allows the customer to
easily communicate, share and control measurement and automation systems and
information with anyone on the Web, and customers can use the Internet and
Intranets to build distributed, networked systems throughout their enterprise.
In addition, in 2000 the Company expanded the capabilities of its LabVIEW Real
Time software product to include support for the PXI hardware platform to allow
users who have exceptional response requirements to reliably execute an expanded
range of system-level applications even if the PC operating system crashes -
solving a key objection some potential users have had in the past to using PC
technology for embedded devices or for mission critical measurement and
automation applications, and extending the range of applications for
computer-based measurement and automation.

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The Company also sells a range of optional add-on products for LabVIEW and
Measurement Studio, such as advanced analysis libraries, database tools and
Internet integration. In 2000, the Company also introduced the LabVIEW
Datalogging and Supervisory Control Module, an add-on module for high channel
count applications in research and development and manufacturing.

The Company's instrumentation software products also include DASYLab and
DIAdem. DASYLab is a schematic environment by which users can quickly configure
simple DAQ applications using both the Company's and third-party DAQ boards. In
1999, the Company added DIAdem to its line of instrumentation software products.
DIAdem is an easy to use, rapid development environment for data acquisition,
monitoring, visualization, open and closed loop control, analysis, automation
and documentation. DIAdem features extensive off-line analysis capabilities,
including analysis functions specific to automotive test.

The Company also offers a software product called TestStand targeted for
T&M applications in a manufacturing environment. TestStand is a test management
environment for organizing, controlling, and running automated production test
systems on the factory floor. It also generates customized test reports and
integrates product and test data across the customers' enterprise and across the
Internet. TestStand manages tests that are written in LabVIEW and Measurement
Studio, C and C++, and VisualBasic, so test engineers can easily share and
re-use test code throughout their organization and from one product to the next.
TestStand is a key element of the Company's strategy to broaden the reach of its
application software products across the corporate enterprise.

The Company's Lookout software product is targeted specifically for IA
applications. Lookout is a non-programming solution. Lookout is a human machine
interface/supervisory control and data acquisition ("HMI/SCADA") software
product that requires no programming or script writing. Lookout provides a
scalable architecture for applications ranging from HMIs to large, sophisticated
SCADA applications.

Hardware Products and Related Driver Software

The Company's hardware and related driver software products include GPIB,
VXI, DAQ, PXI, image acquisition, motion control, and industrial communications.
The Company believes it can deliver significant cost/performance benefits to
users and clearly distinguish its products from competitive products by
designing proprietary ASICs for use in its hardware products. Software drivers
are necessary to link hardware to the operating system and the Company's
application software. The high level of integration between the Company's
products provides users with the flexibility to mix and match hardware
components when developing custom virtual instrumentation systems.

GPIB Interfaces/Driver Software. GPIB, also known as the IEEE 488
standard, has existed since 1975 and defines the protocol for transferring data
between certain instruments and computers over an industry-standard cable. The
computer must be equipped with a GPIB interface. Driver software controls the
interface and the transfer of data between the instrument and the computer. GPIB
is largely used in T&M applications.

The Company began selling GPIB products in 1977 and is a leading supplier
of GPIB interface boards and driver software to control traditional GPIB
instruments. These traditional instruments are manufactured by a variety of
third-party vendors and are used primarily in T&M applications. The Company's
diverse portfolio of hardware and software products for GPIB instrument control
is available for a wide range of computers, workstations and minicomputers. The
Company's GPIB product line also includes products for portable computers such
as a PCMCIA-GPIB interface card, and products for controlling GPIB instruments
using the computer's standard parallel USB, IEEE 1394 (Firewire) and Ethernet
ports.

Portability of GPIB application programs is provided by the Company's
NI-488.2 driver software, considered a de facto industry standard, and NI-VISA
driver software. The Company offers networking capabilities through its GPIB
products. With these products, users can communicate with and control GPIB
instruments from any point on an Ethernet-based TCP/IP network. The Company also
offers a variety of GPIB support products, including converters, expanders,
extenders, data buffers and GPIB system analyzers as well as cables and other
accessories.

VXI Modules/Driver Software. VXI is an industry standard high-end
instrumentation platform developed in 1987 through an industry consortium to
take advantage of the computation, connectivity and display capabilities of
desktop computers and workstations. With VXI, the physical size of multiple
instrument systems can be decreased and communication between instruments and
computers can be dramatically improved. Like GPIB, VXI is supported by a variety
of traditional third-party instrument manufacturers and is largely used in T&M
applications.

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VXI instruments are modular in design and can be inserted into an
industry-standard chassis. Unlike GPIB instruments, VXI modules do not have a
front panel for manual operation or visual data presentation. Therefore,
software is necessary for users to create, define the functionality of and
operate VXI instrumentation systems. Today, VXI is being used primarily to
supplement or replace high-end GPIB products in T&M applications.

The Company is a leading supplier of VXI computer controller hardware and
the accompanying NI-VXI and NI-VISA driver software. The Company also offers a
variety of VXI DAQ modules with NI-DAQ driver software, as well as LabVIEW,
Measurement Studio and TestStand software products for VXI systems.

DAQ Hardware/Driver Software. DAQ hardware and driver software products
are "instruments on a board" that users can combine with sensors, signal
conditioning hardware and software to acquire analog data and convert it into a
digital format that can be accepted by a computer. The Company believes that
computer-based DAQ products are typically a lower-cost solution than traditional
instrumentation.

The Company believes that applications suitable for automation with
computer-based DAQ products are widespread throughout many industries, and that
many systems currently using traditional instrumentation (either manual or
computer-controlled) could be displaced by computer-based DAQ systems. The
Company offers a range of computer-based DAQ products, including models for
digital, analog and timing input-output, and for transferring data directly to a
computer's random-access memory.

The Company's DAQ products provide a range of price/performance options,
and include products for high-speed applications such as on-line monitoring and
control as well as products designed for long-term recording of slowly changing
data such as temperatures. The Company also offers products with features
comparable to stand-alone traditional instruments such as oscilloscopes, DMMs,
and function and arbitrary waveform generators. The Company offers DAQ
hardware/driver software products for numerous desktop and notebook computers.
The Company also offers SCXI (signal conditioning extensions for
instrumentation) hardware, which expands the types and quantity of sensors that
can be connected to the Company's data acquisition boards.

PXI Modular Instrumentation. The Company's PXI modular instrument
platform, which was introduced in 1997, is a desktop PC packaged in a small,
rugged form factor with expansion slots and instrumentation extensions. It
combines mainstream PC software and PCI hardware with advanced instrumentation
capabilities designed in the VXI architecture. In essence, PXI is an
instrumentation PC with plenty of expansion slots to enable the company to
pursue complete system-level opportunities and deliver a much higher percentage
of the overall system content using the company's own products. PXI delivers
many of the benefits of VXI in a much smaller package and at lower prices. The
Company continues to expand its PXI product offerings with new modules, which
address a wide variety of measurement and automation applications. Also, PXI
continues to gain acceptance as an open industry standard, with endorsements
from over 50 suppliers.

Machine Vision/Image Acquisition. In late 1996, the Company introduced its
first image acquisition hardware. With the advanced technologies in personal
computers and the Company's vision products, it is cost-effective for end-users
to integrate vision into their measurement and automation applications. The
Company's vision software is designed to work with many different environments,
including LabVIEW and Measurement Studio. Image acquisition is commonly used in
applications for quality control of manufactured products.

Motion Control. During 1997, the Company acquired technologies and assets
that resulted in the addition of a line of motion control hardware, software and
peripheral products. This intelligent PC-based motion control hardware is
programmable from industry standard development environments including LabVIEW
and Measurement Studio. The Company's software tools for motion are easily
integrated with the Company's other product lines, allowing motion to be
combined with image acquisition, test, measurement, data acquisition and
automation. As in many areas, motion control is moving to PC-based systems and
the motion products allow users to leverage standard hardware and software in
measurement and automation applications to create robust, flexible solutions.

Industrial Communications Interfaces. In mid-1995, the Company began
shipping its first interface boards for communicating with serial devices, such
as dataloggers and PLCs targeted for IA applications, and benchtop instruments,
such as oscilloscopes, targeted for T&M applications. Industrial applications
need the same high-quality, easy-to-use hardware and software tools for
communicating with industrial devices such as process instrumentation, PLCs,
single-loop controllers, and a variety of I/O and DAQ devices. National
Instruments offers three hardware and driver software product lines for
communication with industrial devices -- Controller Area Network (CAN),
Foundation Fieldbus, and RS-485 and RS-232. The Company's industrial
communication products are designed to work with standard serial software
drivers, and Windows versions of LabVIEW and Measurement Studio.

-10-

Distributed Input/Output Hardware/Software. The Company introduced its
FieldPoint product for distributed I/O applications in mid-1997. FieldPoint is
an intelligent, distributed, and modular I/O system that gives industrial system
developers an economical solution for distributed data acquisition, monitoring
and control applications. The FieldPoint system includes isolated analog and
digital I/O modules, terminal base options, and network modules. FieldPoint
software includes a server that provides seamless integration into the LabVIEW
Datalogging and Supervisory Control Module, driver libraries for support under
LabVIEW, Measurement Studio and Lookout, and an OPC server that provides wide
compatibility of FieldPoint hardware with other industrial automation software
packages.

Customer Training Courses

The Company offers fee-based training classes and self-paced course kits
for many of its software and hardware products. On-site courses are quoted per
customer requests. The Company also offers programs to certify programmers and
instructors for its products.

Markets and Applications

The Company's products are used across many industries in a variety of
applications from research and development to production testing and industrial
control.

Customers

The Company has a broad customer base, with no customer accounting for
more than 3% of the Company's sales in 2000, 1999, or 1998.

Marketing

Through its worldwide marketing efforts, the Company strives to educate
engineers and scientists about the benefits of the Company's virtual
instrumentation philosophy, products and technology, and to highlight the
performance, ease of use and cost advantages of its products. The Company also
seeks to present its position as a technological leader among producers of
instrumentation software and hardware and to help promulgate industry standards
that will benefit users of computer-based instrumentation.

The Company reaches its intended audience through its Web site at NI.com
as well as the distribution of written and electronic materials including
demonstration versions of its software products, participation in tradeshows and
technical conferences and training and user seminars. An in-house staff develops
the NI.com Web site, advertising, publicity, and promotional materials that the
Company uses worldwide. The primary marketing/sales tool is the Company's Web
site at NI.com. Throughout 1998, 1999, and 2000, the Company invested
aggressively to enhance the content, performance, and features of NI.com as well
as to integrate E-commerce as a core component of the Company's business model.
Through NI.com, customers can view the Company's complete on-line catalog,
interactively configure systems, obtain pricing in a number of currencies, place
orders, track the status of orders, register products and obtain software
upgrades. The Company's believes its direct business model provides the
opportunity to leverage the Web heavily to reach customers and improve
operations.

The primary printed marketing/sales tool is the Company's catalog,
published annually and distributed worldwide. The catalog is over 900 pages,
with detailed tutorial information that educates readers about the Company's
integrated product architecture and virtual instrumentation concept. Short-form
versions of the catalog are typically also available in languages of major
international markets, including French, German, Spanish and Japanese.

The Company also uses quarterly newsletters to educate current and
prospective customers about its products and technologies. These newsletters
include new product information, feature articles that educate readers about new
instrumentation technology, user solution case studies of real-world
applications, product news from Alliance Program members and key customers, and
event and customer education schedules. These newsletters are available in print
form and via email subscription. There are also many books available on the
Company's technology in English, German, French and other languages.

The Company actively markets its products in higher education
environments, and identifies many colleges, universities and trade and technical
schools as key accounts. The Company offers special academic pricing and
products to enable universities to utilize Company products in their classes and
laboratories. The Company believes its prominence in the higher education area
can contribute to its future success because students gain experience using the
Company's products before they enter the work force.

Sales and Distribution

-11-

The Company distributes its software and hardware products primarily
through a direct sales organization. The Company also uses independent
distributors, OEMs, VARs, system integrators and consultants to market its
products. The Company has sales offices in the United States and sales offices
and distributors in key international markets. Sales outside of North America
accounted for approximately 47%, 47%, and 44% of the Company's revenues in 2000,
1999, and 1998, respectively. The Company expects that a significant portion of
its total revenues will continue to be derived from international sales. See
Note 13 of Notes to Consolidated Financial Statements for details concerning the
geographic breakdown of the Company's net sales, operating income and
identifiable assets.

Through all of its sales channels, the Company seeks to approach potential
customers with a highly technical sales force. The Company believes that the
majority of sales are made directly to those persons within an organization who
actually use the Company's products to integrate their own systems. The Company
identifies and targets major end-user accounts as those having a large number of
actual or potential end users, and believes that it achieves a high level of
repeat customer sales. The Company targets major accounts with a variety of
targeted sales and marketing campaigns such as seminars, user groups,
newsletters and direct mail.

Throughout 2000, the Company continued to invest aggressively to integrate
the Web as a core component of its direct sales model. The Company provides
worldwide on-line pricing for products in a number of currencies, allows
customers to order the complete catalog of products via the Web, provides a
variety of Web-based configuration tools to allow customers to more easily
select and order multiple compatible products for their systems, and offers
Prime Access business-to-business capabilities to allow key customers to conduct
business directly with the Company through secure, private pages at NI.com.

Direct Sales

The Company directly markets and sells its products in the Americas,
Europe and Asia. The Company has sales offices located throughout the United
States and in key international markets. Many of the Company's international
sales offices employ application engineering technical support specialists as
well as sales, marketing and administrative personnel.

The Company's international sales are subject to inherent risks, including
fluctuations in local economies; difficulties in staffing and managing foreign
operations; greater difficulty in accounts receivable collection; costs and
risks of localizing products for foreign countries; unexpected changes in
regulatory requirements, tariffs and other trade barriers, difficulties in the
repatriation of earnings and burdens of complying with a wide variety of foreign
laws. The Company's sales outside of North America are denominated in local
currencies, and accordingly, the Company is subject to the risks associated with
fluctuations in currency rates. In particular, increases in the value of the
dollar against foreign currencies decrease the dollar value of foreign sales
requiring the Company either to increase its price in the local currency, which
could render the Company's product prices noncompetitive, or to suffer reduced
revenues and gross margins as measured in US dollars. These dynamics have
adversely affected revenue growth in international markets in recent years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 12 of Notes to Consolidated Financial Statements.

