2003 Annual Report

To Our Shareholders and Friends

Throughout our history, NI has delivered long-term value to stockholders. While 2003 was another challenging year for the industrial economy, we delivered a new all-time record for sales in Q4 and for the entire year. I believe we executed very well, and our increased R&D investments paid off with a record number of new products. We delivered solid profitability, generated strong cash flow from operations, and delivered the 26th year of growth in the company's 27-year history.

Our Mission
Our mission is to create innovative computer-based products that improve everyday life by improving technology. Our customers are scientists, engineers, and technology professionals in a range of industries, who use our measurement and automation tools to research, design, build, test, automate, and improve a wide array of products and services. With our innovative software and hardware tools, we give our customers a better solution for measuring and automating the world around them. Our strategy is to innovate, constantly improve, and deliver a steady stream of new products that provide higher value to our customers and increase our business opportunities. Our vision is to revolutionize the measurement and automation industry through virtual instrumentation, an innovative approach NI pioneered and continues to lead. With virtual instrumentation, we leverage off-the-shelf, mainstream computer technologies and add our own innovative modular hardware and software products, such as our flagship LabVIEW product family, to create powerful computer-based instrumentation solutions. Our approach empowers customers to easily build solutions that are open, flexible, and user-defined, rather than rely on closed, fixed-function, vendor-defined traditional instrumentation. With virtual instrumentation, our customers can save time and money and achieve higher performance solutions.

Our Results
Our sales for 2003 were a record $426 million, up $35 million or 9 percent from the $391 million in revenue for 2002. I am pleased with our performance, especially with our execution in new product R&D. In 2003, we introduced more new products than in any year in our history. We also delivered solid profitability in each quarter and for the year.

The diversity of our business - across geographies, industries, customers, and applications - is a key factor in our long track record of success. In 2003, we sold products to more than 25,000 different companies in more than 90 countries. Although sales are not tracked by industry in each geography, in the United States, no single industry accounted for more than 10 percent of our total revenue. As we began 2003, broad-based metrics such as U.S. industrial production and the Institute of Supply Management's purchasing managers index were negatively affected throughout the first half of 2003 by the uncertain economic and geopolitical environment. Despite these challenges, we delivered 6 percent year-over-year sales growth for the first half of 2003. In the second half of the year, these metrics began to show early signs of a recovery which strengthened towards the end of the year. This, combined with our record number of new products in 2003 - many of which were announced at our NIWeek Conference in August - enabled us to deliver 12 percent year-overyear sales growth for the second half of the year, and new all-time sales records for Q4 and for the year.

Our Product Mix
The majority of our business today is from our computer-based virtual instrumentation products, including our LabVIEW, LabVIEW Real-Time, DIAdem, and TestStand software, as well as our PC-based data acquisition, PXI modular instrumentation, Compact FieldPoint distributed data collection, and machine vision hardware. Sales of our virtual instrumentation products, which represent a lower-cost alternative to traditional solutions, delivered solid growth throughout 2003.

When our company was founded 27 years ago, we started by building a leadership position in instrument control products (GPIB and VXI) that allow computers to control traditional instruments made by other vendors. Today, our instrument control products have established a mature market presence and our sales generally correlate to the number of traditional instruments sold by other vendors.

Our New Products
Throughout our history, a key to our success has been innovative new products that strengthen our core business, while at the same time expanding our market opportunities. In 2001, 2002, and 2003, while many companies reduced investments in response to the weak industrial economy, we continued to increase our investment in new product R&D. This investment paid off with a record number of new products in 2003. LabVIEW 7 Express, representing over 350 person years of engineering effort, was the most significant upgrade to our flagship software product in over a decade. In addition to dramatic improvements in ease-of-use to attract new customers, LabVIEW 7 Express expanded our target platforms to include handheld PDA computing devices and FPGA chipsets. LabVIEW 7 Express has been extremely well received by both existing and new customers. In the second half of 2003, we saw the strongest growth in application software sales that we have seen in many years.

National Instruments
Our new 100 MHz mixed-signal suite of modular PXI instruments was also a major engineering investment over many years, and a major milestone both for our company and for virtual instrumentation. These products feature a revolutionary new Synchronization and Memory Core (SMC) hardware architecture that delivers dramatic performance improvements for our customers. We look forward to leveraging our new SMC hardware architecture across many future products in the coming years. Strong customer acceptance of our new PXI mixed-signal suite helped deliver very strong growth and record sales of our PXI products in 2003.

