2006 Annual Report

To Our Stockholders

National Instruments had another record year in 2006, as we delivered annual revenue of $660 million, up 15.5 percent year-over-year. This represented the 29th year of revenue growth in the company's 30-year history. Our strong business model allowed us to deliver record profits in 2006 due in part to the success of new products, solid operational execution, and strong fiscal discipline by our employees. Our continued investment in R&D fueled strong growth across many products and, in 2006, we saw the growing adoption of virtual instrumentation in test and measurement as well as the success of graphical system design in industrial and embedded applications. We are especially pleased with our success in selling larger systems based on our PXI, CompactRIO and Compact FieldPoint hardware platforms. The diversity of our business across geographies, industries, customers, and applications has been a key factor in our long track record of growth. In 2006, the company sold products to more than 25,000 different companies in more than 90 countries around the world, and no single industry accounted for more than 10 percent of our total revenue.

In 2006, National Instruments celebrated its 30th anniversary as a company and the 20th anniversary of the release of the company's flagship software LabVIEW. NI began in 1976 with a vision to create an innovative company with differentiated products that greatly improved the way engineers and scientists performed their jobs. Our vision has never been more solid as we continue to deliver innovative new products that strengthen our vision of virtual instrumentation while expanding our opportunities in new areas such as graphical system design. Looking to 2007, we plan to leverage our existing infrastructure and expand our efforts in sales and R&D to succeed in larger opportunities and deliver new product innovation.

Our Mission

Our mission is to create innovative, computer-based products that improve everyday life by delivering today's most advanced technologies for test, control, and design. Our customers are engineers, scientists, and technology professionals in industry, government, and academia. With our innovative software and hardware tools, we give our customers flexible, high-performance products to create reliable, user-defined solutions for measuring and automating the world around them. Our strategy is to innovate, constantly improve, and produce a steady stream of new products that deliver 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 combine off-the-shelf, mainstream computer technologies with our own innovative modular hardware and software products, such as our flagship National Instruments LabVIEW product family. Our approach empowers customers to easily build open, flexible, user-defined solutions rather than rely on closed, fixed-function, vendor-defined traditional instrumentation. With virtual instrumentation, our customers can save time and money, easily integrate a wide variety of devices for their unique application needs, and improve their design and development productivity.

Our vision of virtual instrumentation is now evolving to include graphical system design, which we believe will transform the way engineers design, prototype, and deploy their complex, next-generation systems quickly and reliably. The National Instruments graphical system design platform leverages our industry-proven LabVIEW platform, with modular measurement and control hardware tailored for industrial and embedded applications. With graphical system design, NI redefines how engineers work throughout the entire product design cycle, resulting in reduced time to market and lower development costs. Engineers are able to not only replace custom electronic designs in embedded systems, such as autonomous vehicles or industrial machines, but also implement customized modulation schemes, special signal processing, bit-error-rate testing, and order analysis - all in customizable hardware on our world-class modular instruments. This is part of our embedded and graphical system design strategy, which helps our customers more efficiently design, prototype, and deploy their systems while greatly improving their system performance.

We believe our software-based approach continues to gain momentum in test and measurement applications, and we are pleased with the early success we have experienced with our differentiated graphical system design platform in industrial and embedded applications.

Our Products

When our company was founded more than 30 years ago, we started by building a leadership position in instrument control products that allow computers to control traditional instruments made by other vendors. Today, our instrument control products (GPIB and VXI) have matured, and their sales have generally correlated to the overall sales of the general test and measurement industry. Our leadership in instrument control hardware and software has given us a large base of loyal customers who have become a target market for our newer virtual instrumentation products. In 2006, instrument control products represented only 11 percent of our revenue.

The vast majority of our revenue comes from our products for virtual instrumentation and graphical system design, and we were very pleased with the strong growth of these products in 2006. The cornerstone of National Instruments is software, and, in 2006, we continued to see strong adoption of our software platforms with record software revenue. By selling more software to more customers, we continued to further expand our reach in test, control, and design applications. When we invented LabVIEW more than 20 years ago, our goal was to do for test and measurement what the spreadsheet had done for financial analysis. In 2006, we introduced LabVIEW 8.20, the 20th anniversary edition of the flagship software that builds on the success of LabVIEW as a robust development platform to help engineers design, prototype, and deploy their systems. New features, from textual math integration to improved control design tools and functionality for RF communications test, give customers the tools to meet their expanding application needs. We are very pleased with the initial interest in LabVIEW 8.20 and the industry recognition it has received.