Distributors

The Company utilizes distributors primarily to market its products in
geographic areas not served by the Company's direct sales organization.
Generally, the Company's indirect sales customers do not maintain significant
inventory levels.

OEMs

The Company utilizes OEMs such as traditional instrument manufacturers who
offer integrated systems and/or services to their customer bases. The Company
approaches OEM accounts with its standard product lines and offers quantity
discounts based on volume commitments and technical support capabilities and
requirements. The Company also promotes its sales and marketing capabilities to
its OEMs by providing specialized product training, documentation, packaging and
part numbers to simplify ordering, flexible shipping and warranty repair options
and joint promotion.

VARs, System Integrators and Consultants

The Company has relationships with third-party VARs, system integrators
and consultants who offer add-on products and system integration services. These
third-party developers expand the Company's market and sales opportunities by
adding value to the Company's standard products, making them suitable for
vertical market applications such as manufacturing automation or image

-12-

processing and analysis. The Company maintains a formal third-party
sales/marketing/training program, called the Alliance Program, which it uses to
work with many of the VARs, system integrators and consultants. Applicants must
be sponsored for membership by a Company sales engineer, pass qualification
criteria and pay a nominal annual membership fee. In late 1998, the Company
introduced an elite level of its Alliance Program called Select Integrators.
Select Integrators must qualify for the program based upon their level of
business with the Company. As of December 31, 2000, the Company's Alliance
Program had approximately 600 members including several Select Integrators. The
Company publishes on-line directories on its NI.com Web site of third-party
Alliance Program member products and services for use by its sales force and its
end users to locate additional products and/or services compatible with the
Company's products. The Company makes available to qualified third-parties the
opportunity to participate in joint marketing and sales programs, such as trade
shows, customer sales events and the Company's newsletters. In addition to its
relationships with third party VAR, system integrators and consultants, the
Company has a direct presence in the German systems integration market through
its Datalog and GfS subsidiaries.

Customer Support

The Company believes the ability to provide comprehensive service and
support to its customers is an important factor in its business. The Company
permits customers to return products within 30 days from receipt for a refund of
the purchase price less a restocking charge, and generally provides a two-year
warranty on GPIB hardware products, a one-year warranty on other hardware
products, and a 90-day warranty on cables and software (medium only). Customers
may also purchase a one-year extended warranty on hardware products.
Historically, warranty costs have not been material. Some of the key elements of
the Company's service and support strategy include:

Customer Technical Support

The Company maintains a large staff of application engineers at its
corporate facility, all of whom are highly qualified technical professionals.
Application engineers are also assigned to the Company's major international
offices. These application engineers provide customer support by telephone, fax,
electronic mail and world-wide Web forums, and electronic bulletin boards, and
are trained in both instrumentation and computer technology. In 2000, the
Company continued to invest heavily to leverage the Web for customer support.
Through the Company's NI.com web site, customers have access to a growing range
of support options to solve their own problems directly over the Web, including
software downloads, upgrades and bug fixes, automated product configuration
tools, knowledge databases of common questions and answers, live Web chat
capabilities, and discussion forums.

Upgrades

The Company typically offers programs in which existing customers can
upgrade to the latest Company products for an upgrade fee that is a discount
from the list price. Application software customers have the option of
purchasing a one-year renewable maintenance and support program, which entitles
them to software upgrades and priority access to the Company's technical support
hotline.

Customer Education

The Company offers a variety of fee-based training classes ranging in
scope from basic and introductory courses for new users to advanced courses for
experienced users.

Competition

The markets in which the Company operates are characterized by intense
competition from numerous competitors, some of which are divisions of large
corporations having far greater resources than the Company, and the Company
expects to face further competition from new market entrants in the future. A
key competitor is Agilent Technologies Inc. ("Agilent"). The Company believes
Agilent is the dominant supplier of GPIB and VXI-compatible instruments and
systems. Agilent is also a leading supplier of equipment used in data
acquisition and control applications. Agilent offers its own line of GPIB
instrument controllers, as well as hardware and software add-on products for
third-party desktop computers and workstations that directly compete with the
Company's products. Agilent is aggressively advertising and marketing its
products and system integration services. Because of Agilent's dominance in the
instrumentation business, changes in its marketing strategy or product offerings
could have a material adverse affect on the Company. The Company also faces
competition from a variety of other competitors.

-13-

Certain of the Company's competitors have substantial competitive
advantages in terms of breadth of technology, sales, marketing and support
capability and resources, including the number of sales and technical personnel
and their ability to cover a geographic area and/or particular account more
extensively and with more complete solutions than the Company can offer, and
more extensive warranty support, system integration and service capabilities
than those of the Company. In addition, large competitors can often enter into
strategic alliances with key customers or target accounts of the Company, which
can potentially have a negative impact on the Company's success with those
accounts.

The Company believes its ability to compete successfully depends on a
number of factors both within and outside its control, including: product
pricing, quality and performance; success in developing new products; adequate
manufacturing capacity and supply of components and materials; efficiency of
manufacturing operations; effectiveness of sales and marketing resources and
strategies; success in leveraging the Web; strategic relationships with other
suppliers; timing of new product introductions by the Company and its
competitors; protection of the Company's products by effective use of
intellectual property laws; general market and economic conditions; and events
related to weather and government actions throughout the world. There can be no
assurance that the Company will be able to compete successfully in the future.

The Company is continually designing new and improved products to maintain
its competitive position. Because of the rapidly changing computer technology
for which many of the Company's products are designed, the Company believes that
its future success will depend in part on its ability to continue to improve its
products and technologies. In the past, certain competitors have cloned some of
the Company's hardware products at much lower prices, and promoted these
hardware products as being capable of running the Company's software. The
Company has responded to this tactic in the past by releasing new and improved
versions of its products designed around proprietary ASICs that have improved
performance and functionality in an effort to surpass the competition.

Research and Development

The Company believes that its long-term growth and success depends, in
part, on delivering high quality software and hardware products on a timely
basis. The Company intends to focus its research and development efforts on
enhancing existing products and developing new products that incorporate
appropriate features and functionality to be competitive with respect to
technology and price/performance.

The Company's research and development staff strives to build quality into
products at the design stage in an effort to reduce overall development and
manufacturing costs. The Company's research and development staff also designs
proprietary ASICs, many of which are designed for use in several products. The
goal of the ASIC design program is to further differentiate the Company's
products from competing products, to improve manufacturability and to reduce
costs. The Company seeks to reduce the time to market for new and enhanced
products by sharing its internally developed hardware and software components
across multiple products.

In the past, the Company has experienced significant delays in the
introduction of new products. The Company's strategy of developing products
based primarily on third parties' commercially available technologies is
substantially dependent on the Company's ability to gain pre-release access to,
and to develop expertise in, current and future product developments of such
companies. There can be no assurance that the Company will continue to receive
such pre-release access from any of these companies, or, even with such access,
that the Company will be able to develop products on a timely basis that are
compatible with future releases.

The Company has implemented certain programs, including pre-release bug
analysis measures and enhanced project-tracking efforts, in order to improve the
product development process and to permit more accurate product development
scheduling. Nonetheless, there can be no assurance that the Company's research
and development efforts will not encounter delays or other difficulties, that
development efforts will result in commercially successful products, or that the
Company's products will not be rendered obsolete by changing technology or new
product announcements by other companies.

As of December 31, 2000, the Company employed 672 people in product
research and development. The Company's research and development expenses were
$56.0 million, $45.5 million, and $34.8 million for 2000, 1999, and 1998
respectively.

Intellectual Property

-14-

The Company relies on a combination of patent, trade secret, copyright and
trademark law, contracts and technical measures to establish and protect its
proprietary rights in its products. The Company believes that legal protection
through means such as the patent and copyright laws will be less influential on
the Company's ability to compete than such factors as the creativity of its
development staff, its ability to expand its market share, develop new markets
and serve its customers.

As of December 31, 2000, the Company held 126 United States patents (121
utility patents and 5 design patents) and 6 patents in foreign countries (3
patents registered in Europe in various countries; 1 patent in Canada, and 2
patents in Japan), and had 118 patent applications pending in the United States
and foreign countries. Thirty-five of such United States patents are software
patents related to LabVIEW, and cover fundamental aspects of the graphical
programming approach used in LabVIEW. The Company's patents expire from 2007 to
2019. No assurance can be given that the Company's pending patent applications
will result in the issuance of patents. The Company also owns certain registered
trademarks in the United States and abroad.

Although the Company relies to some extent on trade secret protection for
much of its technology, and regularly obtains confidentiality agreements with
key customers who wish to know more about the Company's product development
philosophy and/or future directions, there can be no assurance that third
parties will not either independently develop the same or similar technology,
obtain unauthorized access to the Company's proprietary technology or misuse the
technology to which the Company has granted access.

The laws of certain foreign countries treat the protection of proprietary
rights of the Company in its products differently from those in the United
States, and in many cases the protection afforded by such foreign laws is not as
strong as in the United States. The Company believes that its products and their
use do not infringe the proprietary rights of third parties. There can be no
assurance, however, that infringement claims will not successfully be made.

Manufacturing and Suppliers

The Company manufactures a majority of its products at its facilities in
Austin, Texas. Product manufacturing operations at the Company can be divided
into four areas: electronic circuit card and module assembly; cable assembly;
technical manuals and product support documentation; and software duplication.
The Company manufactures most of the electronic circuit card assemblies and
modules in-house, although subcontractors are used from time to time. The
Company manufactures some of its electronic cable assemblies in-house, but many
assemblies are produced by subcontractors. The Company primarily subcontracts
its software duplication and packaging functions. Reliance on contract
manufacturers entails risks of quality problems, less control of product
pricing, and potential unavailability of or delays in delivery of products, any
of which could have a material adverse effect on the Company's results of
operations. There can be no assurance that the Company, together with its
third-party manufacturers, will be able to produce sufficient quantities of the
Company's products in a timely manner.

During 2001, the Company will be working to establish a new manufacturing
operation in Hungary. The new Hungarian operation will be the Company's second
manufacturing facility. This new facility will be required to meet the expected
customer demand in Q4, 2001. Any delay in bringing this facility into production
could have a material adverse effect on the results of operations.

The marketplace dictates that many of the Company's products be shipped
very quickly after an order is received. Since purchased component and
manufacturing lead times are typically much longer than the short order
fulfillment time, the Company is required to keep adequate amounts of finished
goods inventory and must use an accurate system for forecasting demand for those
products in its production planning operations. Fluctuations in demand for the
Company's products typically result from month-to-month variations in the
quantity and mix of products and from normal, seasonal variations. A variety of
circumstances, including inaccurate forecasts of customer demand, poor
availability of purchased components, supplier quality problems, production
equipment problems, carrier strikes or damage to products in manufacturing
operations, could create a buildup of excess finished goods on the one hand or
an inability to timely deliver product on the other. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."

Engineering refinements to the Company's new hardware and software
products are fairly common. These changes can result in the disruption of the
manufacturing operation and concurrent delays in delivery dates. Finished goods
inventory at the Company's international warehouses and branches typically has a
short shelf life due to engineering changes and product upgrades initiated by
the Company's product development operation, and, if managed incorrectly, can
result in significant quantities of obsolete inventory. This relatively short
shelf life, and the resulting requirement to properly manage the quantity of

-15-

inventory to meet customer demand while minimizing inventory obsolescence, has
been and continues to be a challenge to the Company and its branch offices. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."

The Company obtains most of its electronic components from suppliers
located principally in the United States and Asia. Some of the components
purchased by the Company, including ASICs, are sole-sourced. Any disruption of
the Company's supply of sole or limited source components, whether resulting
from business demand, quality, production or delivery problems, could adversely
affect the Company's ability to manufacture its products, which could in turn
adversely affect the Company's business and results of operations. See
"Managements Discussion and Analysis of Financial Condition and Results of
Operations."

Backlog

The Company typically ships products shortly following the receipt of an
order. Accordingly, the Company does not have a material amount of backlog.
Backlog should not be viewed as an indicator of future sales.

Employees

As of December 31, 2000, the Company had 2,511 employees, including 672 in
research and development, 1,185 in sales and marketing and customer support, 347
in manufacturing and 307 in administration and finance. None of the Company's
employees is represented by a labor union and the Company has never experienced
a work stoppage. The Company considers its employee relations to be good.

ITEM 2. PROPERTIES

The Company's principal administrative, sales, marketing, manufacturing,
research and development activities are conducted at three Company-owned
buildings in Austin, Texas. The Company owns approximately 69 acres of land in
north Austin, Texas, at which are a 232,000 square foot office facility and a
140,000 square foot manufacturing facility. The Company is in the process of
constructing a new R&D building, a 380,000 square foot office facility with
estimated completion during the first quarter of 2002, and is also working on a
plan and design of a second manufacturing facility to be located in Hungary,
estimated to be completed by Q4 of 2001. The Company also owns a 136,000 square
foot office building in Austin, Texas in which it houses certain of its sales
operations. A portion of the 136,000 square foot office building is currently
leased to Trilogy, Inc. During 2000, the Company's German subsidiary, GfS
Systemtechnik GmbH & Co. completed construction of a 25,500 square foot office
building in Aachen, Germany in which a majority of its activities are conducted.
GfS also owns another 19,375 square foot office building, a portion of which is
partially leased to BMS Modern Games. The remainder of this office building is
used by GfS.

As of December 31, 2000, the Company also leased a number of sales and
support offices in the United States and overseas. The Company believes existing
field sales and support facilities are adequate to meet its current
requirements.

ITEM 3. LEGAL PROCEEDINGS

On May 2, 2000, the Company was served by Cognex Corporation asserting
patent infringement of two Cognex patents, copyright infringement, trademark
infringement and unfair competition. Cognex seeks preliminary and permanent
injunctive relief, actual monetary damages in an unspecified amount, and
attorney's fees and costs. On June 21, 2000, the Company filed a response to
their lawsuit denying all claims. A trial has been scheduled for October 23,
2001. The Company is defending this lawsuit vigorously. The Company is unable to
predict the outcome of the litigation at this time. Based on the facts we have
reviewed to date, management does not expect the resolution of this matter to
have a material adverse effect on the Company's business or financial condition.
However, because the plaintiff has indicated an unwillingness to withdraw these
claims, the Company has accrued $2.5 million of anticipated patent defense costs
that are probable of being incurred.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.