In Q4 of 2002, we introduced a major enhancement to our fast-growing FieldPoint distributed measurement and control platform with our new Compact FieldPoint family of products. Compact FieldPoint gives our customers an even smaller, more rugged platform that further extends the reach of LabVIEW into extremely harsh industrial environments on factory floors, within industrial machines, and in remote locations. In 2003, we continued to expand our Compact FieldPoint family, and customer reaction was very positive, contributing to very strong growth in this product line and record sales for the year.

Our New Opportunities
Many of our latest product introductions give us a strong technology advantage that has increased our success in penetrating key new application areas. For example, we saw continued strong growth throughout 2003 in sales of PXI and Compact FieldPoint systems for real-time, embedded, and distributed industrial applications, especially in the military, aerospace, and automotive industries. We also had continued success with PXI in penetrating high volume consumer electronics manufacturing applications. With our new LabVIEW PDA product, we began penetrating new portable and handheld applications, such as field service and repair, for the first time. Our new LabVIEW FPGA product has been especially successful with our lead customers in military, aerospace, automotive, and other industries who have used it to build ultrahigh-performance solutions that go far beyond the capabilities of our previous products. We also made significant progress in extending the use of our flagship LabVIEW software platform "throughout the design chain," through many initiatives that enhance our own product capabilities as well as further integrate LabVIEW with other software tools used for design and simulation.

I am very pleased with the execution in our sales and marketing organizations in 2003, especially in driving strong initial sales of our record number of new products. With the significant increase in our R&D headcount over the last three years, we have many more exciting new products in the pipeline for 2004 and beyond.

Our Finances
Our employees did an outstanding job in driving increased revenue growth, sustaining our operating margins, and executing on strategic investments in 2003. The year started slow as a result of the economic impact of the conflict in Iraq, but growth accelerated as the year went on with year-over-year revenue growth increasing from 5 percent in Q1, to 7 percent in Q2, 9 percent in Q3 and 14 percent in Q4. At the same time, we maintained our strategy of focusing investment in R&D and our sales channel, ending 2003 with 1,426 engineers, up 34 percent from December 2000. Total headcount on December 31, 2003 was 3,078, up 23 percent, from the end of 2000. This demonstrates our continued commitment to funding sustained revenue growth.

In 2003, we saw a large variation in our patent litigation expenses compared to 2002. In 2003, we recorded $8 million in patent litigation expenses, up from the $4.7 million expense we incurred in 2002. This resulted in a $3.3 million increase in litigation expenses. During 2003, NI received a favorable jury verdict in its patent infringement case against The MathWorks Inc. The jury found them to be infringing three of our LabVIEW patents and confirmed all four of the patents in the suit to be valid.

For 2003, we had $63 million in net cash provided from operating activities, up 28 percent over 2002 and we finished 2003 with $195 million in cash and short-term investments, up from $154 million at the end of 2002. Given our record cash balance, over 44 consecutive quarters of profitable operation, and the recent changes in the tax on dividends, the Board of Directors declared the company's first ever quarterly cash dividend payable to stockholders of record on August 4.

Our Culture
I am very proud that for the fifth consecutive year, FORTUNE magazine named NI among its 100 Best Companies to Work For in America. Keeping NI an innovative, rewarding, and fun place to work is a commitment we take very seriously, and we met the challenge again in 2003.

Our Future
I thank our customers, stockholders, employees, and suppliers for their support during 2003. We released a record number of new products, including ground-breaking innovations that significantly expand the boundaries of virtual instrumentation and our future opportunities, and we delivered record sales for 2003.

As we enter 2004, our primary challenge is to continue to increase our growth rate. We are excited about the success of our latest products, and will continue to invest aggressively to expand our market opportunities, execute on our core vision for virtual instrumentation, and deliver long-term value to our stockholders.

Dr. James Truchard,

President, CEO, and Chairman

This letter contains forward-looking statements as defined under securities laws and such statements are intended to be covered by safe harbors created under the Securities Act of 1993, the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, among other things, the predictions of future financial performance, return on R&D, sales and marketing and other investments, leveraging new SMC hardware architecture, exciting new products in the pipeline, continuing to invest aggressively, expand opportunities and execute on our vision. Actual results could differ materially from those predicted in the forward-looking statements as a result of a number of risks and factors including future changes in the global economy, delays in the release of new products, fluctuations in customer demand for the company’s products, and unexpected changes in expenses and labor costs. We direct you to the documents we file with the SEC, including our recently filed annual report on Form 10-K, for additional risks.