During 2006, we continued to deliver on our vision of graphical system design, with engineers using our software platform to create more complex devices from RF instrumentation in wireless test systems to digital instrumentation for emulating hardware devices. The FPGA and real-time capabilities in LabVIEW, when combined with our rugged measurement and control platforms such as CompactRIO, Compact FieldPoint, and PXI, have opened new opportunities in the industrial and embedded space in addition to addressing new test applications.

Another software success in 2006 was our joint development with LEGO®. The software included with the new LEGO MINDSTORMS® NXT robotics system is powered by our LabVIEW graphical system software. The LEGO product was considered one of the top 2006 holiday products, and the fact that tens of thousands of children (as well as many adults) were able to quickly develop and program custom robotic systems is a great testament to the power, flexibility, and ease of use of the LabVIEW platform.

On the hardware front, the success of our data acquisition products was driven by our continued investment in higher-performance and easier-to-use products. Our USB data acquisition products have enjoyed very strong success in the past few years, strengthening our leadership position in portable, easy-to-use measurements. In Q2, we greatly expanded our USB data acquisition offering by introducing new, higher-performance USB modules based on our M Series technology as well as a new data acquisition system, NI CompactDAQ, which brings the ease of use of USB and the flexibility of a modular platform to portable and benchtop applications. Based on the same compact, rugged hardware architecture as CompactRIO, NI CompactDAQ delivers a fixed-function design that leverages our existing DAQ software technology as well as seamless integration with our LabVIEW software. Because it fulfills previously underserved customer needs for benchtop test and validation, NI CompactDAQ is the preferred choice of a wide range of customers for diverse applications such as remote monitoring, benchtop electronic test, and in-vehicle data logging. In addition to end-users, we are pleased with the number and variety of OEM opportunities that NI CompactDAQ is being designed into, including machine monitoring and sensor measurements.

In industrial and embedded control, we are very pleased with the continued adoption of our distributed I/O products, including Compact FieldPoint and our newer CompactRIO platform for high-speed control in very harsh or embedded environments. These products turned in solid growth in 2006 as customers realized the benefits of graphical system design commercial off-the-shelf technologies, such as LabVIEW and CompactRIO, to solve application challenges that previously required costly custom designs.

PXI continued to show its strength as a market-leading modular test platform with record revenue in 2006. As PXI enters its 10th year, we are pleased that there are now more than 1,200 different PXI products available from more than 70 vendors, including some of the largest test and measurement companies. PXI serves even the most demanding measurement and automation applications from industrial and embedded applications to mainstream electronics testing for consumer electronics and military/aerospace systems.

Our modular instruments, many of which leverage the PXI platform, had another strong revenue year in 2006, driven by our continued investment in new products. For example, we introduced two RF switch modules as well as a new signal generator that extends the frequency range of our PXI products to 6.6 GHz. These products continue to strengthen the capabilities of PXI to address a wider range of applications at higher frequencies in areas such as telecommunications, military/aerospace, and automated test. We also announced the industry's first dual-core PXI embedded controller, improving the performance of automated test applications up to 100 percent. This year, we extended our oscilloscope offering with the introduction of the National Instruments PXI-5152 2 GS/s digitizer/oscilloscope, ideal for applications such as semiconductor chip characterization and biomedical test. NI introduced the industry's first PCI Express high-speed digital instruments, taking advantage of the increased bandwidth of PCI Express to bring a faster, lower-cost solution to demanding applications such as testing display panels or interfacing to memory devices. In 2006, we introduced several new products for PXI Express, which is based on Intel's PCI Express standard and delivers a 40X increase over traditional PXI. With this increased bandwidth, PXI is even better suited for high-performance test applications such as RF and wireless test, and this will protect customer's current investments while ensuring customer success with PXI for many years to come. We are very pleased with the continued strong growth of our PXI and modular instruments products, which delivered record revenue in 2006 and are seeing success across a wide and growing range of industries in a diverse set of applications.

The success of our new products continues to be a key driver of growth, and I would like to thank our global R&D teams for their excellent execution in 2006. I look forward to further innovation and strong new product output in 2007.

Our New Opportunities

Building on the record revenue in 2006 for PXI, modular instruments, and data acquisition, I believe we will continue to expand our opportunities for even greater success across a broad range of application areas, including military/aerospace, consumer electronics, automotive, biomedical, and RF and wireless test. By combining commercial technologies, such as PCI Express, multicore processors, and FPGAs, with powerful, easy-to-use LabVIEW software and modular measurement hardware, we continue to expand our opportunities to a wider set of applications that we can address with a lower-cost, more flexible solution than traditional vendor-defined approaches.