-16-

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS

The Company's Common Stock, $0.01 par value, began trading on the Nasdaq
National Market System under the symbol NATI effective March 13, 1995. Prior to
that date, there was no public market for the Common Stock. The high and low
closing prices for the Common Stock in the following table, as reported by
Nasdaq, have been retroactively restated to reflect the three-for-two stock
split declared by the Company's Board of Directors on July 22, 1999 for holders
of record as of the close of business on August 5, 1999.

2000 High Low

First Quarter 50.188 34.938
2000

Second Quarter 56.75 33.00
2000

Third Quarter 48.875 40.813
2000

Fourth Quarter 52.438 37.063
2000

1999 High Low

First Quarter 23.083 17.417
1999

Second Quarter 27.50 18.167
1999

Third Quarter 35.344 26.167
1999

Fourth Quarter 38.25 27.25
1999

At the close of business on February 2, 2001, there were approximately 798
holders of record of the Common Stock and approximately 6,800 shareholders of
beneficial interest.

The Company believes factors such as quarterly fluctuations in results of
operations, announcements by the Company or its competitors, technological
innovations, new product introductions, governmental regulations, litigation or
changes in earnings estimates by analysts may cause the market price of the
Common Stock to fluctuate, perhaps substantially. In addition, stock prices for
many technology companies fluctuate widely for reasons that may be unrelated to
their operating results. These broad market and industry fluctuations may
adversely affect the market price of the Company's Common Stock.

To date, the Company has not paid any cash dividends on its Common Stock.
The Company currently anticipates that it will retain any available funds to
finance the growth and operation of its business and does not anticipate paying
any cash dividends in the immediate future.

-17-

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements, including the Notes to
Consolidated Financial Statements. The information set forth below is not
necessarily indicative of results of future operations. The information should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

Years Ended December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands, except per share data)

Statements of Income Data:
Net sales:

North America.............. $215,960 $175,873 $153,435 $141,784 $114,382
Europe..................... 133,799 108,801 86,961 66,318 58,108
Asia Pacific............... 60,390 44,909 33,834 32,777 28,225
-------- -------- -------- -------- --------
Consolidated net sales..... 410,149 329,583 274,230 240,879 200,715

Cost of sales................ 98,326 76,040 65,187 55,096 49,755
-------- -------- -------- -------- --------
Gross profit............... 311,823 253,543 209,043 185,783 150,960
-------- -------- -------- -------- --------

Operating expenses:
Sales and marketing........ 147,377 120,886 100,783 87,096 72,067
Research and development... 55,954 45,531 34,757 30,296 24,387
General and administrative. 32,077 24,258 20,455 18,508 17,129
-------- -------- -------- -------- --------
Total operating expenses... 235,408 190,675 155,995 135,900 113,583
-------- -------- -------- --------- --------

Operating income........... 76,415 62,868 53,048 49,883 37,377

Other income (expense):
Interest income............ 6,390 4,759 3,439 3,455 2,405
Interest expense........... (533) (404) (463) (502) (844)
Net foreign exchange (loss)
gain and other........... (1,159) 130 (224) (2,649) (899)
-------- -------- -------- -------- --------

Income before income taxes
and cumulative effect of
accounting change........... 81,113 67,353 55,800 50,187 38,039
Provision for income taxes... 25,956 21,553 18,414 16,562 12,553
-------- -------- -------- -------- --------

Income before cumulative
effect of accounting
change...................... 55,157 45,800 37,386 33,625 25,486
Cumulative effect of
accounting change,
net of tax.................. -- (552) -- -- --
-------- -------- -------- -------- --------

Net income............ $ 55,157 $ 45,248 $ 37,386 $ 33,625 $ 25,486
======== ======== ======== ======== ========

Basic earnings per share:
Income before cumulative
effect of accounting
change.................... $ 1.10 $ 0.92 $ 0.76 $ 0.69 $ 0.53
Cumulative effect of
accounting change, net of
tax....................... -- (0.01) -- -- --
-------- -------- -------- -------- --------
Basic earnings per share.. $ 1.10 $ 0.91 $ 0.76 $ 0.69 $ 0.53
======== ======== ======== ======== ========

-18-

Diluted earnings per share:
Income before cumulative
effect of accounting
change.................... $ 1.03 $ 0.88 $ 0.73 $ 0.67 $ 0.52
Cumulative effect of
accounting change, net of
tax....................... -- (0.01) -- -- --
-------- -------- -------- -------- --------
Diluted earnings per share $ 1.03 $ 0.87 $ 0.73 $ 0.67 $ 0.52
======== ======== ======== ======== ========

Weighted average shares
outstanding:

Basic..................... 50,332 49,776 49,248 48,845 48,539
Diluted................... 53,564 52,203 51,150 50,484 49,415

December 31,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:

Cash and cash equivalents.... $ 75,277 $ 45,309 $ 51,538 $ 31,943 $ 30,211
Short-term investments....... 79,525 83,525 49,158 51,067 48,956
Working capital.............. 220,208 173,761 133,510 112,142 99,294
Total assets................. 389,350 318,753 249,786 204,490 169,225
Long-term debt, net of
current portion............ -- 4,301 4,379 5,151 9,175
Total stockholders' equity... 321,023 254,235 204,184 161,754 126,953

-19-

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The discussion in this document contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those projected in the
forward-looking statements throughout this document as a result of a number of
important factors. For a discussion of important factors that could affect the
Company's results, please refer to the risk factors set forth below in Factors
Affecting the Company's Business, in the financial line item discussions below
and elsewhere in this document.

Overview

National Instruments Corporation designs, develops, manufactures and
markets instrumentation and automation software and hardware for general
commercial, industrial and scientific applications. The Company offers hundreds
of products used to create virtual instrumentation systems for measurement and
automation. The Company has identified a large and diverse market for test and
measurement ("T&M") and industrial automation ("IA") applications. The Company's
products are used in a variety of applications from research and development to
production testing and industrial control. In test and measurement applications,
the Company's products can be used to monitor and control traditional
instruments or to create computer-based instruments that can replace traditional
instruments. In industrial automation applications, the Company's products can
be used in the same ways as in test and measurement and can also be used to
integrate measurement functionality with process automation capabilities. The
Company sells to a large number of customers in a wide variety of industries. No
single customer accounted for more than 3% of the Company's sales in 2000, 1999
or 1998.

The Company's revenues have grown every year since 1977 and the Company
has been profitable in every year since 1990. There can be no assurance that the
Company's net sales will continue to grow or that the Company will remain
profitable in future periods. As a result, the Company believes historical
results of operations should not be relied upon as indications of future
performance.

-20-

Results of Operations

The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items reflected in the Company's
consolidated statements of income:

Years Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
Net sales:
North America........................ 52.7% 53.4% 56.0%
Europe............................... 32.6 33.0 31.7
Asia Pacific......................... 14.7 13.6 12.3
---------- ---------- ----------
Consolidated net sales............... 100.0 100.0 100.0
Cost of sales.......................... 24.0 23.1 23.8
---------- ---------- ----------
Gross profit......................... 76.0 76.9 76.2
Operating expenses:
Sales and marketing.................. 35.9 36.7 36.7
Research and development............. 13.7 13.8 12.7
General and administrative........... 7.8 7.3 7.5
---------- ---------- ----------
Total operating expenses........... 57.4 57.8 56.9
---------- ---------- ----------
Operating income................... 18.6 19.1 19.3
Other income (expense):
Interest income ..................... 1.5 1.4 1.3
Interest expense..................... (0.1) (0.1) (0.2)
Net foreign exchange gain (loss)..... (0.3) -- (0.1)
---------- ---------- ----------
Income before income taxes and
cumulative effect of accounting
change............................... 19.7 20.4 20.3
Provision for income taxes............. 6.3 6.5 6.7
---------- ---------- ----------
Income before cumulative effect of
accounting change.................... 13.4 13.9 13.6
Cumulative effect of accounting change,
net of tax........................... -- (0.2) --
---------- ---------- ----------
Net income............................. 13.4% 13.7% 13.6%
========== ========== ==========

-21-

Net Sales. In 2000, net sales for the Company's products reached $410.1
million, a 24% increase from the level achieved in 1999, which followed an
increase in net sales of 20% in 1999 over the level achieved in 1998. This year
marks the twenty-fourth year of consecutive double-digit annual sales growth.
The increase in sales in these periods is primarily attributable to the
introduction of new and upgraded products in each period, increased market
acceptance of the Company's products in each of the major geographical areas in
which the Company operates, and an expanded customer base. The increase in the
revenue growth rate to 24% from 20% in 1999, is attributed to an increase in
unit sales growth in all regions, a broad increase in demand for the Company's
products and significant growth in newer product areas such as PXI, Machine
Vision, Motion Control, FieldPoint and PC based instruments.

North American revenue was $216.0 million in 2000, an increase of 23% from
1999, following a 15% increase in 1999 over 1998. The increase in sales and in
the revenue growth rate in North America in 2000 is primarily attributable to
market acceptance of the Company's new products, an expanded sales force and a
recovery from the industry downturn in early 1999.

European revenue was $133.8 million in 2000, an increase of 23% over 1999,
following a 25% increase in 1999 from 1998. The increase in revenue in Europe is
primarily attributable to continued market acceptance of the Company's new
products, the strong local economies and the Company's expansion in its European
sales force.

Asia Pacific revenue grew 35% to $60.4 million in 2000, which followed a
33% increase in 1999 over 1998 levels. The increase in the Asia Pacific revenue
growth rate during 2000 is primarily attributed to the success of the Company's
new products, an expanded sales force and the continued improvement in the state
of the Asian economies. See the discussion below for more information concerning
the impact of foreign currency fluctuations on sales growth.

International sales (sales to customers outside of North America)
accounted for 47%, 47% and 44% of the Company's consolidated net sales for 2000,
1999 and 1998, respectively. The Company intends to continue to expand its
international operations by increasing market presence in existing markets, and
continuing to use distributors to sell its products in countries in which the
sales volume does not justify direct sales activities.

The Company's international sales are subject to inherent risks, including
fluctuations in local economies; difficulties in staffing and managing foreign
operations; greater difficulty in accounts receivable collection; costs and
risks of localizing products for foreign countries; unexpected changes in
regulatory requirements, tariffs and other trade barriers; difficulties in the
repatriation of earnings and burdens of complying with a wide variety of foreign
laws. The Company's sales outside of North America are denominated in local
currencies, and accordingly, the Company is subject to the risks associated with
fluctuations in currency rates. In particular, increases in the value of the
dollar against foreign currencies decrease the U.S. dollar value of foreign
sales requiring the Company either to increase its price in the local currency,
which could render the Company's product prices noncompetitive, or to suffer
reduced revenues and gross margins as measured in U.S. dollars. These dynamics
have adversely affected revenue growth in international markets in 2000 and in
previous years. The Company's foreign currency hedging program includes both
foreign currency forward and purchased option contracts to reduce the effect of
exchange rate fluctuations. However, the hedging program will not eliminate all
of the Company's foreign exchange risks. (See "Foreign Exchange Gain/Loss" below
and Note 12 of Notes to Consolidated Financial Statements.)

Sales made by the Company's direct sales offices in Europe and Asia
Pacific are denominated in local currencies, and accordingly, the U.S. dollar
equivalent of these sales is affected by changes in the weighted average value
of the U.S. dollar. This weighted average is calculated as the percentage change
in the value of the currency relative to the dollar, multiplied by the
proportion of international sales recorded in the particular currency. Between
2000 and 1999 this weighted average value of the U.S. dollar increased by 8.2%,
causing an equivalent decrease in the U.S. dollar value of the Company's foreign
currency sales and expenses. If the weighted average value during 2000 had been
the same as that in 1999, on a pro-forma basis, the Company's growth rate for
2000 would have been 26.6%. Pro-forma European sales for 2000 would have
increased by 32% over 1999 sales. Pro-forma Asia Pacific sales for 2000 would
have increased by 29% over 1999 sales. If the weighted average value of the
dollar during 2000 had been the same as that in 1999, on a pro-forma basis, the
Company's consolidated operating expenses would have been $236.4 million,
representing an increase of $1.0 million. The preceding pro-forma amounts and
percentages are not presented in accordance with Generally Accepted Accounting
Principles but are presented for comparative purposes.

Gross Profit. As a percentage of sales, gross profit represented 76%, 77%
and 76% in 2000, 1999, and 1998, respectively. The relatively high software
content of the Company's products is demonstrated in the gross margins achieved

-22-

by the Company. The lower margin in 2000 is the result of unfavorable foreign
currency exchange rates, lost capacity and increased overhead costs related to
delayed receipt of components from suppliers. In 1999, improved production
efficiencies and favorable foreign currency exchange rate fluctuations resulted
in higher margins. There can be no assurance that the Company will maintain its
historical margins.

The marketplace for the Company's products dictates that many of the
Company's products be shipped very quickly after an order is received. As a
result, the Company is required to maintain significant inventories. Therefore,
inventory obsolescence is a risk for the Company due to frequent engineering
changes, shifting customer demand, the emergence of new industry standards and
rapid technological advances including the introduction by the Company or its
competitors of products embodying new technology. While the Company maintains
valuation allowances for excess and obsolete inventory and management continues
to monitor the adequacy of such valuation allowances, there can be no assurance
that such valuation allowances will be sufficient.

The Company is currently working to establish a new manufacturing facility
in Hungary in Q4 of 2001. This new facility will be required in order to meet
the customer demand anticipated in Q4, 2001. Any delay in making this capacity
available could have a material adverse effect on the results of operations.

Sales and Marketing. Sales and marketing expense in 2000 increased 22%
from 1999, which followed an increase of 20% in 1999 from 1998. The increase in
the expense in absolute amounts during 2000 and 1999 is primarily attributable
to increases in sales and marketing personnel both internationally and in North
America, increased marketing for new products and web marketing and sales
activities. Sales and marketing personnel increased by 237 during 2000 from 948
at December 31, 1999 to 1,185 at December 31, 2000. Sales and marketing expense,
as a percentage of revenue was 36% in 2000, down from 37% in 1999 and 1998.

The Company expects sales and marketing expenses in future periods to
increase in absolute dollars, and to fluctuate as a percentage of sales based on
new recruiting, initial marketing and advertising campaign costs associated with
major new product releases and entry into new market areas, investment in the
web sales and marketing efforts, increasing product demonstration costs and the
timing of domestic and international sales conferences and trade shows.

Research and Development. Research and development expense in 2000
increased 23% compared to 1999 following an increase of 31% in 1999 over 1998.
Excluding the pre-tax charge for the write-off of in-process research and
development, on a pro-forma basis, research and development expense grew 29%,
28% and 12% during 2000, 1999 and 1998, respectively. (See Note 8 of Notes to
Consolidated Financial Statements for a description of the Company's
acquisitions.) The increase in research and development expenditures (excluding
the acquisition related charges in 1998) in absolute amounts and as a percentage
of sales in each period was primarily due to increases in personnel costs from
hiring of additional product development engineers. Research and development
personnel increased from 501 at December 31, 1999 to 672 at December 31, 2000.
The Company believes that a significant, ongoing investment in research and
development is required to remain competitive and continue revenue growth.

The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased, or Otherwise Marketed." The Company
amortizes such costs over the related product's estimated economic useful life,
generally three years, beginning when a product becomes available for general
release. Software amortization expense totaled $2.6 million, $2.3 million and
$2.8 million during 2000, 1999 and 1998, respectively. Software development
costs capitalized during such years were $5.0 million, $2.8 million and $3.3
million, respectively. The increased levels of capitalization for 2000 were
primarily a result of the development of LabVIEW 6i, NI-DAQ 6.9 and MAX 2.1. The
significant items capitalized in 1999 were primarily the result of NI-DAQ 6.6,
Lookout 4.0 and purchased software development costs related to the GfS
acquisition. (See Note 5 of Notes to Consolidated Financial Statements for a
description of intangibles.)

General and Administrative. General and administrative expenses in 2000
increased 32% from 1999, which followed an increase of 19% in 1999 from 1998. A
significant amount of the increase was due to the increase in legal costs
primarily from a $2.5 million accrual for anticipated patent defense costs. The
increase was also comprised of cost attributable to staffing increases in the
information system, finance, legal and human resources departments and
significant increases in recruiting costs due to the continued growth in the
target number of engineering recruits. Continued development of web and
e-commerce offerings were the main areas of focus for incremental investment in
the information system department in 2000. The 2000 increase followed a 19%
increase in 1999, which was primarily driven by support of the new management
information systems and web based applications. General and administrative
expenses as a percentage of revenue increased to 7.8% during 2000 from 7.3% in

-23-

1999. The increase in 2000 was primarily due to the $2.5 million accrual for
future patent defense costs recorded in the fourth quarter of 2000. The Company
expects that general and administrative costs will continue to increase in
absolute amounts and to fluctuate as a percentage of revenue as the Company
continues to invest in maintaining its existing systems, developing the
infrastructure for the new Hungarian manufacturing facility, and developing web
based commerce and management information systems.

Interest Income and Expense. Interest income increased 34% in 2000 from
1999, which followed an increase of 38% in 1999 from 1998. The primary source of
interest income is from the investment of proceeds from the Company's issuance
of common stock under an initial public offering in March 1995 and cash flow
generated from operations. Net cash provided by operating activities in 2000
totaled $55.0 million. During 2000, interest income increased due to the
investment of cash generated from operations. Interest expense increased 32%
from 1999, which followed a decrease of 13% in 1999 from 1998. Interest expense
represents less than 1% of net sales and fluctuates as a result of bank
borrowings and interest terms thereon. (See Note 6 of Notes to Consolidated
Financial Statements for a description of the Company's debt.)

Net Foreign Exchange Gain/Loss. The Company experienced net foreign
exchange losses of $1.5 million in 2000, compared to gains of $130,000 in 1999
and losses of $224,000 in 1998. These results are attributable to movements
between the U.S. dollar and the local currencies in countries in which the
Company's sales subsidiaries are located. The Company recognizes the local
currency as the functional currency of its international subsidiaries.

The Company utilizes foreign currency forward contracts to hedge a
majority of its foreign currency-denominated receivables in order to reduce its
exposure to significant foreign currency fluctuations. The Company typically
limits the duration of its "receivables" foreign exchange forward contracts to
90 days.

The Company also utilizes foreign currency forward contracts and foreign
currency purchased option contracts in order to reduce its exposures to
fluctuations in future foreign currency cash flows. The Company purchases these
contracts for up to 100% of its forecasted cash flows in selected currencies
(primarily the euro, yen and pound sterling) and limits the duration of these
contracts to 30 months. The foreign currency purchased option contracts are
purchased "at-the-money" or "out-of-the-money". As a result, the Company's
hedging activities only partially address its risks in foreign currency
transactions, and there can be no assurance that this strategy will be
successful. The Company does not invest in contracts for speculative purposes.
(See Note 12 of Notes to Consolidated Financial Statements for a description of
the Company's forward and purchased option contracts and hedged positions.) The
Company's hedging strategy reduced the foreign exchange loss for December 31,
2000 by $10.2 million and reduced the net foreign exchange loss for December 31,
1999 by $3.3 million.

Effective January 1, 1999, the Company elected to adopt SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." (See Note 11 and
Note 12 of Notes to Consolidated Financial Statements.)

Provision for Income Taxes. The provision for income taxes reflects an
effective tax rate of 32% in 2000 and 1999 and 33% in 1998. The effective tax
rate is lower than the Federal Statutory rate primarily as a result of
tax-exempt interest and reduced tax rates in certain international locations.
(See Note 7 of Notes to Consolidated Financial Statements).

Liquidity and Capital Resources

The Company is currently financing its operations and capital expenditures
through cash flow from operations. At December 31, 2000, the Company had working
capital of approximately $220.2 million compared to $173.8 million at December
31, 1999.

Accounts receivable increased to $74.7 million at December 31, 2000 from
$58.3 million at December 31, 1999, as a result of higher sales levels.
Receivable days outstanding at December 31, 2000 increased to 60 days from 58
days at December 31, 1999. Consolidated inventory balances have increased to
$33.3 million at December 31, 2000 from $26.2 million at December 31, 1999.
Inventory turns of 3.3 per year for 2000 represent a decrease from turns of 3.6
per year for 1999 and reflect the planned increase in the level of inventory
related to allocated components and increased procurement of end-of-life
components. The Company expects these high inventory levels to persist until the
component supply situation has eased significantly.

Cash used for investing activities in 2000 includes $27.6 million for the
purchase of property and equipment and capitalization of software development
costs of $5.0 million.

-24-

In October of 2000, the Company began construction of an office building
("Mopac C") located on the North Austin campus. It is currently anticipated that
a significant portion of the construction costs will be paid out of the
Company's existing working capital. The Company estimates the total cost for the
new building, including furniture, fixtures and equipment, will range from $58
million to $62 million. In October of 2000, the Company entered into firm
commitments of approximately $60 million for the new building. The Company has
incurred approximately $6.6 million in construction costs as of December 31,
2000, with the remainder becoming payable in 2001. The actual level of spending
may vary depending on a variety of factors, including unforeseen difficulties in
construction. Upon completion of the Mopac C building, the Company intends to
vacate its existing 136,000 sq. ft. Millenium office building. The Company has
signed an agreement to lease the Millenium building to a third party and
currently estimates that the net rental income from this lease will offset
approximately 30% of the projected operating costs from the Mopac C building.

The Company also plans to construct a second manufacturing facility to be
located in Hungary. The Company estimates that this European manufacturing
facility will be operational by Q4 of 2001, and that by 2003 will source a
significant portion of the Company's international sales. The location of the
facility has a cost base and tax rate significantly lower than in the U.S.,
which should have the effect of reducing the cost of manufacturing and lowering
the consolidated tax rate. However, there can be no assurance that the actual
manufacturing costs will be lower. It is currently anticipated that a
significant portion of the construction costs will be paid out of the Company's
existing working capital with any remaining costs being funded through credit
from the Company's current financial institutions. The Company estimates the
total cost for the new facility, including furniture, fixtures and equipment,
will be approximately $17.0 million. The actual level of spending may vary
depending on a variety of factors, including unforeseen difficulties in
construction.

The Company currently expects to fund expenditures for capital
requirements as well as liquidity needs created by changes in working capital
from a combination of available cash and short-term investment balances and
internally generated funds. As of December 31, 2000, the Company had no debt
outstanding to financial institutions. (See Note 6 of Notes to Consolidated
Financial Statements for additional information regarding the Company's debt.)

The Company believes that the cash flow from operations, if any, existing
cash balances and short-term investments, will be sufficient to meet its cash
requirements for at least the next twelve months. Cash requirements for periods
beyond the next twelve months depend on the Company's profitability, its ability
to manage working capital requirements and its rate of growth.

Market Risk

The Company is exposed to a variety of risks, including foreign currency
fluctuations and changes in the market value of its investments. In the normal
course of business, the Company employs established policies and procedures to
manage its exposure to fluctuations in foreign currency values and changes in
the market value of its investments.

Foreign Currency Hedging Activities. The Company's objective in managing
its exposure to foreign currency exchange rate fluctuations is to reduce the
impact of adverse fluctuations in such exchange rates on the Company's earnings
and cash flow. Accordingly, the Company utilizes purchased foreign currency
option contracts and forward contracts to hedge its exposure on anticipated
transactions and firm commitments. The principal currencies hedged are the euro,
British pound and Japanese yen. The Company monitors its foreign exchange
exposures regularly to ensure the overall effectiveness of its foreign currency
hedge positions. However, there can be no assurance the Company's foreign
currency hedging activities will substantially offset the impact of fluctuations
in currency exchange rates on its results of operations and financial position.
Based on the foreign exchange instruments outstanding at December 31, 2000, an
adverse change (defined as 20% in the Asian currencies and 10% in all other
currencies) in exchange rates would result in a decline in the aggregate fair
market value of all instruments outstanding of approximately $17.9 million.
However, as the Company utilizes foreign currency instruments for hedging
anticipated and firmly committed transactions, management believes that a loss
in fair value for those instruments will be substantially offset by increases in
the value of the underlying exposure. (See Note 11 of Notes to Consolidated
Financial Statements for a description of the Company's financial instruments at
December 31, 2000 and 1999.)

Short-term Investments. The fair value of the Company's investments in
marketable securities at December 31, 2000 was $79.5 million. The Company's
investment policy is to manage its investment portfolio to preserve principal
and liquidity while maximizing the return on the investment portfolio through
the full investment of available funds. The Company diversifies the marketable
securities portfolio by investing in multiple types of investment-grade

-25-

securities. The Company's investment portfolio is primarily invested in
short-term securities with at least an investment grade rating to minimize
interest rate and credit risk as well as to provide for an immediate source of
funds. Based on the Company's investment portfolio and interest rates at
December 31, 2000, a 100 basis point increase or decrease in interest rates
would result in a decrease or increase of less than $400,000, respectively, in
the fair value of the investment portfolio. Although changes in interest rates
may affect the fair value of the investment portfolio and cause unrealized gains
or losses, such gains or losses would not be realized unless the investments are
sold.

Recently Issued Accounting Pronouncement

In the fourth quarter of 2000, the Company adopted Staff Accounting
Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements, which
provides guidance in applying generally accepted accounting principles to
certain revenue recognition issues. The adoption of SAB 101 did not have a
material impact on the Company's financial position or overall trends in results
of operations.

Factors Affecting the Company's Business

U.S./Global Economic Slowdown. As has occurred in the past, most recently
in 1998 when the Asian economic situation and its effects on the U.S. economy
resulted in a slowdown in automated test equipment, semiconductor and other
markets, the markets in which the Company does business could again experience
the negative effects of a slowdown in the U.S. and/or Global economies.
Downturns in the U.S. or Global economies could have a material adverse effect
on the Company's operating results.

Risk of Component Shortages. As has occurred in the past, most recently in
the quarter ended December 31, 2000, supply shortages of components including
sole source components can result in significant additional costs and
inefficiencies in manufacturing. Component shortages, including components from
Analog Devices, Inc., have continued in the first quarter and if the Company is
unsuccessful in resolving these issues, it will experience a significant impact
on the timing of revenue and/or an increase in manufacturing costs, either of
which would have a material adverse impact on the Company's operating results.

Expansion of Manufacturing Capacity. The Company is working to establish a
new manufacturing facility which is to be located in Hungary. It is anticipated
that this facility will be in operation by Q4, 2001. This additional capacity is
required to meet anticipated customer demand in Q4, 2001. Any delay in bringing
this facility into production could have a material adverse effect on the
Company's results of operations. Factors, which could result in a delay in
bringing this new facility into production, include possible delays in
construction, difficulties in recruiting and training the local work force and
possible difficulties in establishing the required information systems.

Fluctuations in Quarterly Results. The Company's quarterly operating
results have fluctuated in the past and may fluctuate significantly in the
future due to a number of factors, including: changes in the mix of products
sold; the availability and pricing of components from third parties (especially
sole sources); the timing of orders; level of pricing of international sales;
fluctuations in foreign currency exchange rates; the difficulty in maintaining
margins, including the higher margins traditionally achieved in international
sales; and changes in pricing policies by the Company, its competitors or
suppliers. Specifically, if the local currencies in which the Company sells
weaken against the U.S. dollar, and if the local sales prices cannot be raised,
the Company will experience a deterioration of its gross and net profit margins.
The Company expects the strength of the U.S. dollar to have a negative effect on
gross and net profit margins in future quarters.

As has occurred in the past and as may be expected to occur in the future,
new software products of the Company or new operating systems of third parties
on which the Company's products are based, often contain bugs or errors that can
result in reduced sales and/or cause the Company's support costs to increase,
either of which could have a material adverse impact on the Company's operating
results. Furthermore, the Company has significant revenues from customers in
industries such as semiconductors, automated test equipment, telecommunications,
aerospace, defense and automotive which are cyclical in nature. Downturns in
these industries could have a material adverse effect on the Company's operating
results.