As we build on the successes of our first 30 years, we look to the important role graphical system design is playing in expanding virtual instrumentation to address new opportunities in industrial and embedded applications where traditional approaches are costly and lack the flexibility needed for the growing complexity of today's devices and machines. The intuitive LabVIEW graphical programming software combined with flexible off-the-shelf hardware helps engineers and scientists more efficiently design, prototype, and deploy their measurement, automation, and embedded systems. With LabVIEW Real-Time and LabVIEW FPGA at the core of our embedded and industrial platform, customers can use LabVIEW graphical programming to create high-performance, rugged, and reliable systems with embedded hardware platforms such as CompactRIO and PXI. This combination opens up new opportunities and design wins in a wide range of applications from very high-speed control to embedded board-level design to proprietary custom electronics.

Heading into 2007, we will continue to invest in bringing powerful, easy, flexible software and off-the-shelf reconfigurable hardware to design engineers' desktops, empowering them to design, prototype, and deploy their next-generation systems more quickly and at less cost than traditional approaches. We will continue to innovate with LabVIEW and our hardware platforms, pushing them into new application areas such as high-speed digital test and high-frequency RF. By continuing to innovate on this platform, we will deliver a more complete solution that I believe will result in more design wins with machine builders, device manufacturers, and test system developers across a wide range of industries.

Our Finances

In 2006, we delivered a new all-time revenue record of $660 million, up 15.5 percent year-over-year. The company also reported record GAAP net income of $72.7 million, an 18 percent increase over 2005. Our employees did an outstanding job in managing expenses, driving revenue growth, improving our operating margins, and executing on strategic investments in 2006. We also maintained our strategy of focusing on R&D investment, demonstrating our continued commitment to investing in the future growth of the company. We finished the year with $250 million in cash and short-term investments and no debt. Given the record year for revenue and profits in 2006 and our very strong balance sheet, the Board of Directors approved a quarterly dividend increase of 1 cent per share to 7 cents per common share.

I am pleased with our solid execution this year, delivering strong operating leverage while maintaining our investment in R&D. We remain committed to our long-term goal of 18 percent non-GAAP operating margin as we drive further operating efficiency in our business. We will continue to expand our efforts in sales and R&D to succeed in larger opportunities and deliver new products. We plan to leverage our existing infrastructure and maintain budget discipline while positioning the company for success over the long term.

Our Culture

I am very proud of the National Instruments innovative spirit, which I spend much of my time fostering. This spirit is a key reason that in January, FORTUNE magazine named National Instruments to its 100 Best Companies to Work For list for the eighth consecutive year. Also in 2006, BusinessWeek named NI one of the "50 Best Places to Launch a Career." The company also received recognition internationally when NI Hungary was named No. 7 on the Best Places to Work list, the equivalent of the FORTUNE magazine award. In addition, The Financial Times named NI UK one of the Top 50 Best Workplaces for 2006. National Instruments is composed of talented employees worldwide who not only contribute to our success but also inspire our culture, and I am pleased that the employees recognize the company's engaging environment and consistent commitment to innovation.

I would like to recognize all NI employees for another record year in 2006, with record revenue, record net income, and very strong cash flow. Thank you to our shareholders, customers, and suppliers for their continued support throughout 2006. The strong profitability of our business model helped us continue our investment in R&D, and I believe that this is the best strategic investment we can make to deliver and sustain long-term success. We will continue to align R&D, sales, and marketing to strengthen our core and expand our opportunities. We are determined to continue to innovate, execute effectively, and deliver long-term value to our shareholders. Our results for 2006 give us confidence as we look ahead to 2007.

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, statements related to delivering new products, our vision for virtual instrumentation, expanding opportunities in graphical system design, leveraging existing infrastructure, expanding efforts in sales and R&D, positioning for success over the long-term, graphical system design changing how engineers design and work, momentum in our software-based approach, further innovation and strong new product output in 2007, expanding opportunities across a broad set of applications, important role being played by graphical system design, continuing to innovate with LabVIEW, providing a more complete solution, further operating efficiencies, long-term goal of 18 percent operating margin, maintaining budget discipline, succeeding in larger opportunities, R&D being the best strategic investment, continuing adoption of our software and hardware platforms and continuing to align R&D, sales, and marketing to strengthen our core and expand our opportunities, and delivering long-term value to our shareholders. 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 our current products and our new products, unexpected changes in expenses and labor costs, current exchange fluctuations, the outcome of any current or future litigation involving intellectual property or other matters, and our ability to successfully identify and execute strategic transactions. We direct you to the documents we file with the SEC, including our recently filed annual report on Form 10-K, for additional risks.

© 2007 National Instruments Corporation. All rights reserved. CompactRIO, FieldPoint, LabVIEW, National Instruments, NI, ni.com, and NI CompactDAQ are trademarks of National Instruments. Other product and company names listed are trademarks or trade names of their respective companies.