In recent years, the Company's revenues have been characterized by
seasonality, with revenues typically being relatively constant in the first,
second and third quarters, growing in the fourth quarter and being relatively
flat or declining from the fourth quarter of the year to the first quarter of
the following year. If this historical pattern continues, revenues and earnings
for the first quarter of 2001 may not exceed revenues from the fourth quarter of
2000. Also, the Company's results of operations in the third quarter of 2001 may

-26-

be adversely affected by lower sales levels in Europe, which typically occur
during the summer months. The Company believes the seasonality of its revenue
results from the international mix of its revenue and the variability of the
budgeting and purchasing cycles of its customers throughout each international
region. In addition, total operating expenses have in the past tended to be
higher in the second and third quarters of each year, due to college recruiting
and significantly increased intern personnel expenses.

New Product Introductions and Market Acceptance. The market for the
Company's products is characterized by rapid technological change, evolving
industry standards, changes in customer needs and frequent new product
introductions, and is therefore highly dependent upon timely product innovation.
The Company's success is dependent in part on its ability to successfully
develop and introduce new and enhanced products on a timely basis to replace
declining revenues from older products, and on increasing penetration in
domestic and international markets. In the past, the Company has experienced
significant delays between the announcement and the commercial availability of
new products. Any significant delay in releasing new products could have a
material adverse effect on the ultimate success of a product and other related
products and could impede continued sales of predecessor products, any of which
could have a material adverse effect on the Company's operating results. There
can be no assurance that the Company will be able to introduce new products in
accordance with announced release dates, that new products will achieve market
acceptance or that any such acceptance will be sustained for any significant
period. Failure of new products to achieve or sustain market acceptance could
have a material adverse effect on the Company's operating results. Moreover,
there can be no assurance that the Company's international sales will continue
at existing levels or grow in accordance with the Company's efforts to increase
foreign market penetration.

Risks associated with Increased Development of Web site. The Company has
devoted significant resources in developing its Web site as a key marketing and
sales tool and expects to continue to do so in the future. There can be no
assurance that the Company will be successful in its attempt to leverage the Web
to increase sales. The Company hosts its Web site internally. Failure to
successfully maintain the Web site and to protect it from hackers could have a
significant impact on the Company's results.

Operation in Intensely Competitive Markets. The markets in which the
Company operates are characterized by intense competition from numerous
competitors, some of which are divisions of large corporations having far
greater resources than the Company, and the Company expects to face further
competition from new market entrants in the future. A key competitor is Agilent
Technologies Inc. ("Agilent"). Agilent offers its own line of instrument
controllers, and also offers hardware and software add-on products for
third-party desktop computers and workstations that provide solutions that
directly compete with the Company's virtual instrumentation products. Agilent is
aggressively advertising and marketing products that are competitive with the
Company's products. Because of Agilent's strong position in the instrumentation
business, changes in its marketing strategy or product offerings could have a
material adverse effect on the Company's operating results.

The Company believes its ability to compete successfully depends on a
number of factors both within and outside its control, including: new product
introductions by competitors; product pricing; quality and performance; success
in developing new products; adequate manufacturing capacity and supply of
components and materials; efficiency of manufacturing operations; effectiveness
of sales and marketing resources and strategies; strategic relationships with
other suppliers; timing of new product introductions by the Company; protection
of the Company's products by effective use of intellectual property laws;
general market and economic conditions; and government actions throughout the
world. There can be no assurance that the Company will be able to compete
successfully in the future.

Management Information Systems. During 2000, the Company devoted
significant resources to the continued development of web and e-commerce
offerings. In 2001, the Company will focus on implementing information systems
to support its new manufacturing facility in Europe and upgrading its worldwide
business applications suite to Oracle's latest web-based release 11i. The
Company will also be implementing an advanced planning system to enhance
predictability of material flow in its manufacturing operations and will
continue to devote significant resources to the development of the web. Failure
to successfully implement these initiatives could have a material adverse effect
on the results of operations.

The Company relies on three primary regional centers for its management
information systems. As with any information system, unforeseen issues may arise
that could affect management's ability to receive adequate, accurate and timely
financial information, which in turn could inhibit effective and timely
decisions. Furthermore, it is possible that one or more of the Company's three
regional information systems could experience a complete or partial shutdown. If

-27-

such a shutdown occurred near the end of a quarter it could impact the Company's
product shipments and revenues, as product distribution is heavily dependent on
the integrated management information systems in each region. Accordingly,
operating results in that quarter would be adversely impacted due to the
shipments, which would not occur until the following period. The Company is
working to achieve reliable regional management information systems to control
costs and improve the ability to deliver its products in substantially all of
its direct markets worldwide. No assurance can be given that the Company's
efforts will be successful. The failure to receive adequate, accurate and timely
financial information could inhibit management's ability to make effective and
timely decisions.

Risks Associated with International Operations and Foreign Economies.
International sales are subject to inherent risks, including fluctuations in
local economies, difficulties in staffing and managing foreign operations,
greater difficulty in accounts receivable collection, costs and risks of
localizing products for foreign countries, unexpected changes in regulatory
requirements, tariffs and other trade barriers, difficulties in the repatriation
of earnings and the burdens of complying with a wide variety of foreign laws.
The regulatory environment in some countries is very restrictive as their
governments try to protect their local economy and value of their local currency
against the U.S. dollar. Sales made by the Company's international direct sales
offices are denominated in local currencies, and accordingly, the U.S. dollar
equivalent of these sales is affected by changes in the weighted average value
of the U.S. dollar. This weighted average is calculated as the percentage change
in the value of the currency relative to the dollar, multiplied by the
proportion of international sales recorded in the particular currency. Between
2000 and 1999 this weighted average value of the U.S. dollar increased by 8.2%,
causing an equivalent decrease in the U.S. dollar value of the Company's foreign
currency sales and expenses. If the weighted average value during 2000 had been
the same as that in 1999, the Company's growth rate for 2000 would have been
26.6%. If the weighted average value during 2000 had been the same as that in
1999, the Company's consolidated operating expenses would have been $236.4
million, representing an increase of $1.0 million. If the U.S. dollar
strengthens again in the future, it could have a materially adverse effect on
the operating results of the Company.

Dependence on Key Suppliers. The Company's manufacturing processes use
large volumes of high-quality components and subassemblies supplied by outside
sources. Several of these components are available through sole or limited
sources. Sole-source components purchased by the Company include custom
application-specific integration circuits ("ASICS") and other components. The
Company has in the past experienced delays and quality problems in connection
with sole-source components, and there can be no assurance that these problems
will not recur in the future. Accordingly, the failure to receive sole-source
components from suppliers could result in a material adverse effect on revenues
and results of operations.

Proprietary Rights and Intellectual Property Litigation. The Company's
success depends in part on its ability to obtain and maintain patents and other
proprietary rights relative to the technologies used in its principal products.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may have in the past infringed or violated certain of the Company's
intellectual property rights. As is typical in the industry, the Company from
time to time may be notified that it is infringing certain patent or
intellectual property rights of others. On May 2, 2000, the Company was served
by Cognex Corporation, asserting patent infringement of two Cognex patents,
copyright infringement, trademark infringement and unfair competition. Cognex
seeks preliminary and permanent injunctive relief, actual monetary damages in an
unspecified amount and attorney's fees and costs. In the fourth quarter of 2000,
the Company accrued $2.5 million, the estimated legal fees for defending this
litigation. The Cognex litigation and any other intellectual property litigation
initiated in the future may cause significant litigation expense, liability and
a diversion of management's attention which may have a material adverse effect
on results of operations.

Dependence on Key Management and Technical Personnel. The Company's
success depends to a significant degree upon the continued contributions of its
key management, sales, marketing, research and development and operational
personnel including Dr. Truchard and other members of senior management and key
technical personnel. The Company has no agreements providing for the employment
of any of its key employees for any fixed term and the Company's key employees
may voluntarily terminate their employment with the Company at any time. The
loss of the services of one or more of the Company's key employees in the future
could have a material adverse effect on operating results. The Company also
believes its future success will depend in large part upon its ability to
attract and retain additional highly skilled management, technical, marketing,
research and development, and operational personnel with experience in managing
large and rapidly changing companies, including companies acquired through
acquisition, as well as training, motivating and supervising the employees. In
addition, the recruiting environment for software engineering, sales and other

-28-

technical professionals is very competitive. Competition for qualified software
engineers is particularly intense and is likely to result in increased personnel
costs. Failure to attract or retain qualified software engineers could have an
adverse effect on the Company's operating results. The Company also recruits and
employs foreign nationals to achieve its hiring goals primarily for engineering
and software positions. There can be no guarantee that the Company will continue
to be able to recruit foreign nationals to the current degree. These factors
further intensify competition for key personnel, and there can be no assurance
that the Company will be successful in retaining its existing key personnel or
attracting and retaining additional key personnel. Failure to attract and retain
a sufficient number of technical personnel could have a material adverse effect
on the results of operations.

Risk of Product Liability Claims. The Company's products are designed in
part to provide information upon which the users may rely. The Company attempts
to assure the quality and accuracy of the processes contained in its products,
and to limit its product liability exposure through contractual limitations on
liability, including disclaimers in its "shrink wrap" license agreements with
end-users. If future products contain errors that produce incorrect results on
which users rely, customer acceptance of the Company's products could be
adversely affected. Further, the Company could be subject to liability claims
that could have a material adverse effect on the Company's operating results or
financial position. Although the Company maintains liability insurance, there
can be no assurance that such insurance or the contractual provisions used by
the Company to limit its liability will be sufficient.

ITEM 7(a). MARKET RISK

Response to this item is included in "Item 7 - Management's Discussion and
Analysis of Financial Condition and Results of Operations - Market Risk" above.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The information required by this item is incorporated by reference to the
Consolidated Financial Statements set forth on pages F-1 through F-19 hereof.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

Not applicable.

-29-

PART III

Certain information required by Part III is omitted from this Report in
that the Registrant intends to file a definitive proxy statement pursuant to
Regulation 14A with the Securities and Exchange Commission (the "Proxy
Statement") relating to its annual meeting of stockholders not later than 120
days after the end of the fiscal year covered by this Report, and such
information is incorporated by reference herein.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The information concerning the Company's directors required by this Item
is incorporated by reference to the Company's Proxy Statement under the heading
"Election of Directors."

The information concerning the Company's executive officers required by
this Item is incorporated by reference to the Company's Proxy Statement under
the heading "Executive Officers."

ITEM 11. EXECUTIVE COMPENSATION

The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Election of Directors."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

From time to time the Company's directors, executive officers and other
insiders may adopt stock trading plans pursuant to Rule 10b5-1(c) promulgated by
the Securities and Exchange Commission under the Securities Exchange Act of
1934, as amended. Starting in the fourth quarter of 2000, William C. Nowlin,
Jr., Jeffrey L. Kodosky and James J. Truchard have made periodic sales of the
Company's stock pursuant to such plans.

The information required by this Item is incorporated by reference to the
Company's Proxy Statement under the heading "Election of Directors."

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Not applicable.

-30-

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a) Documents Filed with Report

1. Financial Statements. See Index to Consolidated Financial
Statements at page F-1 of this Form 10-K and the Financial
Statements and Notes thereto which are included at pages F-2
to F-19 of this Form 10-K.

2. Exhibits

Exhibit
Number Description

3.1* Certificate of Incorporation of the Company.
3.2* Bylaws of the Company.
4.1* Specimen of Common Stock certificate of the Company.
4.2* Rights Agreement dated as of May 19, 1994, between the
Company and The First National Bank of Boston.
10.1* Form of Indemnification Agreement.
10.2* 1994 Incentive Plan.
10.3* 1994 Employee Stock Purchase Plan.
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of the Company.
23 Consent of Independent Accountants.
24.0 Power of Attorney (see page 32).

* Incorporated by reference to the Company's Registration
Statement on Form S-1 (Reg. No. 33-88386) declared effective
March 13, 1995.

(b) Reports on Form 8-K

Not Applicable.

(c) Exhibits

See Item 14(a)(2) above.

-31-

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.

Registrant

NATIONAL INSTRUMENTS CORPORATION

February 8, 2001 BY: /s/ James J. Truchard
Dr. James J. Truchard
Chairman of the Board and President

POWER OF ATTORNEY

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Dr. James J. Truchard and
Alexander M. Davern, jointly and severally, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and conforming all that each of said
attorneys-in-fact, or his substitute or substitutes, any do or cause to be done
by virtue hereof.

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 Capacity in Which Signed Date

- --------------------------------------------------------------------------------

/s/ James J. Truchard Chairman of the Board and
Dr. James J. Truchard President (Principal Executive February 8, 2001
Officer)
- --------------------------------------------------------------------------------

/s/ Alexander M. Davern Chief Financial Officer and
Alexander M. Davern Treasurer (Principal Financial
and Accounting Officer) February 8, 2001

- --------------------------------------------------------------------------------

Director
Jeffrey L. Kodosky

- --------------------------------------------------------------------------------

/s/ William C. Nowlin, Jr. Director February 4, 2001
William C. Nowlin, Jr.

- --------------------------------------------------------------------------------

/s/ L. Wayne Ashby Director February 6, 2001
L. Wayne Ashby

- --------------------------------------------------------------------------------

/s/ Donald M. Carlton Director February 7, 2001
Dr. Donald M. Carlton

- --------------------------------------------------------------------------------

/s/ Ben G. Streetman Director February 3, 2001
Ben G. Streetman

- --------------------------------------------------------------------------------

/s/ R. Gary Daniels Director February 4, 2001
R. Gary Daniels

- --------------------------------------------------------------------------------

/s/ Charles J. Roesslein Director February 5, 2001
Charles J. Roesslein

- --------------------------------------------------------------------------------

-32-

NATIONAL INSTRUMENTS CORPORATION
INDEX TO FINANCIAL STATEMENTS

Page No.

Financial Statements:

Report of Independent Accountants F-2
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-3
Consolidated Statements of Income for the Three Years Ended
December 31, 2000 F-4
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 2000 F-5
Consolidated Statements of Stockholders' Equity for the Three
Years Ended December 31, 2000 F-6
Notes to Consolidated Financial Statements F-7

Financial Statement Schedules:
For the Three Years Ended December 31, 2000
Schedule II - Valuation and Qualifying Accounts S-1

All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.

-F1-

Report of Independent Accountants

To the Board of Directors and Stockholders of National Instruments Corporation

In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
National Instruments Corporation and its subsidiaries at December 31, 2000 and
1999, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000 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
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial 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 audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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 audits provide a
reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Austin, Texas

January 18, 2001

-F2-

National Instruments Corporation
Consolidated Balance Sheets
(In thousands, except share data)

Assets

December 31,
-----------------------
2000 1999
---------- ----------
Current assets:
Cash and cash equivalents...................... $ 75,277 $ 45,309
Short-term investments......................... 79,525 83,525
Accounts receivable, net....................... 74,704 58,279
Inventories, net............................... 33,292 26,161
Prepaid expenses and other current assets...... 13,499 11,216
Deferred income taxes, net..................... 8,262 6,539
---------- ----------
Total current assets........................ 284,559 231,029

Property and equipment, net..................... 84,694 69,771
Intangibles and other assets.................... 20,097 17,953
---------- ----------
Total assets................................ $ 389,350 $ 318,753
========== ==========

Liabilities and Stockholders' Equity

Current liabilities:
Current portion of long-term debt.............. $ -- $ 876
Accounts payable............................... 30,365 23,318
Accrued compensation........................... 12,720 11,021
Accrued expenses and other liabilities......... 9,923 10,326
Income taxes payable........................... 3,366 4,739
Other taxes payable............................ 7,977 6,988
---------- ----------
Total current liabilities................... 64,351 57,268

Long-term debt, net of current portion.......... -- 4,301
Deferred income taxes, net...................... 3,976 2,949
---------- ----------
Total liabilities........................... 68,327 64,518
---------- ----------

Commitments and contingencies................... -- --
Stockholders' equity:
Common stock: par value $.01; 180,000,000
shares authorized; 50,634,603 and 50,047,182
shares issued and outstanding, respectively.. 506 500
Additional paid-in capital................... 69,534 58,830
Retained earnings............................ 254,006 198,849
Accumulated other comprehensive loss......... (3,023) (3,944)
---------- ----------
Total stockholders' equity.................. 321,023 254,235
---------- ----------
Total liabilities and stockholders' equity.. $ 389,350 $ 318,753
========== ==========

The accompanying notes are an integral part of these financial
statements.

-F3-

National Instruments Corporation
Consolidated Statements of Income
(In thousands, except per share data)

For the Years
Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------

Net sales................................ $ 410,149 $ 329,583 $ 274,230
Cost of sales............................ 98,326 76,040 65,187
---------- ---------- ----------
Gross profit.......................... 311,823 253,543 209,043
---------- ---------- ----------

Operating expenses:
Sales and marketing................... 147,377 120,886 100,783
Research and development.............. 55,954 45,531 34,757
General and administrative............ 32,077 24,258 20,455
---------- ---------- ----------
Total operating expenses.............. 235,408 190,675 155,995
---------- ---------- ----------

Operating income...................... 76,415 62,868 53,048

Other income (expense):
Interest income....................... 6,390 4,759 3,439
Interest expense...................... (533) (404) (463)
Net foreign exchange (loss) gain and
other................................. (1,159) 130 (224)
---------- ---------- ----------
Income before income taxes and cumulative
effect of accounting change.............. 81,113 67,353 55,800
Provision for income taxes............... 25,956 21,553 18,414
---------- ---------- ----------
Income before cumulative effect of
accounting change........................ 55,157 45,800 37,386
Cumulative effect of accounting change,
net of tax............................... -- (552) --
---------- ---------- ----------
Net income............................ $ 55,157 $ 45,248 $ 37,386
========== ========== ==========

Basic earnings per share:
Income before cumulative effect of
accounting change...................... $ 1.10 $ 0.92 $ 0.76
Cumulative effect of accounting change,
net of tax............................. -- (0.01) --
---------- ---------- ----------
Basic earnings per share............... $ 1.10 $ 0.91 $ 0.76
========== ========== ==========

Diluted earnings per share:
Income before cumulative effect of
accounting change...................... $ 1.03 $ 0.88 $ 0.73
Cumulative effect of accounting change,
net of tax............................. -- (0.01) --
---------- ---------- ----------
Diluted earnings per share............. $ 1.03 $ 0.87 $ 0.73
========== ========== ==========

Weighted average shares outstanding:

Basic.................................. 50,332 49,776 49,248
Diluted................................ 53,564 52,203 51,150

The accompanying notes are an integral part of these financial
statements.

-F4-

National Instruments Corporation
Consolidated Statements of Cash Flows
(In thousands)

For the Years Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
Cash flow from operating activities:

Net income................................ $ 55,157 $ 45,248 $ 37,386
Adjustments to reconcile net income to
cash provided by operating activities:
Charges to income not requiring cash
outlays:
Depreciation and amortization......... 16,345 13,026 11,638
(Benefit) provision for deferred
income taxes........................ (832) 798 1,529
Purchase of in-process research &
development......................... -- 2,130 --
Changes in operating assets and liabilities:

Increase in accounts receivable....... (16,425) (9,963) (5,678)
Increase in inventory................. (7,131) (9,002) (605)
Increase in prepaid expenses and
other assets........................ (1,655) (7,761) (952)
Increase in accounts payable.......... 7,047 6,075 1,128
Increase in taxes and other
liabilities......................... 2,490 6,185 1,730
---------- ---------- ----------
Net cash provided by operating activities 54,996 46,736 46,176
---------- ---------- ----------

Cash flow from investing activities:

Payments for acquisitions, net of cash
received................................ -- (13,072) (1,519)
Capital expenditures...................... (27,631) (9,452) (27,985)
Additions to intangibles.................. (6,930) (2,188) (2,667)
Purchases of short-term investments....... (97,685) (268,965) (52,188)
Sales of short-term investments........... 101,685 234,808 54,097
---------- ---------- ----------
Net cash used in investing activities..... (30,561) (58,869) (30,262)
---------- ---------- ----------

Cash flow from financing activities:

Repayments of long-term debt.............. (5,177) (1,435) (824)
Net proceeds from issuance of common
stock under employee plans.............. 10,710 7,339 4,505
---------- ---------- ----------
Net cash provided by financing activities. 5,533 5,904 3,681
---------- ---------- ----------

Net increase (decrease) in cash and cash
equivalents............................. 29,968 (6,229) 19,595
Cash and cash equivalents at beginning of
period.................................. 45,309 51,538 31,943
---------- ---------- ----------
Cash and cash equivalents at end of period $ 75,277 $ 45,309 $ 51,538
========== ========== ==========

Cash paid for interest and income taxes
Interest............................... $ 601 $ 336 $ 499
Income taxes........................... $ 26,776 $ 21,283 $ 16,008

The accompanying notes are an integral part of these financial
statements.

-F5-

National Instruments Corporation
Consolidated Statements of Stockholders' Equity
(In thousands, except share data)

Accumulated
Common Common Additional Other Total
Stock Stock Paid-In Retained Comprehensive Stockholders'
(Shares) Amount Capital Earnings Gain/(Loss) Equity
--------- -------- ---------- -------- ------------- -------------

Balance at December 31,
1997................. 48,984,709 $ 490 $ 46,996 $116,215 $ (1,947) $ 161,754
Net income............. 37,386 37,386
Foreign currency
translation
adjustment (net of
$288 tax expense).... 584 584
Unrealized loss on
securities available
for sale (net of $0
tax benefit)......... (45) (45)
Issuance of common
stock under employee
plans................ 429,401 5 4,500 4,505
===============================================================================================

Balance at December 31,
1998................. 49,414,110 $ 495 $ 51,496 $153,601 $ (1,408) $ 204,184
Net income............. 45,248 45,248
Foreign currency
translation
adjustment (net of
$647 tax benefit).... (1,374) (1,374)
Unrealized loss on
securities available
for sale (net of $0
tax benefit)......... (534) (534)
Unrealized loss on
derivative instruments
(net of $295 tax
benefit)............. (628) (628)
Issuance of common
stock under employee
plans................ 633,072 5 7,334 7,339
===============================================================================================

Balance at December 31,
1999................. 50,047,182 $ 500 $ 58,830 $198,849 $ (3,944) $ 254,235
Net income............. 55,157 55,157
Foreign currency
translation
adjustment (net of
1,126 tax benefit)... (2,090) (2,090)
Unrealized gain on
securities available
for sale (net of $75
tax expense)......... 202 202
Unrealized gain on
derivative instruments
(net of 1,512 tax
expense)............. 2,809 2,809
Issuance of common
stock under employee
plans................ 587,421 6 10,704 10,710
===============================================================================================

Balance at December 31,
2000................. 50,634,603 $ 506 $ 69,534 $254,006 $ (3,023) $ 321,023

The accompanying notes are an integral part of these financial
statements.

-F6-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Operations and summary of significant accounting policies

National Instruments Corporation (the "Company") is a Delaware
Corporation. The Company engages in the design, development, manufacture and
marketing of instrumentation software and specialty interface cards and
accessories for general commercial, industrial and scientific applications. The
Company offers hundreds of products used to create virtual instrumentation
systems. The Company's products may be used in different environments, and
consequently, specific application of the Company's products is determined by
the customer and often is not known to the Company. The Company approaches all
markets with essentially the same products, which are used in a variety of
applications from research and development to production testing and industrial
control. The following industries and applications are served worldwide by the
Company: advanced research, automotive, commercial aerospace, computers and
electronics, continuous process manufacturing, education, government/defense,
medical research/pharmaceutical, power/energy, semiconductors, automated test
equipment, telecommunications and others.

Principles of consolidation

The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.

Certain prior year amounts have been reclassified to conform with the 2000
presentation.

Use of estimates

Judgments and estimates by management are required in the preparation of
financial statements to conform with generally accepted accounting principles.
The estimates and underlying assumptions affect the reported amounts of assets
and liabilities, the disclosure of contingencies at the balance sheet date and
the reported revenues and expenses for the period. Actual results could differ
from those estimates.

Cash and cash equivalents

Cash and cash equivalents include cash and highly liquid investments with
maturities of three months or less at the date of acquisition.

Short-term investments

Short-term investments consist of corporate, state and municipal
securities with readily determinable fair market values and original maturities
in excess of three months. The Company's investments are classified as
available-for-sale and accordingly are reported at fair value, with unrealized
gains and losses reported as other comprehensive income. Unrealized losses are
charged against income when a decline in fair value is determined to be other
than temporary. The specific identification method is used to determine the cost
of securities sold.

Inventories

Inventories are stated at the lower of cost or market. Cost is determined
using standard costs, which approximate the first in, first out (FIFO) method.
Cost includes the acquisition cost of purchased components, parts and
subassemblies, in-bound freight costs, labor and overhead. Market, with respect
to raw materials, is replacement cost and, with respect to work-in-process and
finished goods, is net realizable value.

Inventory is shown net of allowance for excess and obsolete inventory of
$2.5 million and $2.4 million at December 31, 2000 and 1999, respectively.

Property and equipment

Property and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets,
which range from twenty to forty years for buildings and three to five years for
equipment. Leasehold improvements are depreciated over the shorter of the life
of the lease or the asset.

Intangible assets

The Company has capitalized costs related to the development and
acquisition of certain software products. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 86 "Accounting for the Costs of

-F7-

Computer Software to Be Sold, Leased or Otherwise Marketed," capitalization of
costs begins when technological feasibility has been established and ends when
the product is available for general release to customers. Amortization is
computed on an individual product basis for those products available for market
and has been recognized based on the product's estimated economic life,
generally three years.

The excess purchase price over the fair value of assets acquired is
recorded as goodwill and is amortized using the straight-line method over ten
years. Intangible assets are periodically assessed for impairment of value and
any loss is recognized upon impairment.

Concentrations of credit risk

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of foreign currency forward
and option contracts, cash and cash equivalents, short-term investments and
trade accounts receivable. In management's opinion, no significant concentration
of credit risk exists for the Company.

The Company's counterparties in its foreign currency forward and option
contracts are major financial institutions. The Company does not anticipate
nonperformance by these counterparties. The Company maintains cash and cash
equivalents with various financial institutions located in many countries
worldwide. Company policy is to limit exposure in foreign countries by
transferring cash to the U.S. The Company's short-term investments are
diversified among and limited to high-quality securities with high credit
ratings. Concentration of credit risk with respect to trade accounts receivable
is limited due to the large number of customers and their dispersion across many
countries and industries. The amount of sales and trade accounts receivable to
any individual customer was not material for the periods presented.

Revenue recognition

Sales revenue is recognized on the date the product is shipped to the
customer. Provision is made for estimated sales returns based on actual
historical experience. Revenue related to the sale of maintenance contracts is
deferred and amortized on a straight-line basis over the service period.

In the fourth quarter, the Company adopted Staff Accounting Bulletin
("SAB") No. 101, Revenue Recognition in Financial Statements, which provides
guidance in applying generally accepted accounting principles to certain revenue
recognition issues. The adoption of SAB 101 did not have a material impact on
the Company's financial position or overall trends in results of operations.

Accounts receivable are net of allowances for doubtful accounts of $4.5
million and $4.1 million at December 31, 2000 and 1999, respectively.

Warranty expense

The Company offers a one-year limited warranty on most hardware products
and a 90-day warranty on software products, which is included in the sales price
of many of its products. Provision is made for estimated future warranty costs
at the time of sale.

Advertising expense

The Company expenses its costs of advertising as incurred. Advertising
expense for the years ended December 31, 2000, 1999 and 1998 is $35.4 million,
$34.1 million and $31.3 million, respectively.

Foreign currency translation

The functional currency for the Company's international operations is the
applicable local currency. The assets and liabilities of these operations are
translated at the rate of exchange in effect on the balance sheet date; sales
and expenses are translated at average rates. The resultant gains or losses from
translation are included in a separate component of other comprehensive income.
Gains and losses resulting from remeasuring monetary asset and liability
accounts that are denominated in a currency other than a subsidiary's functional
currency are included in determining net income.

Foreign currency hedging instruments

The Company adopted SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," on January 1, 1999. In accordance with the transition
provisions of SFAS 133, the Company recorded a net-of-tax cumulative-effect
adjustment of $552,000 in current earnings to recognize the fair value of its
derivatives designated as cash-flow hedging instruments at the date of adoption.

-F8-

All of the Company's derivative instruments are recognized on the balance
sheet at their fair value. The Company currently uses foreign currency forward
and purchased option contracts to hedge its exposure to material foreign
currency denominated receivables and forecasted foreign currency cash flows.

On the date the derivative contract is entered into, the Company
designates its derivative as either a hedge of the fair value of foreign
currency denominated receivables ("fair-value" hedge) or as a hedge of the
variability of foreign currency cash flows to be received ("foreign-currency"
hedge). Changes in the fair market value of a fair-value hedge are recorded,
along with the loss or gain on the re-measurement of
foreign-currency-denominated receivables, in current earnings. Changes in the
fair value of derivatives that are highly effective as - and that are designated
and qualify as - foreign-currency hedges under FAS 133 are recorded in other
comprehensive income, with the exception of changes in the time-value of
instruments, which are recorded in current earnings. As of December 31, 2000,
the Company has not entered into a derivative contract for speculative purposes.

The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and
strategy for undertaking various hedge transactions. This process includes
linking all derivatives that are designated as fair-value or foreign-currency
hedges to specific assets and liabilities on the balance sheet or to specific
firm commitments or forecasted transactions. The Company also formally assesses,
both at the hedge's inception and on an ongoing basis, whether the derivatives
that are used to hedge forecasted transactions are highly effective in
offsetting changes in cash flows of hedged items.

The Company prospectively discontinues hedge accounting if (1) it is
determined that the derivative is no longer highly effective in offsetting
changes in the fair value or cash flows of a hedged item (including firm
commitments or forecasted transactions); (2) the derivative expires or is sold,
terminated or exercised; (3) the derivative is de-designated as a hedge
instrument, because it is unlikely that a forecasted transaction will occur; (4)
the hedged firm commitment no longer meets the definition of a firm commitment;
or (5) management determines that designation of the derivative as a hedge
instrument is no longer appropriate.

When hedge accounting is discontinued because it is probable that a
forecasted transaction will not occur, the derivative will continue to be
carried on the balance sheet at its fair value, and gains and losses that were
accumulated in other comprehensive income will be recognized immediately in
earnings. In all other situations where hedge accounting is discontinued, the
derivative will be carried as its fair value on the balance sheet, with changes
in its fair value recognized in current-period earnings.

Income taxes

The provision for income taxes is based on pretax financial accounting
income. Deferred tax assets and liabilities are recognized for the expected tax
consequences of temporary differences between the tax bases of assets and
liabilities and their reported amounts. Valuation allowances are established
when necessary to reduce deferred tax assets to amounts which are more likely
than not to be realized.

Earnings per share

Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of common shares outstanding during each period. Diluted
EPS is computed by dividing net income by the weighted average number of common
shares and common share equivalents outstanding (if dilutive) during each
period. Common share equivalents include stock options. The number of common
share equivalents outstanding relating to stock options is computed using the
treasury stock method.

The reconciliation of the denominators used to calculate the basic EPS and
diluted EPS for the years ended December 31, 2000, 1999 and 1998, respectively
are as follows (in thousands):

Years Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
Weighted average shares
outstanding-basic................ 50,332 49,776 49,248

Plus: Common share equivalents
Stock options.................. 3,232 2,427 1,902
---------- ---------- ----------

Weighted average shares
outstanding-diluted.............. 53,564 52,203 51,150
========== ========== ==========

-F9-

Stock options to acquire 989,545, 57,783 and 1,144,686 shares for the
years ended December 31, 2000, 1999 and 1998, respectively were excluded from
the computations of diluted earnings per share because the effect of including
stock options would have been anti-dilutive.

Stock-based compensation plans

The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." As allowed by SFAS No. 123, the
Company continues to apply the provisions of Accounting Principles Board Opinion
No. 25, "Accounting for Stock issued to Employees" and related interpretations
in accounting for its plans. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the Company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock.

Comprehensive income

The Company has adopted SFAS No. 130, "Reporting Comprehensive Income",
which established standards for reporting, in addition to net income,
comprehensive income and its components including, as applicable, foreign
currency items, minimum pension liability adjustments and unrealized gains and
losses on certain investments in debt and equity securities. Total comprehensive
income for 2000, 1999 and 1998 was $56.1 million, $42.7 million and $37.9
million, respectively.

Note 2: Short-term investments

Short-term investments at December 31, 2000 and 1999, consisting of
corporate, state and municipal securities, were acquired at an aggregate cost of
$78.3 million and $81.5 million, respectively. The contractual maturities of
these securities, which are classified as available-for-sale and carried at fair
value, are as follows (in thousands):

December 31,
------------------
2000 1999
-------- --------
Less than 90 days..................... $ 990 $ --
90 days to one year................... 55,969 26,989
One year through two years............ 19,484 41,681
Two years through three years......... 3,082 14,855
-------- --------
$ 79,525 $ 83,525
======== ========

Note 3: Inventories

Inventories, net consist of the following (in thousands):

December 31,
------------------
2000 1999
-------- --------
Raw materials......................... $ 17,298 $ 11,115
Work-in-process....................... 978 2,402
Finished goods........................ 15,016 12,644
-------- --------
$ 33,292 $ 26,161
======== ========

Note 4: Property and equipment

Property and equipment consist of the following (in thousands):

December 31,
----------------------
2000 1999
---------- ----------
Land.................................. $ 5,208 $ 4,006
Buildings............................. 55,242 45,013
Furniture and equipment............... 78,221 68,595
---------- ----------
138,671 117,614
Accumulated depreciation.............. (60,552) (47,843)
Construction-in-progress.............. 6,575 --
---------- ----------
$ 84,694 $ 69,771
========== ==========

Depreciation expense for the years ended December 31, 2000, 1999 and 1998,
is $12.8 million, $10.5 million and $8.9 million, respectively.

-F10-

Note 5: Intangibles and other assets

Intangibles at December 31, 2000 and 1999 include capitalized software
development costs of $6.7 million and $4.4 million, respectively, which are net
of accumulated amortization of $8.5 million and $6.0 million, respectively, and
goodwill of $6.8 million and $7.5 million in 2000 and 1999 (net of accumulated
amortization of $900,000 and $180,000), respectively. Total amortization costs
were $3.5 million, $2.5 million and $2.8 million for the years ended December
31, 2000, 1999 and 1998, respectively. Substantially all of these amounts were
amortization of software development costs.

Note 6: Debt

Debt consists of the following (in thousands): December 31,
------------------
2000 1999
-------- --------
Long-term debt: Manufacturing facility loan, LIBOR,
$8,480,000 commitment, half the principal is
payable, together with interest, in equal
quarterly installments over a five-year term,
beginning September 1995, remainder due
maturity at February 28, 2001.................... $ -- $ 4,515
Other............................................. -- 662
-------- --------
Total debt........................................ -- 5,177
Less current portion........................... -- 876
-------- --------
Long-term portion................................. $ -- $ 4,301
======== ========

The manufacturing facility loan was fully repaid in 2000 at its carrying
value.

Note 7: Income taxes

The components of income before the provision for income taxes are as
follows (in thousands):

Years Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
Domestic............... $ 68,982 $ 57,189 $ 46,817
Foreign................ 12,131 10,164 8,983
---------- ---------- ----------
$ 81,113 $ 67,353 $ 55,800
========== ========== ==========

The provision for income taxes charged to operations is as follows (in
thousands):

Years Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
Current tax expense:
U.S. federal........ $ 22,902 $ 17,858 $ 11,945
State............... 2,043 1,165 1,109
Foreign............. 1,843 1,732 3,831
---------- ---------- ----------
Total current.......... 26,788 20,755 16,885
---------- ---------- ----------
Deferred tax expense
(benefit):
U.S. federal........ (2,031) 1,394 2,352
State............... (12) 115 329
Foreign............. 1,211 (711) (1,152)
---------- ---------- ----------
Total deferred......... (832) 798 1,529
---------- ---------- ----------
Total provision........ $ 25,956 $ 21,553 $ 18,414
========== ========== ==========

-F11-

Deferred tax liabilities (assets) at December 31, 2000 and 1999 are as
follows (in thousands):

December 31,
----------------------
2000 1999
---------- ----------
Capitalized software......................... $ 2,202 $ 1,194
Unrealized gain on derivative instruments.... 1,174 --
Depreciation and amortization................ 263 164
Undistributed earnings of foreign
subsidiaries............................... -- 616
---------- ----------
Gross deferred tax liabilities............. 3,639 1,974
---------- ----------
Operating loss carryforwards................. (685) (1,563)
Vacation and other accruals.................. (1,835) (1,711)
Inventory valuation and warranty provisions.. (2,124) (1,853)
Doubtful accounts and sales provisions....... (1,434) (1,413)
Unrealized exchange loss..................... (436) (137)
Intercompany profit.......................... (1,162) (782)
Undistributed earnings of foreign
subsidiaries............................... (155) --
Accrued legal expenses....................... (923) --
Unrealized loss on derivative instruments.... -- (318)
Other........................................ (442) (462)
---------- ----------
Gross deferred tax assets.................. (9,196) (8,239)
---------- ----------
Valuation allowance.......................... 332 292
---------- ----------
Net deferred tax asset....................... $ (5,225) $ (5,973)
========== ==========

A reconciliation of income taxes at the U.S. federal statutory income tax
rate to the effective tax rate follows:
Years Ended
December 31,
----------------------
2000 1999 1998
------ ------ ------
U.S. federal statutory tax rate............. 35 % 35 % 35 %
Foreign sales corporation benefit........... (2) (2) (2)
Foreign taxes less than federal statutory
rate...................................... (1) (1) --
Tax exempt interest......................... (2) (2) (2)
State income taxes, net of federal tax
benefit................................... 2 2 2
------ ------ ------
Effective tax rate........................ 32 % 32 % 33 %
====== ====== ======

As of December 31, 2000, eight of the Company's subsidiaries have
available, for income tax purposes, foreign net operating loss carryforwards of
approximately $2.9 million, of which $1.3 million expire during the years 2002 -
2010 and $1.6 million of which may be carried forward indefinitely.

The Company has not provided for U.S. federal income and foreign
withholding taxes on approximately $3.3 million of certain non-U.S.
subsidiaries' undistributed earnings as of December 31, 2000. These earnings
would become subject to taxes of approximately $400,000, if they were actually
or deemed to be remitted to the parent company as dividends or if the Company
should sell its stock in these subsidiaries. The Company currently intends to
reinvest indefinitely these undistributed earnings.

Note 8: Acquisitions

On August 31, 1999, the Company acquired all of the issued and outstanding
shares of common stock of GfS Systemtechnik GmbH and related companies. The
acquisition was accounted for as a purchase. The Company recorded a $2.1 million
pre-tax charge against earnings during the third quarter of 1999 for the
write-off of in-process GfS research and development technology that had not
reached the working model stage. The Company also recorded $1.1 million of
capitalized software development costs and $7.7 million of goodwill related to
the acquisition, which are included in intangibles and other assets. The
consolidated financial statements include the operating results from the date of
acquisition. Pro-forma results of operation have not been presented because the
effects of those operations were not material.

-F12-

Note 9: Stockholders' equity

Common stock

On July 22, 1999, the Company declared a stock split effected in the form
of a dividend of one share of common stock for each two shares of common stock
outstanding. The dividend was paid on August 20, 1999 to holders of record as of
the close of business on August 5, 1999. All share information included in the
accompanying consolidated financial statements and notes has been retroactively
adjusted to reflect the exchange and stock split.

Stock-based compensation plans

At December 31, 2000, the Company has two active stock-based compensation
plans and one inactive plan. The two active stock-based compensation plans are
the 1994 Incentive Stock Option Plan and the Employee Stock Purchase Plan. No
compensation cost has been recognized in the Company's financial statements for
the stock option plan and the stock purchase plan. If compensation cost for the
Company's two active stock-based compensation plans were determined based on the
fair value at the grant date for awards under those plans consistent with the
method established by SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the pro forma amounts indicated below (in
thousands, except per share data).

Years Ended December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Net income As reported $ 55,157 $ 45,248 $ 37,386
Pro-forma 44,307 38,742 31,281

Basic earnings per share As reported $ 1.10 $ 0.91 $ 0.76
Pro-forma 0.88 0.78 0.63

Diluted earnings per share As reported $ 1.03 $ 0.87 $ 0.73
Pro-forma 0.83 0.74 0.61

Stock option plans

The stockholders of the Company approved the 1994 Incentive Stock Option
Plan on May 9, 1994. At the time of approval, 6,075,000 shares of the Company's
common stock were reserved for issuance under this plan. In 1997, an additional
4,725,000 shares of the Company's common stock were reserved for issuance under
this plan. The 1994 Plan, administered by the Compensation Committee of the
Board of Directors, provides for granting of incentive awards in the form of
stock options to directors, executive officers and employees of the Company and
its subsidiaries. Awards under the plan must be granted within ten years of the
effective date of the 1994 Plan. Options granted may be either incentive stock
options within the meaning of Section 422 of the Internal Revenue Code or
nonqualified options. The right to purchase shares vests over a five to ten-year
period, beginning on the date of grant. Stock options must be exercised within
ten years from date of grant. Stock options are issued at market price at the
grant date. Shares available for grant at December 31, 2000 were 3,326,327.

-F13-

Transactions under all plans are summarized as follows:

Number of Weighted
shares under average exercise
option price
------------ ----------------
Outstanding at December 31, 1997... 4,557,272 $ 10.38
Exercised....................... (244,691) 5.11
Canceled........................ (202,313) 14.57
Granted......................... 1,481,866 22.53
------------ ----------------
Outstanding at December 31, 1998... 5,592,134 13.69
Exercised....................... (498,514) 9.94
Canceled........................ (522,905) 16.22
Granted......................... 946,247 20.41
------------ ----------------
Outstanding at December 31, 1999... 5,516,962 14.95
Exercised....................... (443,544) 11.56
Canceled........................ (209,966) 24.98
Granted......................... 1,451,062 47.92
------------ ----------------
Outstanding at December 31, 2000... 6,314,514 $ 22.40
============ ================

Options exercisable at December 31:

1998............................ 1,855,802 $ 10.29
1999............................ 2,398,305 11.99
2000............................ 2,964,530 14.20

Weighted average, grant date Weighted
fair value value of options average fair
granted during: value
----------------
1998............................ 1,481,866 $ 10.33
1999............................ 946,247 8.57
2000............................ 1,451,062 25.17

December 31, 2000
- --------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ------------------------------------------------------- ----------------------
Weighted
Weighted average Weighted
Number average remaining Number of average
Exercise of options exercise contractual options exercise
price outstanding price life (yrs) exercisable price
- --------------- ----------- ---------- ----------- ----------- ---------
$ 6.44 - $ 8.78 693,018 $ 6.55 4 608,380 $ 6.55
8.89 - 14.06 1,040,668 9.20 5 813,887 9.17
14.44 - 14.44 1,155,306 14.44 6 696,036 14.44
14.83 - 22.96 1,879,463 20.89 8 723,060 21.16
23.33 - 51.56 1,546,059 46.17 9 123,167 42.97
----------- -----------
6,314,514 22.40 7 2,964,530 14.20

The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions:

2000 1999 1998
---------- ---------- ----------
Dividend expense yield..... 0% 0% 0%
Expected life.............. 5 years 5 years 5 years
Expected volatility........ 40.6% 35.5% 33.3%
Risk-free interest rate.... 6.8% 4.8% 5.6%

Employee stock purchase plan

The Company's stock purchase plan became effective March 13, 1995 upon the
first date of registration of the Company's Common Stock. The plan permits
substantially all domestic employees and employees of designated subsidiaries to
acquire the Company's Common Stock at a purchase price of 85% of the lower of
the market price at the beginning or the end of the participation period. The
semi-annual periods begin on October 1 and April 1 of each year. Employees may
designate up to 15% of their compensation for the purchase of Common Stock.

-F14-

Common Stock reserved for future employee purchases aggregated 2,461,702 shares
at December 31, 2000. Shares issued under this plan were 145,821 in 2000. The
weighted average fair value of the employees' purchase rights, as shown below
was estimated using the Black-Scholes model with the following assumptions:

2000 1999 1998
---------- ---------- ----------
Dividend expense yield..... 0% 0% 0%
Expected life.............. 6 months 6 months 6 months
Expected volatility........ 58% 38% 40%
Risk-free interest rate.... 5.6% 4.2% 5.3%

Weighted average, grant date fair value
of purchase rights granted under the Number Weighted average
Employee Stock Purchase Plan: of shares fair value
---------- ---------------
1998.............................. 195,179 $ 5.16
1999.............................. 160,830 6.79
2000.............................. 158,158 14.54

Stockholders' rights plan

The Board of Directors and stockholders approved and adopted the Rights
Agreement prior to the Company's initial public offering (the "offering"). On
March 13, 1995, the effective date of the offering, the Board of Directors
declared a dividend distribution of one common share purchase right for each
outstanding share of Common Stock. The rights become exercisable under certain
conditions involving acquisition of the Company's Common Stock. Under certain
other conditions where the Company is consolidated or merged, each holder of a
right shall have the right to receive, upon exercise of the right, shares of
Common Stock of the Company, or acquiring company, having a value of twice the
exercise price of the right. The rights expire on March 13, 2005, and may be
redeemed in whole by the Company for $.01 per right. The rights are excluded
from earnings per share computations because they qualify as contingent shares
and therefore are excluded as long as the conditions that require issuance of
the shares are not imminent.

Note 10: Employee retirement plan

The Company has a defined contribution retirement plan pursuant to Section
401(k) of the Internal Revenue Code. Substantially all domestic employees with
at least one year of continuous service are eligible to participate and may
contribute up to 15% of their compensation. The Board of Directors has elected
to make matching contributions equal to 50% of employee contributions, which may
be applied, to a maximum of 6% of each participant's compensation. Company
contributions vest immediately. Company contributions charged to expense were
$1,292,000, $1,087,000 and $933,000 in 2000, 1999 and 1998, respectively.

Note 11: Financial instruments

Fair value of financial instruments

The estimated fair value amounts disclosed below have been determined by
the Company using available market information and valuation methodologies
described below. However, considerable judgment is required in interpreting
market data to develop these estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts that the Company
could realize in a current market exchange. The use of different market
assumptions could have a significant effect on the estimates. For certain
financial instruments of the Company, including cash and cash equivalents,
accounts receivable, accounts payable, accrued liabilities and the current
portion of long-term debt, the carrying amount approximates fair value due to
the short-term maturity of these instruments. The estimated fair values of the
other assets (liabilities) of the Company's remaining financial instruments at
December 31, 2000 and 1999 are as follows (in thousands):

December 31,
--------------------------------------------
2000 1999
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------- --------------------
Short-term investments..... $ 79,525 $ 79,525 $ 83,525 $ 83,525

Other assets/liabilities:
Forward contracts....... 3,293 3,293 (41) (41)
Purchased options....... 871 871 -- --
Long-term debt............. -- -- (4,301) (3,884)

The fair values of short-term investments and foreign currency forward
contracts were estimated based upon quotes from brokers as of the applicable
balance sheet date. The fair value of long-term debt was estimated by
discounting the future cash flows using rates currently available for debt of
similar terms and maturity.

-F15-

Note 12: Derivative instruments and hedging activities

The Company has operations in over 30 countries. Forty-seven percent of
the Company's revenues are generated outside North America. The Company's
activities expose it to a variety of market risks, including the effects of
changes in foreign-currency exchange rates and interest rates. These financial
risks are monitored and managed by the Company as an integral part of its
overall risk management program.

The Company maintains a foreign-currency risk management strategy that
uses derivative instruments (foreign currency forward and purchased options
contracts) to protect its interests from fluctuations in earnings and cash flows
caused by the volatility in currency exchange rates. Movements in
foreign-currency exchange rates pose a risk to the Company's operations and
competitive position, since exchange rate changes may affect the profitability,
cash flow, and business and/or pricing strategies of non-U.S. based competitors.

Foreign currency fair value and cash flow hedges

The Company's foreign sales are denominated in the customers' local
currency. The Company purchases foreign currency forward and purchased options
contracts as hedges of anticipated sales that are denominated in foreign
currencies and as hedges of foreign currency denominated receivables. These
contracts are entered into to protect against the risk that the eventual
dollar-net-cash inflows resulting from such sales or firm commitments will be
adversely affected by changes in exchange rates.

At December 31, 2000, the Company held forward contracts with a notional
amount of $35.1 million that were designated as foreign currency fair value
hedges of the Company's foreign denominated receivables. These contracts, which
are for 90-day periods, had a carrying amount of $(63,000). The Company hedges
up to 90% of its outstanding foreign denominated receivables.

At December 31, 2000, the Company held forward contracts with a notional
amount of $65.3 million that were designated as foreign currency cash flow
hedges related to the Company's anticipated sales transactions. These contracts,
which are for terms up to twenty-four months, had a pre-tax carrying amount of
$3.4 million and a net unrealized deferred gain of $3.4 million recorded in
"Accumulated Other Comprehensive Income." Based on the Company's estimates of
future foreign exchange rates, it hedges up to 100% of anticipated cash inflows
for the following 1 to 30 months.

As of December 31, 2000, $38,000 of deferred gains on derivative
instruments recorded in Accumulated Other Comprehensive Income are expected to
be reclassified to earnings during the next twelve months. The actual foreign
sales expected to occur over the next twelve months will necessitate the
reclassifying to earnings of these derivative gains.

For the year ended December 31, 2000, the Company recognized a net loss of
$961,000 (reported in the "Net Foreign Exchange Gain/(Loss)" line item in the
Consolidated Statement of Income), which represented the total ineffectiveness
of all cash-flow hedges.

Note 13: Segment information

In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 supersedes SFAS No. 14
"Financial Reporting for Segments of a Business Enterprise", replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. It also requires disclosures about products and
services, geographic areas and major customers.

While the Company sells its products to many different markets, its
management has chosen to organize the Company by geographic areas, and as a
result has determined that it has one reportable segment. Substantially all of
the interest income, interest expense, depreciation and amortization is recorded

-F16-

in North America. Net sales, operating income and identifiable assets,
classified by the major geographic areas in which the Company operates, are as
follows (in thousands):

Years Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
Net sales:
North America:
Unaffiliated customer sales.......... $ 215,960 $ 175,873 $ 153,435
Geographic transfers................. 55,524 41,739 32,451
---------- ---------- ----------
271,484 217,612 185,886
---------- ---------- ----------
Europe:
Unaffiliated customer sales.......... 133,799 108,801 86,961
---------- ---------- ----------
Asia Pacific:
Unaffiliated customer sales.......... 60,390 44,909 33,834
---------- ---------- ----------
Eliminations........................... (55,524) (41,739) (32,451)
---------- ---------- ----------
$ 410,149 $ 329,583 $ 274,230
========== ========== ==========

Years Ended December 31,
----------------------------------
2000 1999 1998
---------- ---------- ----------
Operating income:
North America.......................... $ 57,188 $ 48,679 $ 44,669
Europe................................. 48,180 39,603 29,964
Asia Pacific........................... 27,001 20,117 13,172
Unallocated:
Research and development expenses...... (55,954) (45,531) (34,757)
---------- ---------- ----------
$ 76,415 $ 62,868 $ 53,048
========== ========== ==========

December 31,
----------------------
2000 1999
---------- ----------
Identifiable assets:
North America.......................... $ 324,881 $ 261,709
Europe................................. 52,056 34,457
Asia Pacific........................... 12,413 22,587
---------- ----------
$ 389,350 $ 318,753
========== ==========

Total sales outside the United States for 2000, 1999 and 1998 was $217.3
million, $171.6 million and $135.6 million, respectively.

Note 14: Commitments and contingencies

The Company has commitments under noncancelable operating leases primarily
for office facilities and equipment. Future minimum lease payments as of
December 31, 2000, for each of the next five years are as follows (in
thousands):

2001........................ $ 1,741
2002........................ 1,653
2003........................ 1,539
2004........................ 1,485
2005........................ 737
Thereafter.................. --
--------
$ 7,155
========

Rent expense under operating leases was approximately $3.5 million, $3.6
million and $2.6 million for the years ended December 31, 2000, 1999 and 1998,
respectively.

Note 15: Litigation

On May 2, 2000, the Company was served by Cognex Corporation, asserting
patent infringement of two Cognex patents, copyright infringement, trademark
infringement and unfair competition. Cognex seeks preliminary and permanent
injunctive relief, actual monetary damages in an unspecified amount and
attorney's fees and costs. On June 21, 2000, the Company filed a response to

-F17-

their lawsuit denying all claims. A trial has been scheduled for October 23,
2001. The Company is defending this lawsuit vigorously. The Company is unable to
predict the outcome of the litigation at this time. Based on the facts we have
reviewed to date, management does not expect the resolution of this matter to
have a material adverse effect on the Company's business or financial condition.
However, because the plaintiff has indicated an unwillingness to withdraw these
claims, the Company has accrued $2.5 million of anticipated patent defense costs
that are probable of being incurred.

Note 16: Quarterly results (unaudited)

The following quarterly results have been derived from unaudited
consolidated financial statements that, in the opinion of management, reflect
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of such quarterly information. The operating results for any
quarter are not necessarily indicative of the results to be expected for any
future period. The unaudited quarterly financial data for each of the eight
quarters in the two years ended December 31, 2000 are as follows (in thousands,
except per share data):

Three Months Ended
----------------------------------------------
Mar. Jun. Sep. Dec.
31, 30, 30, 31,
2000 2000 2000 2000
---------- ---------- ---------- ----------
Net sales...................... $ 94,105 $ 99,550 $ 102,247 $ 114,247
Gross profit................... 71,865 75,520 77,830 86,607
Operating income............... 18,053 20,175 18,404 19,783
Net income..................... 12,664 14,431 13,197 14,864
Basic earnings per share....... $ 0.25 $ 0.29 $ 0.26 $ 0.29
Weighted average shares
outstanding-basic............ 50,112 50,274 50,364 50,567
Diluted earnings per share..... $ 0.24 $ 0.27 $ 0.25 $ 0.28
Weighted average shares
outstanding-diluted.......... 53,415 53,567 53,612 53,642

Three Months Ended
----------------------------------------------
Mar. Jun. Sep. Dec.
31, 30, 30, 31,
2000 2000 2000 2000
---------- ---------- ---------- ----------
Net sales...................... $ 73,686 $ 79,777 $ 82,724 $ 93,396
Gross profit................... 56,746 61,658 63,176 71,963
Operating income............... 15,166 15,883 12,841 18,978
Income before cumulative effect
of accounting change......... 10,560 11,257 9,946 14,037
Net income..................... 10,008 11,257 9,946 14,037

Basic earnings per share:
Income before cumulative
effect of accounting change.. $ 0.21 $ 0.23 $ 0.20 $ 0.28
Cumulative effect of
accounting change,
net of tax................... (0.01) -- -- --
---------- ---------- ---------- ----------
Basic earnings per share..... $ 0.20 $ 0.23 $ 0.20 $ 0.28
========== ========== ========== ==========

Diluted earnings per share:
Income before cumulative
effect of accounting change.. $ 0.20 $ 0.22 $ 0.19 $ 0.27
Cumulative effect of
accounting change,
net of tax................... (0.01) -- -- --
---------- ---------- ---------- ----------
Diluted earnings per share... $ 0.19 $ 0.22 $ 0.19 $ 0.27
========== ========== ========== ==========

Weighted average shares outstanding:

Basic........................ 49,484 49,725 49,855 50,029
Diluted...................... 51,339 51,866 52,570 52,802

-F18-

SCHEDULE II

NATIONAL INSTRUMENTS CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(In thousands)

Allowance for doubtful accounts
Provision
Balance at for Write-Offs Balance
Beginning Bad Debt Charged to at End of
Year Description of Period Expense Allowances Period
- ---- ---------------------- ---------- --------- ---------- ----------
1998 Allowance for doubtful
accounts $ 4,000 $ 183 $ 513 $ 3,670
1999 Allowance for doubtful
accounts 3,670 1,455 982 4,143
2000 Allowance for doubtful
accounts 4,143 1,962 1,589 4,516

Valuation allowances for excess and obsolete inventory

Provision
Balance at Charged Write-Offs Balance
Beginning to Cost Charged to at End of
Year Description of Period of Sales Allowances Period
- ---- ---------------------- ---------- --------- ---------- ----------
1998 Valuation allowances
for excess and
obsolete inventory $ 3,160 $ -- $ 1,356 $ 1,804
1999 Valuation allowances
for excess and
obsolete inventory 1,804 1,244 694 2,354
2000 Valuation allowances
for excess and
obsolete inventory 2,354 1,090 978 2,466

-S1-